Big Little Plans

Posted By Maria T. Hurd, CPA

How Big Can a Retirement Plan Be and Still Qualify for the Small Plan Audit Exemption?

“Define Large.” It is a question I often get from advisors hoping to get their clients out of a retirement plan audit. Until now the answer has been simple: 100 participants is the general rule, but if your retirement plan started out small and grew, you can delay the audit until the plan has more than 120 participants on the first day of the plan year. For this purpose, the definition of participants includes anyone eligible to participate in the plan plus terminated employees who still have a balance in the plan. For more detail on the mechanics of the 80-120 rule, please refer to our blog titled: I don’t want to grow up, I want to be a Small Plan.

Enter PEPs: How Many Small Plans Does a Large Plan Make?

Life Used to be So Simple. In the good old days, if you had more than 100 or 120 participants, as applicable, you had a large plan – AUDIT REQUIRED! Pursuant to the SECURE ACT, however, starting on January 1, 2021, a group of Small Plans can band together in one Pooled Employer Plan (PEP) and still escape the audit requirement, but only until the total number of participants in the PEP reaches 1,000 (or one of the Small Plans becomes a Large Plan). As the world turns, we get to redefine and restructure old concepts to accommodate new alternatives.

How Big Can a Plan Be and Still Be Considered Small?

A PEP that includes only Small Plans can cover up to 999 participants on the first day of the plan year and still be considered a Small Plan. Imagine that! It takes 1,000 participants to be subject to an audit requirement! Undoubtedly, Pooled Plan Providers (PPPs) will start new PEPs to avoid exceeding the 1,000-participant threshold.

“Define Large” suddenly has a longer response. It could be more than 100 participants, more than 120, or 1,000 if the plan is a PEP.

A Picture is Worth 1,000 Words

Following is a chart that summarizes the audit requirement determination:

Type of Plan Audit Threshold Applies to # of

Forms 5500

# of Audits
Stand Alone Plan 80-120 Rule Participants in the Plan 1 1
Open MEP 80-120 Rule Each Member Employer Separately 1 Per Plan 1 for each Large Plan
Exchange 80-120 Rule Each Member Employer Separately 1 Per Plan 1 for each Large Plan
PEP 1,000 Participants 100 participants or less and fewer than 1,000 in total 1 1
Closed MEP 1,000 Participants 100 participants or less and fewer than 1,000 in total 1 1


The conventional wisdom is that Open MEPs will choose to become PEPs starting January 1, 2021 — partly to benefit from filing only one Form 5500 and undergoing only one audit –rather than many audits, one for each member with a large plan. When transitioning from an Open MEP to a PEP, small plans that are not currently subject to an audit should perform careful cost analysis and remember that PEPs that cover less than 1,000 participants in total, made up of all plans with less than 100, don’t have to undergo a financial statement audit. Although some plan sponsors might welcome the oversight, most agree that an efficient audit is not better than no audit at all.

Streamlined Audit Procedures Result from Streamlined Plan Design, Administration and Economies of Scale

Any PEP runs the risk of having a non-compliant employer. If the PEP does have an audit, the auditor must consider the risk that each employer could be non-compliant. Each employer will have its own processes and mechanisms to update census data and payroll data. Even 3(16) administrators with 360 integration do not take over the original input performed by the plan sponsor’s personnel. For this reason, the auditor must understand each employer’s processes related to the plan, as well as the processes at the recordkeeper for the PEP provider once the original input is done. If the plan is not a safe harbor plan, the auditor will likely need to verify that discrimination testing was done using a complete census at each participating employer level. The level of automation for each process will affect the extent and type of testing the auditors perform. Filing only one 5500, which is subject to only one audit, does not mean that any of the employers in the PEP will completely escape audit procedures.

PEP members are generally seeking simplified administration and reduced cost, so much of the streamlined audit procedures will be a function of the more streamlined plan design, more automated and homogeneous processes across employers, and the involvement of 3(16) administrators and 3(38) advisors. Fortunately, the SECURE Act eliminated the one-bad-apple rule so any non-compliance the auditor finds should not jeopardize the qualified status of the entire plan and, hopefully, just needs to be corrected in accordance with EPCRS. The industry eagerly awaits guidance on how to handle non-compliant employers that stay non-compliant.

Bigger is Better? Or Good Things Come in Small Packages? – The Truth is in the Eye of the Beholder

Just like public transportation, the cheapest economy car, a Maserati, or a private driver will all do the job of getting you there from here, with different levels of personal involvement and cost, both a PEP and a stand-alone plan can provide your employees a mechanism to save for retirement. It depends on how much design flexibility, administrative involvement, and cost, you can afford. There is no universally right answer.

Photo By: Jan (Arny) Messersmith (License)