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Employee retirement plans, including 401(K) and 403(B) plans, must follow various rules and limitations defined by the government, as well as the employer. An annual audit by a certified public account is part of these requirements, but not all retirement plans require it.

Three factors come into play when determining if an employee retirement plan needs an annual audit: plan size, eligible participants, and the 80-120 rule.

Small and large employee retirement plans

Retirement plan sizes fall into two categorizations: small and large plans.

Retirement plans with under 100 participants are classified as small plans and are required to file Form 5500-SF. Form 5500-SF is a straight forward three page report that does not require audited financial statements.

Once your plan reaches 100 participants, it is considered a large plan. With large plans there are many additional reporting requirements, including preparation of the full Form 5500 reporting, as well as audited financial statements. To properly complete your filing as a large plan holder you will need to work with an independent auditor to complete the audited financial statements that you are required to submit as part the filing process for Form 5500.

Who count as participants in the retirement plan?

When evaluating the number of participants in your plan it is not enough to only look at employees that are actively participating in the plan. Your participant count must also include retired, deceased or separated employees who still have assets in the plan, and all eligible participants.

Employees are classified as eligible participants on the date in which the employee becomes eligible to participate in your retirement plan. Whether or not they elect to participate doesn’t matter, it’s when the option is available to them that they become includable as “participants” in the plan.

The total participant count of these three groups will be taken on the first day of the plan year.

The 80-120 Rule

Generally, plans with 100 participants or greater must file the full Form 5500, but there is one exception to this rule: the 80-120 rule.

The 80-120 rule is in place for plans that fluctuate between 80-120 participants each year, so those sitting around the divide between small plan and large plan. These plans may elect to complete the current year return using the same category that was used the previous year.

Let’s look at an example. If you have 105 participants this year, but you reported 83 participants the previous year and filed a 5500-SF, you could choose to once again file a 5500-SF this year even though you have over 100 participants in your plan which would technically classify your plan as large.

The 80-120 rule makes it more convenient and less disruptive for plans that hover around the cut off point, and avoids fluctuating between filing as a small plan or large plan from year to year.

For more information on audits of employee retirement plans, or to see how our team or certified public accountants at Harshwal & Company can help, pleaseget in touch with us today. We love to work with our clients to meet their needs and present their operations in a good light.