After the year of inception, the number of eligible participants as of the first day of the plan year determines a plan’s filing status. In general, 100 eligible participants is the cutoff separating large plans from small, but there is one exception that allows a plan to skip the audit requirement—the 80/120 rule. This rule allows plans that hover around the 100-participant threshold to continue filing as small plans. It is best explained with an example:
A plan with 85 eligible participants files as a small plan in 2013. On January 1, 2014, the eligible participant count has risen to 105. The 80/120 rule allows the plan to file as a small plan not subject to the audit requirement. Had the eligible participant count exceeded 120, the plan would be considered a large plan for filing purposes.
Once a plan files as a large plan, it cannot go back to filing as a small plan unless the eligible participant count drops below 100 on the first day of the plan year.
In general, the participant count includes all active employees eligible to participate in the plan, whether or not they actually choose to. A plan must also count all separated participants with an account balance or a deferred vested balance. Again, this count is determined on the first day of each plan year. Please note that the rules for a welfare plan are different and are not covered in this article.
As you can see, all of this can cause some confusion when it comes time to file your Form 5500. If you are confused, or would simply like to discuss your options, please give us a call.
Sandy P. Purdy, CPA, is a senior manager in Lindquist LLP’s San Ramon office. She has spent more than 14 years in public accounting, working with employee benefit plans of various sizes, complexities and structures. She performs both full and limited-scope audits of more than 25 defined contribution and defined benefit plans with more than $400 million in total assets.
Our firm provides the information in this e-newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.