If your 401(k) plan is close to hitting “large” by DOL rules at the start of your plan year, the 80/120 rule could save you time and money.
It happens. You begin a new plan year, and suddenly, you’re now a “large” 401(k) plan by Department of Labor standards. (Yes, the 80/120 policy still applies, even with the new rules).
Namely, you have 100+ participating employees with balances in your 401(k) plan and must now hire an independent auditor to review your plan’s financials.
Did your 401(k) plan experience a significant change in participants?
Any number of situations can lead to a change in plan size:
- Your organization has grown, and additional staff has been hired to meet the increased workload.
- A recent merger or acquisition resulted in an influx of new 401(k) plan participants.
- Layoffs or widespread terminations have shrunk your plan. (Don’t forget, though: terminated employees still count if they carry a balance.)
- An appealing change in plan or options or a recent push to encourage more participation has inspired more employees to contribute.
Whatever the reason, if your plan ends the year with around 100 balance-carrying participants, you have a decision to make.
The 80/120 rule, defined.
This participant rule exists to ease the transition for plan sponsors whose 401(k) plans are close to “large” and may soon need an independent auditor.
Briefly, the 80/120 rule permits plans with between 80 and 120 participants at the beginning of the plan year to file Form 5500 in the same category (“large plan” or “small plan”) as the prior year filing.
If you were considered a small plan for the prior year’s filing, you may opt to file again as small. That is, as long as your balance-carrying participants total between 100 and 120 (inclusive) at the plan year’s beginning.
If you filed as a large plan the prior year and begin the next with 80-100 balance-carrying participants, you can file again as a large plan, even though technically, you can file as a small plan.
So, if you have 80 to 120 participants in your plan, you have a choice as to how you file.
With this rule in place, you can put off filing as a large plan and avoid triggering the independent audit requirement as long as your balance-carrying participants stay under the magic number (120 or less). This is where the 80/120 rule could save you time and money.
Once you hit more than 120 participants, however, you must file as a large 401(k) plan. At that point, the audit requirement is triggered.
If you are getting close to 100 or more participating employees with balances in your 401(k) plan, you may be required to have an independent firm audit your plan. If so, it’s time to choose the right auditor for your organization.
We can help. Contact Cassell Plan Audits today.
