Employee benefit plans (EBP) such as 403(b), 401(k), and other retirement savings programs have become a fixture in many employer benefits packages. Jobseekers and current employees expect these programs to be offered and trust employers to manage them responsibly. But that responsibility comes with plan obligations, such as an ERISA audit. But are benefit plan audits necessary for all EBPs?
As an employee benefit plan adds more participants, the Department of Labor (DOL) requires employers to document their compliance with ERISA regulations through an annual retirement plan audit. For 200 plan year 5500 filings, audits are required for any plan with 100 or more active participants, but some exceptions exist. And that’s where the 80/120 rule comes in.
To help you understand the 80/120 rule, let’s take a closer look at what it means and how it can affect audits of employee benefit plans.
The 80/120 Rule Overview
In the United States, employee benefit plans are governed by the Employee Retirement Income Security Act (ERISA). Under ERISA, plans of certain sizes are required to have annual 401k plan audits, while others are exempt.
The 80/120 rule defines whether a plan is “small” or “large” for the purpose of an ERISA audit and exempts small plans from the annual audit requirement, provided they meet specific criteria.
How do you know if your plan is exempt from an ERISA audit?
According to the 80/120 rule, if a benefit plan has between 80 and 120 participants at the beginning of the plan year, the employer can elect to file in the same category of Form 5500 as it did in the previous year.
For example, if at the beginning of the plan year, a company has 110 participants, and the prior year it filed as a small plan, then it can elect to file in the current year as a small plan again. It would be exempt from an ERISA audit requirement under the 80/120 rule. However, if the company had 122 participants at the beginning of the plan year, it would no longer be considered a small plan and now requires an audit engagement.
Who Is an Eligible Participant?
Under the 80/120 rule, an eligible participant in an employee benefit plan includes several types of individuals. Here are the categories of eligible participants:
- Employees currently participating in the company’s retirement plan.
- An employee that has fulfilled the plan’s eligibility requirements.
- A separated employee who is currently receiving or can receive 401(k) benefits.
- A retired employee who is now receiving or can receive 401(k) benefits.
- Deceased employees with beneficiaries who currently receive or can receive 401(k) benefits.
After accurately assessing the number of eligible participants, a plan administrator can consider whether an audit is required.
How Does the 80/120 Rule Affect Your Company?
The 80/120 rule provides guidance to companies on when an audit filing is necessary. If you’ve determined that your benefit plan requires one, finding a qualified CPA firm with experience performing ERISA audits is essential.
At Assurance Dimensions, our team of audit and assurance professionals can help you navigate the complexities of benefit plan audits. If you have any questions or need assistance with an audit report, our team can help. Contact us today to request an audit quote.
