Have you heard of the 80/120 rule? As suggested by the name, this ruling allows plans with between 80 and 120 participants to file as a “small” plan if they filed as such in the previous year. This may allow a retirement plan to avoid the external audit requirement required of a large plan.

More about the 80/120 rule

The number of participants in your plan is bound to fluctuate from year to year—meaning that the requirement for an annual audit could also change from year to year. Your plan might be larger than it was last year, meaning that you are required to have an audit. Or, you could have lost participants meaning an audit is no longer required.

The 80/120 rule is an exception to the general rule (general rule states that plans with 100+ eligible participants are considered large plans, under 100 eligible participants are considered small plans). This means that until the Plan’s eligible participant count at the beginning of the plan year goes above 120, the plan can continue to file as a small plan without being subject to the external audit requirements.

The most common eligible participants include the following:

• Active participants - current employees who are eligible to participate in the Plan, either through salary deferrals or employer contributions;
• Retirees - former employees who are retired and receiving benefits under the Plan;
• Beneficiaries of deceased participants - beneficiaries currently receiving benefits or entitled to receive benefits in the future;
• Separated participants entitled to receive benefits in the future - terminated employees who have balances in the Plan.

Many Plan Administrators do not realize that allowing former employees to keep their balances in the Plan after separation may in fact cause the Plan to incur fees from the custodian and trigger the need for an audit. If your Plan document has an involuntary cash-out provision, you should revisit it and see if your Plan is complying with this provision.

An involuntary cash-out allows the Plan to distribute out the former employee’s vested balance to them without their written consent. If you are a Plan Administrator or a fiduciary of a Plan, you should review your Plan document or contact your current service providers to check on your distribution provisions and also look at your eligible participant count. By addressing this issue early on, you may be able to save the Plan or the Plan Sponsor the cost of an audit.

Learn more about the 80/120 rule and your specific situation’s requirements by contacting a member of our Employee Benefit Plan Services Team.