The 80–120 Rule: Former employees can cost you money

 

Not many plan sponsors look forward to an audit and the associated fees, especially as an annual event.

Every year plan administrators must file Form 5500, an annual benefit plan report, with the IRS. As part of the filing, federal law requires “large plans” to undergo an annual audit by an independent qualified public accountant.

For “small plan” employers, the shift from the short form 5500-SF to the long form 5500 filing, with its 82 pages of instructions and accompanying auditor’s report (and fees), can be quite a shock. Your plan could be heading towards “large plan” status with the help of your former employees.

If your plan has 100 or more participants on the first day of the plan year, it is considered a “large plan”. The number of participants is not just a simple count of actively contributing participants in the plan, your former employees could be part of the total. Participant count, for filing purposes, is the sum of all current employees who are eligible, whether they are participating or not, any retirees receiving benefits, and all separated employees or their beneficiaries with a balance in the plan. Fortunately, if that number is less than 121, the 80 120 rule may provide your business with an exception.

What is the 80 -120 Rule?

The 80-120 Rule allows companies, whose participant count may shift marginally above or below 100, to file in the same plan size classification as the prior year.

If your prior year filing was as a “small plan” and on the first day of the plan year you have more than 100 but less than 120 participants, you can continue to bypass the audit requirement and file the short form 5500 as a “small plan”.

When the filing prior year filing was submitted as a “large plan” and you have more than 100 participants on the first day of the plan year, you are required to have an audit and file the long form 5500 as a “Large Plan” for the current year. If your participant count drops to the 80 – 119 range, you have the option to circumvent the audit requirement by filing Schedule I. Once your participant count drops below 80, the plan can return to the “small plan” filing status.

See table below  

	80-120 Audit Requirement Guidelines*
Eligible Participant Count 1st Day of Plan Year		Form 5500  Prior Year Filing	Form 5500 Current Year Options	Audit Requirement
<80		Immaterial	Small Plan – Schedule I	No
80-99		Small Plan – Schedule I	Small Plan – Schedule I	No
80-99		Large Plan – Schedule H	Schedule H or I	H Only
100-119		Small Plan – Schedule I	Schedule H or I	H Only
100-119		Large Plan – Schedule H	Large Plan – Schedule H	Yes
>120		Large Plan – Schedule H	Large Plan – Schedule H	Yes

*This content is intended for informational purposes only. Please consult your plan provider or professional advisor to determine the correct filing and audit requirement.