Editor’s note: This blog has been updated as of January 25, 2022 for accuracy and comprehensiveness.

Are you required to have an audit of your retirement plan? The answer lies in the plan’s eligible participant count as of the first day of the plan year.

What is the 80/120 rule?

Typically, an audit requirement is triggered when a retirement plan reaches 100 eligible participants, which is considered a “large” plan. The 80/120 rule is an exception to this general rule. The 80/120 rule allows plans with between 80 and 120 participants to file as a “small” plan (no audit requirement) 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.

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. Alternatively, you could have lost participants meaning an audit is no longer required.

With the 80/120 rule, 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 a former employee has a vested balance above the involuntary cash-out amount, you should contact them and encourage them to roll over their balance into an IRA or a new qualified plan, if they are enrolled in one. 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.

For more information about the 80/120 rule or assistance navigating your specific Plan’s requirements, contact a member of our Employee Benefit Plan Team today.