Recent Posts:Do I Need a 401(k) Audit?Plan administrators are often surprised when their record keeper informs them that their plan has grown to the size that an audit is required. Many times, these administrators call and ask - does my plan really need an audit? The answer to this question lies in the instructions to the IRS Form 5500. While every qualified retirement plan must file the Form 5500, only plans that the IRS considers to be 'large' plans need submit an independent auditors report along with their Form 5500 filing. In a Plan's initial year of existence, the cutoff for determining if your plan is to be classified as a large or small plan is 100 eligible participants. If you have less than 100 eligible participants, you are considered a small plan when filing the Form 5500. A large plan filing the Form 5500 (those with over 100 participants) will be required to complete Schedule H which is what ultimately triggers the audit requirement. After the year of inception, the filing status of your plan is determined by the number of eligible participants as of the first day of the plan year. In general, 100 eligible participants is the cutoff separating large plans from small plans, but there is one twist that could allow you to skirt the audit requirement - the 80/120 rule. In short, the 80/120 rule allows plans that hover around the 100 participant threshold to continue filing as small plans. The easiest way to demonstrate the 80/120 rule is with an example. Example: A plan that had 89 eligible participants files as a small plan in 2008. On 1/1/09, the eligible participant count has risen to 110. Utilizing the 80/120 rule, the plan can elect to file as a small plan and not be subject to the audit requirement. Had the eligible participant count exceeded 120, the plan would be considered a large plan for filing purposes. In the above example, the plan in question could continue to file as a small plan in future periods as long as they did not exceed 120 eligible participants on the first day of the plan year. Once classified as a large plan, the plan will need to go below 100 eligible participants to file using small plan status. Note, the 80/120 rule can be applied in reverse (large plan falling under 100 but above 80) but this is rare in practice as plan administrators choose to forego an audit when possible. Clearly, there is room for confusion as to which classification your plan should be using when filing your Form 5500. If you are confused, or would simply like to discuss your options, please call and we will be happy to discuss this with you. HTML Comment Box is loading comments...
Scott M Dufek, CPA | 05/05/2010
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