“As a plan sponsor, are we required to perform an independent audit on our 401(k) Plan?” This is one of the most common questions we receive from clients and potential clients. The quick answer is, plans with over 100 participants at the beginning of the plan year are subject to an audit, which must be attached to the 5500 form that is to be filed each year.
However, plan sponsors must also be aware of the “80 –120” rule, and what is the definition of a plan participant.
80-120 Rule
If the plan had between 80 and 120 participants at the beginning of the plan year, the sponsor may file the same form as filed in the previous year, thus avoiding the time and expenses involved in an audit. For example, if you had 85 participants in 2007 and filed a short form 5500, and you had 110 participants at the beginning of 2008, you would be able to file the same short 5500 and an independent audit would not be required. However, if the plan participant count exceeded 120 at the beginning of 2008, the plan is required to engage an independent audit for 2008.
Who is a Plan Participant?
Defining the plan participants is the next step in determining if an audit is necessary. Are they active participants only? Are terminated participants included? Are eligible employees included? Yes, yes, and yes! A plan participant for independent audit purposes is any eligible employees as of the prior plan year-end, any terminated participants with account balances, and any new participants eligible as of the first day of the plan year. For example, an employee who was eligible by meeting age and service requirements at the beginning of the plan year, but is not deferring into the plan is considered a participant. More importantly, all terminated employees with account balances are included as participants. These termed participants highlight the need for administering the distribution process and tracking down “lost” participants.
If you have any questions or are still uncertain if your plan requires an audit please contact Precept and we can walk through the steps to determine if your plan requires an independent audit.
Janelle Sotelo – RPS Account Manager
#1 by Jim Montgomery on March 13th, 2009
I have not found a definition of the number of participants at the beginning of the plan year. Would that include participants who enter the plan as of the beginning of the plan year or would it be the number of participants as of the end of the previous plan year? Your help is appreciated.