Does your defined contribution plan need an audit?
The question is not as easily determined as one would expect. Determination must first be directed to the plan’s Form 5500 filing category and status. Is the plan considered a “Large” plan or a “Small” plan? How many eligible employees are in the plan at the beginning of the audit period? How was the plan’s previous year Form 5500 filed? These are all important questions that plan sponsors must assess and be aware of when determining if their plans are subject for an employee benefit plan audit.
What Determines a Large or Small Employee Benefit Plan?
Focusing on the beginning of the plan year employee counts, as a general rule, plans with 100 or more participants are considered “Large” plans and plans with less than 100 participants are considered “Small” plans. This determination impacts which schedules should be filed with the plan’s annual 5500 reporting. The beginning of the year participant count is driven by line 5 of the Form 5500.
Overview of 80-120 Participant Rule
But wait, there is an exception…the 80-120 participant rule. This exception provides some level of relief for plan sponsors to avoid having to change filing categories. Included in the Department of Labor (“DOL”) Regulation 2520.103-1(d), “plans with between 80 and 120 participants (inclusive) at the beginning of the current plan year may elect to complete the current year return using the same category (that is, “large” plan or “small” plan) that was used in the previous year.”
The Department of Labor (“DOL”) has graciously provided this exception in the instructions to the Form 5500. As it relates to the determination of the necessity of a 2020 plan audit, the DOL states, “if the number of participants reported on line 5 is between 80 and 120, and a Form 5500 Annual Return/Report was filed for the prior plan year, you may elect to complete the return/report in the same category (‘‘large plan’’ or ‘‘small plan’’) as was filed for the prior return/report. Thus, if a Form 5500-SF or a Form 5500 Annual Return/Report was filed for the 2019 plan year as a small plan, including the Schedule I if applicable, and the number entered on line 5 of the 2020 Form 5500 is 120 or less, you may elect to complete the 2020 Form 5500 and schedules in accordance with the instructions for a small plan, including for eligible filers, filing the Form 5500-SF instead of the Form 5500.”
This exception is important because it can offer some temporary relief for Form 5500 reporting consistency. For example, a plan that has beginning of the plan year employees ranging between 80 and 90 employees, which was filed as a “Large” plan in the previous plan year, may elect to file as a “Large” plan again in the next filing period and avoid switching to a “Small” plan. This would be beneficial if the plan’s beginning of plan year employees decrease was temporary and the plan expects to exceed 120 participants in the subsequent filing period.
For more information regarding the 80-120 participant rule or employee benefit plan audits, please contact your Keiter Opportunity Advisor, Brett Sinsabaugh, Business Assurance and Advisory Services Senior Manager or another member of our Employee Benefit Plan Niche team.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.