Avoiding Plan Sponsor Audits

Under the Employee Retirement Income Security Act of 1974 (ERISA), Federal law compels any company sponsored retirement plans with 100 or more eligible participants at the beginning of the plan year (January 1), categorized as a “large plan”, to undergo a third-party audit subject to the provisions of ERISA at the end of the following year. These audits typically costs the company $10-12,000 depending on the size of the participant pool. However, the “80-120 Rule” may be employed to avoid the costly audit. If you have submitted a Form 5500 for a plan year with fewer than 100 participants, the 80-120 rule kicks in and lets you file in the same category as the previous year, the small plan, until your total participants hit 121.

Often, companies with a 401(k) plan will teeter between more than 100 participants one year and fewer than 100 the next year. The 80-120 rule is designed to exempt companies in this situation from the yearly audit requirement. So to avoid the audit, file with 99 or fewer participants in the beginning of the plan year and then add additional participants after the annual report of your employee benefit plan, Form 5500. Eligible participants consist of current employees, retired or separated employees (meaning participants no longer employed with the company) who still have balances in the plan, and deceased employees also with balances in the plan.

A large plan may also decrease the number of eligible participants by cashing out participants who meet certain guidelines. Most plans allow a company to cash out retired, separated and deceased employees’ retirement plans if total balances of their account amount to less than $1,000 or to initiate a mandatory distribution move to IRA accounts for participants with balances between $1,000 and $5,000, thus removing them from the plan. Both of these actions will decrease the number of eligible participants to help reach the sub-100 eligible participant number. Consult with your plan administrator to confirm this is allowed in your plan document.

Sometimes simple knowledge can save thousands of dollars for plan sponsors.  The ability to avoid an audit by managing the employee base is just one of many tools that plan sponsors can utilize by working with experienced retirement plan professionals.

To learn more about audits and how to avoid them, read Tips to Avoid the Surprise DOL/IRS Company Audit.