Knowing whether an audit is required for your benefit plan is a little like the story of Goldilocks – you need to figure out what number of participants is “just right.”
In general, an audit is required when an employer has a qualified benefit plan with more than 100 active participants at the beginning of the plan year.
Active participants include:
- Eligible participants – those meeting eligibility requirements regardless of plan participation
- Terminated and retired participants
- Beneficiaries of deceased participants
Plans with more than 100 participants are usually considered large plans, while those with fewer than 100 are considered small plans.
However, plans that fluctuate over and under 100 participants aren’t required to switch categories. This is called the 80-120 participant rule. Plans that have within 80 and 120 participants can opt to stay in the same category as in the prior year, while plans under 80 participants file as “small” and plans over 120 file as “large.”
The categorization of “large” or “small” plan isn’t always set in stone. In fact, a plan sponsor has the ability to manage the number of plan participants. Certain plan provisions and hiring decisions can impact the categorization of the plan.
Here are a few plan aspects to consider:
- Terminated participants – You can make automatic benefit payments to terminated participants with nominal balances to reduce the participant count. Follow plan document provisions or amend your plan to set a threshold of automatic cash-out balances (e.g., $1,000 or $5,000). Then, the participant’s balance can be distributed, rolled into another qualified plan or placed in an IRA without having to track down the participant.
- Eligibility requirements – Consider a high-turnover workplace, where it’s somewhat common for employees to leave within their first six months of employment. Even if they are not actively deferring into the plan, these employees can still count toward the size of the plan. One way to manage this is to consider amending your eligibility requirements so that employees must have six months of service before they can participate. This can reduce overall plan counts and administrative burden.
- Count projections – Use the 80-120 rule to your advantage. If you hover around 100 participants, it may be more cost effective to remain a small or large plan, instead of bouncing back and forth, needing an audit one year and not the next.
If you’d like more information on categorizing the size of your benefit plan to get the most advantage, request a free executive-level fiduciary assessment with a CSH advisor.