Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Does your employee benefit plan need an audit?

employee benefit plan, audit, Arizona, accounting, CPAIf your Company sponsors an employee benefit plan (this includes 401(k) plans), an audit of that plan may be required. What triggers the need for an audit? The number of participants. Plans with 100 or more participants at the start of the plan year are considered “large” and generally require an annual audit, while plans with less than 100 are considered “small” and generally have no audit requirement.

Large or small?

There are exceptions to the rule. The “80-120 Participant Rule” allows plans with between 80 and 120 participants at the beginning of the plan year to keep their “large” or “small” classification that was used in the previous year. For example, if a plan has 118 participants at the start of the 2016 plan year, but was in the “small” plan category for the 2015 plan year, the plan can keep their “small” plan status for 2016. Similarly, a plan with 83 participants at the start of the 2016 year can keep their “large” plan status if they were considered a “large” plan for the 2015 plan year. This rule is in place to reduce the amount of filing-status changes, as some plans can bounce back and forth along the 100 participant threshold.

What’s a participant?

Understanding the definition of “participant” can be vital to a plan that is close to the 100 participant threshold. An employee is considered a participant if they are eligible for the retirement plan, whether they are contributing to the plan or not. Eligible employees who have never participated and do not have an account in the plan are still technically considered “participants.” Retired or separated participants are also deemed “participants” if they are still receiving plan benefits, even if the employee’s remaining balance is required to be rolled over or withdrawn in the near future. Additionally, a deceased participant who has beneficiaries receiving benefits under the plan would also still be considered a “participant.”

The need for an employee benefit plan audit is not always black and white, so having an understanding of these reporting requirements can save some time and money.

Brad Sinko, CPA