In order to remain competitive in the industry and retain quality employees, many restaurant companies choose to offer a 401(k) plan. While this is one of the greatest benefits you can offer your employees, it is important to consider the costs and other implications associated with this. Are we required to have an external audit performed for our plan? How much does this cost? How can we minimize these costs? These are just a few of the various questions to consider when you are administering a 401(k) plan.
401(k) Audit Requirements
Federal law requires “large” plans to file audited financial statements with their Form 5500. The general rule is that plans with over 100 eligible participants are typically considered large; however, there is an exception known as the “80-120 participant rule”. If you filed as a “small” plan in the prior year (meaning you were not required to have a 401k audit), and still have under 120 participants, you can still file as a small plan. If the number of eligible participants is greater than 121 on the first day of the plan year, you are required to file as a large plan and obtain audited financial statements. Once your plan reaches 120 eligible participants, this 80-120 rule no longer applies, and you will be required to have an audit each year that you have more than 100 eligible participants.
Defining an Eligible Employee
An eligible employee includes current and former employees with an account balance, as well as current employees that meet the eligibility requirements but are not participating in the plan. It is important to remember that the rule is based on eligible participants and not simply number of employees.
In industries where turnover rates are extremely high, such as the restaurant industry, there are ways to structure your 401(k) plan to benefit the company and employees while minimizing costs (such as audit fees). For example, implementing a longer service requirement (i.e. a full year of service) for eligibility purposes can drastically reduce the number of eligible employees. Additionally, increasing the minimum age requirement to 21 (rather than 18) can also decrease this number. All in all, for plans with low participant rates, reducing the number of eligible employees can eliminate the need (and cost) for an external audit.
When offering a 401(k) plan to your employees, ensure that it is structured to align with your business; if you have high turnover and low participation, adjust your eligibility requirements accordingly. If you have questions or are unsure how to go about adjusting your plan, please reach out to a Henry+Horne restaurant advisor as we would be happy to help!