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March 16, 2022

401(k) Audit: Why 120 is the Magic Number

As the administrator of the company 401(k) plan it’s your job to determine if you have a large plan or a small plan. What’s the difference? A large plan has 100 or more eligible participants and a small plan will have less than 100 eligible participants.

WHAT IS AN ELIGIBLE PARTICIPANT?

An eligible participant includes: former employees that have a balance in their account, current employees who actively participate as well as those that may be eligible for the plan but are not participants, and beneficiaries of the plan.

When you add all these eligible participants up the magic number that you should keep in mind is “120”.

If your plan didn’t have an independent audit in the prior year and filed Form 5500 as a small plan, but now have increased to 120 eligible participants, your plan will now be considered a large plan and will be required to have an external third party audit.

THE “80-120” PARTICIPANT RULE

Generally, any 401(k) plan that has over 100 eligible participants is considered to be a large plan and will be required to have an annual audit performed by independent auditor. However, due to the “80-120” rule, a plan that was filed as a “small” plan in the prior year and still under 120 eligible participants may continue to file as a “small” plan, and avoid the required external audit.

However, when the number of eligible participants reaches 121 by the first day of a plan year, the plan is no longer subject to the “80-120″ rule. You now must file as a large plan and will be required to have an annual external audit.

What happens if the number of eligible participants falls below 120 to 100?

Although a plan must have 120 eligible participants to be required to have a third party audit, you only need 100 eligible participants to be required to have an audit in future years. This is because the “80-120” eligible participant rule will no longer apply. The number of eligible participants applies to the number of participants as of the first day of the plan year.

Why are plan audits required?

An annual audit is required by federal law to protect the best interests of all plan participants.

This requirement is to ensure a plan is operating in compliance with federal regulations set by the IRS and DOL (Department of Labor). The regulations are in place to ensure that plan documents and financial information are reported accurately and in a timely manner.

If you need an external 401(k) audit for your plan, consider a specialized firm like Anders CPAs + Advisors. We can provide a quality benefit plan audit that is efficient and accurate. For more information on how we can help, request a free consultation. For assistance, contact the team at (314)-886-7913 to schedule an appointment.

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