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Can you avoid an annual audit? Breaking down the 80-120 rule

Form 5500 audit and the 80-120 Rule
Can you avoid an annual 5500 audit? Breaking down the 80-120 rule.

Corporate retirement plans with more than 100 participants are generally required to have an audit of the plan done.  While having your 401(k) plan audited by a qualified, independent public accountant is a relatively straightforward affair, audits do incur annual hard dollar costs and consume staff time.  Therefore, for those plans approaching the level of 100 eligible participants, it is important to review a few key considerations, such as the 80-120 exemption rule, the number of terminated employees with balances, and your plan’s eligibility requirements.

For a large plan, an “eligible participant” is anyone who could be contributing to the plan, even if they choose not to, and any former employee who still has a balance in the plan.  The count of eligible participants is based on the first day of the plan year, generally January 1st.  If your count is over 100, you are usually required to have an independent audit.  However, there is an exception, called the 80-120 Rule.

The 80-120 Rule allows companies with participant counts that may shift marginally above or below 100 to file in the same plan size classification as the prior year.

For example, if your prior year filing was as a “small plan” and on the first day of the plan year you have more than 100 but less than 120 participants, you can elect to continue to bypass the audit requirement and file the short form 5500 as a small plan.  If you have more than 120 participants, you are required to file as a large plan regardless of your prior year filing status. 

Conversely, if your prior year filing was submitted as a large plan and you still have more than 100 participants on the first day of the plan year, you are required to have an audit and file the long form 5500 as a large plan for the current year. If your participant count drops below 100, the plan can elect to use Schedule I of Form 5500 to avoid the audit requirement.  If your plan count drops below 80, the plan can only file as a small plan.

For an illustration of filing requirements, please see the table below.

Eligible participants on 1st day of the plan yearPrior Year Form 5500Current Year Form 5500Audit Requirement
<80n/aSmall Plan - Schedule INo
80-99Small Plan - Schedule ISmall Plan - Schedule INo
Large Plan - Schedule HEither - Schedule H or IOptional*
100-119Small Plan - Schedule ISmall Plan - Schedule IOptional*
Large Plan - Schedule HEither - Schedule H or IYes
>120n/aLarge Plan - Schedule HYes
* If filing using Schedule H an audit is required.


If your plan is approaching the large plan limit, but you would like to continue to file as a small plan and avoid the audit requirement, it is a good idea to review your eligible list of participants for terminated employees with smaller balances.  Often those participants can be forced out of the plan, possibly keeping the plan below the 100-participant limit.

Additionally, if your company has a high level of turnover, you may also want to review the eligibility requirements of your plan.  It may make sense to require six or twelve months of service before participating in the plan.  This could keep “short timers” out of the plan and help reduce plan expenses by avoiding the need for an audit. 

Annual audits shouldn’t fill you with fear and dread, but why pay for something you don’t need?  With a few considerations and some careful planning, plans hovering around 100 participants may be able to avoid some unnecessary time and expense.  Give us a call if you would like to discuss ways to make your plan administration more efficient.