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Understanding the 80-120 Participant Rule

Posted by Emily Taibl on May 2, 2017 3:46:51 PM

80 120 Rule - Bellevue 401k AuditorWhen it comes to determining whether an employee benefit plan is a “large” or a “small” plan, nothing seems to cause more confusion among plan sponsors than the so-called 80-120 Participant Rule.

In general, Department of Labor regulations require that plans with 100 or more participants be audited by a CPA. Problems occur with plans that fluctuate between slightly more or less than 100 participants. Under a strict interpretation of DOL rules, these plans would have to switch between being categorized as a “small” plan and a “large” plan each year. However, many plan administrators find this inconvenient and disruptive.

Fortunately, DOL Reg. 2520.103-1(c) and (d) provides an exception to this general rule. Plans that have previously filed a Form 5500, with between 80 and 120 participants (as defined by the DOL) at the beginning of the current plan year have the option to elect to complete the current year return using the same category (“large” plan or “small” plan) that was used in the previous year.

For example, if a plan had 115 participants at the beginning of the 2014 plan year but was considered a “small” plan for the previous year, the plan could opt to file its Form 5500 using the “small” plan category again in 2015. It could continue doing so in subsequent years until the number of participants exceeded 120.

Here, it’s important to note that employees become includable as “participants” on the date when the employee becomes eligible to participate — regardless of whether he or she elects to participate. Your participant count must include all of the following:

  • Actively participating employees;
  • Retired, deceased or separated employees who still have assets in the plan; and
  • All eligible employees who have yet to enroll or have elected not to enter the plan.

Please contact Wende Wadsworth at 425.629.1990 or wende@sweeneyconrad.com for guidance on issues of participant counts, audits and the 80-120 Participant Rule.

Topics: Retirement Reporter, Tax

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