The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. One of these requirements is that “large” plans undergo an annual audit. At first glance of the audit requirements, the triggers for an audit seem pretty clear-cut, however there are some exceptions to the general rule that should be considered.

General Rule

The general rule is that plans with 100 or more participants at the beginning of the plan year are considered “large” plans (required to have an audit) and plans with fewer than 100 participants are considered “small” plans. However, there is an exception to this general rule. Certain plans with 100 – 120 participants may be exempt from the annual audit requirement.

80 – 120 Participant Rule

If the general rule were applied without exception, plans that fluctuate between slightly more or less than 100 participants would have to switch between being categorized as a “small” plan and a “large” plan which could be inconvenient and disruptive. As a result, an exception to the general rule is provided, called the 80 – 120 rule. This exception provides relief from having to switch to the reporting requirements that the general rule would otherwise require. It provides that plans with between 80 and 120 participants at the beginning of the current plan year may elect to complete the current year return using the same category that they reported under in the previous year.

  • For example, if a plan had 110 participants at the beginning of the year and was considered a “small” plan during the previous year, the plan may file as a small plan in the current year, and each subsequent year until the number of participants exceeds 120.
  • Also, if a plan that had 90 participants at the beginning of the plan year and was considered a “large” plan during the previous year it may elect to file as a “large” plan again rather than following the general rule and switching back to a “small” plan if the decline to 90 participants was considered to be temporary and it was considered likely that next year the plan would exceed 120 participants.

In summary, if you have always been classified as a “small” plan and are still under the 120 participant count you can avoid classifying yourself as a “large” plan and forego the annual audit requirement.

Who is Considered a Participant of the Plan?

Anyone who has a balance in the benefit plan is classified as a participant. In addition, anyone who is eligible to join the plan is considered a participant. As a result, even if an employee does not make contributions and does not have an account in the plan, if he or she is eligible to participate then they are classified as a participant of the plan. The number of participants in a plan is reported on Line 5 of the Form 5500.