Explain the 80-120 participation rule for the audit requirement.

[Guest Tara Curran]

A 401(k) plan had 114 participants at the end of 1998. At the beginning of 1999 the plan has 134 participants due to employees becoming eligible January 1, 1999. Since the plan has greater than 120 participants at the beginning of the 1999 plan year, is an audit required for 1999?

[Richard Anderson]

Yes an audit is required for 1999. Is 1999 the first year that the beginning participant count was over 120?

The 80-120 rule is that if the count is 80-120, then you may treat the plan the same as the prior year. Meaning, if the plan was treated as a small plan in the prior year and the plan has 120 or less in the current year, then it may be treated as a small plan.

I don't why you would want to, but if the plan in the prior year was a large plan, but this year the count is 90, the 80-120 rule allows you to treat the plan as a large plan, if you want to. You elect, because the count is between 80 and 120, to treat the plan the same as the prior year.