Tips to Reduce Participant Count to Avoid Financial Audit Requirement

“We are a small nonprofit that sponsors an ERISA 403(b) plan. Until now our plan has been small enough to avoid the plan financial audit requirement, but, due to a lot of former employees retaining balances in the plan, we will now have more than 100 participants on 1/1/2020. We can use the 80/120 rule to avoid an audit for 2020 (our plan is a calendar year plan), but I want to be proactive here to avoid crossing the 120-particpant threshold that would require audits in the future.  Are there any steps I can take to reduce the number of participants in the plan?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Absolutely! The Experts can suggest any of the following actions in order to reduce your participant count:

1)         If your plan lacks a small balance cashout provision, adding one would eliminate participant account balances of terminated employees that do not exceed $5,000, assuming that your recordkeeper can enforce such a provision.

2)         If your plan has a small balance cashout provision, make certain it is being enforced. The Experts’ experience with many recordkeepers is that small balance cashouts are often not processed as efficiently as they should be.

3)         If the participant count remains an issue after addressing small balance cashouts, you could amend your plan so that ALL terminated employees must take a lump-sum distribution following termination of employment. A common provision in 401(k) plans, you will want to check with your recordkeeper and underlying investment providers to confirm that such a provision could be administered. However, such a provision may create more ex-employee relations issues than a small balance cashout provision would.

Thank you for your question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.