Whether your retirement plan needs a 401(k) audit comes down to a single count: the number of participants in the plan at the start of the year. That count determines whether the Department of Labor treats your plan as a large plan, which must attach audited financial statements to its Form 5500, or a small plan, which generally does not. A 2023 rule change altered how that count is calculated, and a long-standing provision called the 80-120 rule gives many plans more breathing room than their sponsors realize.
Quick answer: A 401(k) plan generally needs an annual audit by an independent qualified public accountant when it has 100 or more participants with account balances at the beginning of the plan year. Under the 80-120 rule, a plan with between 80 and 120 participants at the start of the year may keep filing in the same category, large or small, that it used the prior year, so a plan that previously filed as small is not pushed into an audit until it exceeds 120 participants.
This article explains when a 401(k) audit is required, how the 2023 counting change works, how the 80-120 rule can defer an audit, and what plan sponsors should do to prepare. The rules apply to defined contribution plans broadly, so 403(b) and similar plans follow the same logic.
When Does a 401(k) Plan Need an Audit?
The audit requirement comes from the Employee Retirement Income Security Act (ERISA). A plan that qualifies as a large plan must engage an independent qualified public accountant, often called an IQPA, to examine the plan’s financial statements and must file that audit report as part of its annual Form 5500.
The dividing line is 100 participants. A plan with 100 or more counted participants at the beginning of the plan year is generally a large plan, while a plan below that line is a small plan. Small plans usually qualify for an audit waiver under 29 CFR 2520.104-46, provided at least 95 percent of plan assets are qualifying plan assets held by regulated institutions or any shortfall is covered by a fidelity bond.
The audit is not a tax examination and it is not optional for plans that cross the threshold. It is a financial statement audit performed under professional auditing standards, and a late or missing audit can lead to a rejected Form 5500 filing and Department of Labor penalties. For plan sponsors, the practical question each year is simple: how many participants do we count, and on what date.
What Changed in 2023: Counting Participants With Account Balances
For years, the participant count for a 401(k) plan included every employee eligible to participate, whether or not they had ever contributed or held a balance. That approach swept in large numbers of eligible-but-not-enrolled workers and pushed many growing employers into an audit even when relatively few employees actually used the plan.
In February 2023, the Department of Labor, the IRS, and the Pension Benefit Guaranty Corporation changed the method for defined contribution plans. Beginning with plan years that started on or after January 1, 2023, the count is based only on participants with an account balance at the beginning of the plan year, rather than all eligible employees. Both active employees with a balance and terminated participants who still hold a balance are counted.
The shift was meaningful. A company with 250 eligible employees but only 70 account balances at the start of the year is now a small plan, where under the old method it would likely have been a large plan facing an annual audit. Many small and midsize employers that had been paying for audits found, beginning with their 2023 filings, that they no longer met the threshold. The change cannot be applied retroactively to earlier plan years.
How the 80-120 Rule Works
The 80-120 rule is a separate provision that adds stability near the 100-participant line. It exists so that a plan hovering around the threshold does not have to start and stop an audit from one year to the next as its count drifts up and down.
Under 29 CFR 2520.103-1(d), if a plan has between 80 and 120 participants, inclusive, as of the beginning of the plan year, the plan administrator may elect to file the same category of annual report that was filed for the prior plan year. A plan that filed as a small plan last year can continue filing as a small plan, with no audit, until its beginning-of-year count exceeds 120.
Consider a plan that filed as a small plan and grows to 108 participants with balances at the start of the next year. Without the 80-120 rule, crossing 100 would force a large-plan filing and an audit. With the rule, because the count is within the 80 to 120 band and the plan filed small the prior year, the administrator may file as a small plan again and defer the audit. Once the count tops 120, the large-plan filing and the audit become unavoidable.
The rule cuts both ways. A plan that filed as a large plan last year and dips into the 80 to 120 range may elect to continue as a large plan, which can simplify reporting for an employer expecting to grow again. The election is the administrator’s to make each year within those bounds, and it should be documented.
SAS 136 and What a Modern Plan Audit Looks Like
Plan sponsors who do cross into audit territory will encounter a more demanding standard than existed a few years ago. Statement on Auditing Standards No. 136 (SAS 136) reshaped employee benefit plan audits for periods ending on or after December 15, 2021, and it remains the governing framework today.
SAS 136 replaced the old limited-scope audit with what is now called an ERISA Section 103(a)(3)(C) audit. The plan administrator must affirmatively elect that approach and acknowledge specific responsibilities, including maintaining a current plan document, keeping accurate records, and providing the auditor a substantially complete draft Form 5500. The auditor, in turn, performs procedures on the certified investment information that the prior approach allowed them to skip.
For sponsors, the message is that the audit is a shared responsibility, not something handed off entirely to the accountant. Clean records, timely contributions, an up-to-date plan document, and well-organized participant data make the engagement faster and reduce the risk of reportable findings. Sponsors who want help building those controls before an audit cycle can lean on a firm’s audit and assurance team and on client accounting support to keep plan records audit-ready year-round.
Deadlines and How to Prepare
Form 5500 is due the last day of the seventh month after the plan year ends, which is July 31 for a calendar-year plan. Filing Form 5558 extends that deadline by two and a half months, to October 15 for a calendar-year plan. When an audit is required, the completed audit report must accompany the Form 5500, so the audit timeline has to work backward from the filing date.
That backward planning is where many sponsors get caught. An audit cannot start until the recordkeeper provides final reports, the trust statements are reconciled, and the plan’s contribution and distribution activity is complete. Sponsors who wait until September to engage an auditor for an October 15 deadline leave little room for the document requests, payroll testing, and management representations that the engagement requires.
The better practice is to confirm your participant count and filing category early in the year, ideally as soon as the beginning-of-year data is available. Determine whether the count, measured by participants with account balances, lands above 100, below 100, or inside the 80 to 120 band where the prior-year election applies. If an audit is likely, schedule it well ahead of the deadline and assemble the plan document, recordkeeper reports, and payroll records the auditor will request. A firm’s risk advisory team can also help sponsors strengthen the internal controls that auditors test.
Frequently Asked Questions
How many participants trigger a 401(k) audit?
Generally, a plan with 100 or more participants with account balances at the beginning of the plan year is a large plan and must include an independent audit with its Form 5500. The 80-120 rule can defer that obligation, as described below.
How are participants counted after the 2023 change?
For defined contribution plans, the count includes only participants with an account balance at the beginning of the plan year, counting both active employees with balances and terminated participants who still hold a balance. Employees who are merely eligible but have no balance are no longer counted.
What is the 80-120 rule?
If a plan has between 80 and 120 participants at the beginning of the plan year, the administrator may elect to file in the same category, large or small, that it used the prior year. A plan that filed as small can keep filing as small, with no audit, until its beginning-of-year count exceeds 120.
When is the Form 5500 due, and when is the audit due?
Form 5500 is due the last day of the seventh month after the plan year ends, with a two-and-a-half-month extension available via Form 5558. When an audit is required, the audit report must be filed with the Form 5500, so it must be completed before the filing deadline.
Knowing your participant count and your filing category early is the single most effective step a plan sponsor can take. It tells you whether an audit is coming, whether the 80-120 rule gives you another year, and how much time you have to prepare. That clarity, more than anything, is what keeps a 401(k) plan compliant and its Form 5500 filed on time.
