Form 5500 Schedule H filing requirements changed significantly in 2023, and many plan sponsors are still catching up. In February 2023, the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) revised the Form 5500 instructions to provide meaningful relief to smaller plan sponsors of defined contribution retirement plans. The core change centers on how plans determine the number of participants for reporting purposes, a calculation that directly determines whether a plan must undergo an independent audit.
Under the updated methodology, defined contribution plans now count only participants who have an account balance at the beginning of the plan year. Previously, plans had to count all eligible participants, including employees who were eligible but had not elected to participate. This single change is expected to reclassify a substantial number of plans from “large plan” status to “small plan” status, removing the obligation to attach an independent audit report to the annual Form 5500 filing.
Why the participant count methodology matters for employee benefit plan audit requirements
Employee benefit plan audit requirements hinge on a single threshold: the 100-participant mark. The DOL draws a bright line between large plans and small plans using this number, and the consequences of landing on one side versus the other are significant.
A defined contribution plan with 100 or more participants at the beginning of the plan year is classified as a large plan. Large plan filers must complete Schedule H of Form 5500 and attach an independent audit report prepared by a qualified independent public accountant. This audit verifies that the plan’s financial statements are fairly presented and that the plan operates in compliance with IRS and DOL regulations.
Small plans, those with fewer than 100 participants, file Schedule I instead of Schedule H and are generally exempt from the independent audit requirement. They still must file Form 5500 annually, but the filing is simpler and far less costly to prepare.
The expense difference is not trivial. A benefit plan audit commonly costs somewhere between $8,000 and $20,000 or more depending on plan complexity, the number of participants, and the types of investments held, with first-year audits and plans holding harder-to-value investments running toward the upper end. For a plan hovering near the 100-participant boundary, the previous counting methodology could trigger audit requirements based on employees who had never contributed a dollar to the plan. The revised rule corrects this by tying the count to actual economic participation. Working with an experienced audit and assurance services team helps sponsors confirm where their plan falls and what the change means for their filing.
How the new counting rule works under Schedule H filing requirements
The revised Schedule H filing requirements apply to plan years beginning on or after January 1, 2023. Under this rule, a defined contribution plan counts only those individuals who held an account balance as of the first day of the plan year. Employees who are eligible to participate but have not enrolled, and therefore have no account balance, are excluded from the count.
This change matters most for employers who auto-enroll employees or who have a large pool of eligible employees across multiple locations or divisions. Under the old methodology, a company with 130 eligible employees but only 85 active participants would have been classified as a large plan. Under the new rule, that same company’s plan would count only the 85 participants with balances and would qualify as a small plan, exempt from the audit requirement.
The rule applies only to defined contribution plans, such as 401(k), 403(b), and profit-sharing plans. Defined benefit pension plans continue to use the prior participant counting methodology. Plan administrators should verify which counting method applies to each plan they sponsor, particularly if they maintain both types. The DOL’s Form 5500 series resources and the IRS Form 5500 corner provide the official instructions that govern these distinctions.
What plan sponsors should do now to evaluate their audit obligations
Plan sponsors who have not yet assessed the impact of the new participant count rule should take action promptly. The first step is to contact your third-party administrator (TPA) and request a participant count using the updated methodology. Your TPA can confirm how many participants held an account balance at the start of each relevant plan year and whether the plan’s classification changes from large to small.
If the plan drops below the 100-participant threshold under the new rule, the plan sponsor has a choice. The audit requirement no longer applies, and the plan can file Schedule I instead of Schedule H. However, dropping the audit is not always the best decision.
Consider the following before eliminating the audit:
- Fluctuating participant counts. If the plan is close to the 100-participant line and headcount is growing, the plan may cycle in and out of audit status from year to year. Stopping and restarting audits creates gaps in financial oversight and can increase costs when the audit resumes because the auditor must perform additional procedures to cover the gap period.
- Fiduciary protection. An independent audit provides an extra layer of fiduciary protection for plan trustees and administrators. The audit process identifies errors in contributions, forfeitures, distributions, and participant data that might otherwise go undetected.
- Plan governance best practices. Many plan sponsors choose to continue voluntary audits because they view the process as part of responsible plan governance, even when it is not legally required. An audit can also reassure participants that their retirement assets are being managed properly.
The broader impact on Form 5500 filings and compliance
The participant count methodology change is one of several updates the IRS and DOL have made to Form 5500 in recent years. These changes reflect a broader effort to reduce the compliance burden on smaller employers while maintaining adequate regulatory oversight of retirement plan assets.
For plan administrators, the practical impact goes beyond the audit itself. Plans that shift from Schedule H to Schedule I will file a shorter, simpler return. Schedule I requires less detailed financial information and does not require the plan to prepare audited financial statements. This streamlines the entire annual reporting process and can reduce the time and cost associated with year-end plan administration.
Plan sponsors should not assume that the absence of an audit means less scrutiny. The DOL continues to conduct enforcement actions and investigations of plans of all sizes. Plans that are exempt from the audit requirement are still subject to DOL examinations, and sponsors remain responsible for ensuring contributions are deposited timely, plan documents are followed, and fiduciary obligations are met. A coordinated review across accounting services can help sponsors keep these obligations on track even after the audit ends.
How to discuss the rule change with your auditor and TPA
Proactive communication with your current auditor and TPA is essential. If you have been filing as a large plan and believe the new counting rule changes your status, start the conversation early in the plan year rather than waiting until the filing deadline approaches.
Your auditor can help you evaluate whether continuing a voluntary audit makes sense given your plan’s size, complexity, and growth trajectory. If you decide to discontinue the audit, your auditor can advise on the proper transition procedures, including how to handle the final audit year and what documentation to maintain going forward.
Your TPA should update their systems to apply the revised participant counting methodology and confirm that your Form 5500 filing reflects the correct plan size classification. If your plan uses a calendar year-end, the 2023 plan year was the first year subject to the new rule, and your 2023 Form 5500 filing should already reflect the updated count.
Frequently Asked Questions
What changed about Form 5500 Schedule H in 2023?
The IRS and DOL revised the participant counting methodology for defined contribution plans effective for plan years beginning January 1, 2023. Plans now count only participants with an account balance at the start of the plan year, rather than all eligible participants. This change determines whether a plan is classified as a large plan requiring an independent audit.
How many participants trigger a Form 5500 audit requirement?
A defined contribution plan with 100 or more participants at the beginning of the plan year is classified as a large plan and must file Schedule H with an independent audit report attached. Plans with fewer than 100 participants file the simpler Schedule I and are generally exempt from the audit requirement.
Does the new participant count rule apply to defined benefit plans?
No. The revised counting methodology applies only to defined contribution plans such as 401(k) and 403(b) plans. Defined benefit pension plans continue to count participants using the prior methodology, which includes all eligible participants regardless of account balance status.
Should a plan sponsor stop auditing if the plan falls below 100 participants?
Not necessarily. While the audit is no longer legally required, plan sponsors should consider whether their participant count may fluctuate above and below the threshold in future years. Stopping and restarting audits creates coverage gaps and can increase costs. Many sponsors choose to continue voluntary audits for fiduciary protection and governance purposes.
What is the difference between Schedule H and Schedule I on Form 5500?
Schedule H is required for large plans (100 or more participants) and includes detailed financial information along with an independent audit report. Schedule I is the simplified version for small plans and does not require audited financial statements. The new participant counting rule may shift some plans from Schedule H to Schedule I.
When should a plan sponsor contact their TPA about this change?
Plan sponsors should contact their third-party administrator as soon as possible to determine the impact of the new counting rule on their specific plan. The TPA can provide an updated participant count and confirm whether the plan’s classification has changed, which affects the Form 5500 filing approach and audit obligations for the current and future plan years.
