401(k) audit requirements: when a plan needs an audit

When does a 401(k) plan need an audit?

When it files the Form 5500 as a large plan. A plan with 100 or more participants at the beginning of the plan year files as a large plan, and large plans file Schedule H and generally must engage an independent qualified public accountant and attach that accountant’s report.^[1]

The report goes in with the Form 5500, which is due on the last day of the seventh month after the plan year ends: July 31 for a calendar-year plan. Filing Form 5558 extends that by up to two and a half months, to October 15.^[5]

Who counts as a participant?

For a 401(k) plan, only participants who have an account balance on the first day of the plan year. That is the number on line 6g(1) of the Form 5500, or line 5c(1) of the Form 5500-SF.^[1][2][3] In practice that means:

• Counted: current employees with money in the plan, former employees who left their balance in it, and a deceased participant whose beneficiary is still entitled to the balance.^[2]
• Not counted: employees who are eligible but have never had a balance, and former employees who were paid out in full.^[2]

Example. A company with 300 eligible employees, 85 of whom have money in the plan on January 1, has 85 participants for this test. It files as a small plan.

Watch two things that move the count. Former employees who never take their money out keep counting, year after year. And automatic enrollment gives new hires a balance from their first paycheck, so a growing company can cross 100 faster than its headcount suggests.

A brand-new plan counts differently. If the plan is filing its first return, it uses the number of participants with account balances at the end of the plan year instead of the beginning.^[1] For a 401(k), that is everyone who has made a contribution, or had one made for them.^[2]

How does the 80-120 rule work?

It is an election, not an exemption. The DOL’s wording: “If the number of participants is between 80 and 120, and a Form 5500 Annual Return/Report was filed for the prior plan year, you may elect to complete the return/report in the same category (‘large plan’ or ‘small plan’) as was filed for the prior return/report.”^[1] So a plan that filed small last year can keep filing small up to 120, and it works in the other direction too.

The rule itself is at 29 CFR 2520.103-1(d).^[3] The election uses the same count as the 100 test: participants with an account balance.

Does a plan under 100 participants ever need an audit?

It can. A small plan skips the audit only if it meets the small plan audit waiver conditions in 29 CFR 2520.104-46.^[3] For a 401(k) plan that usually means:

• at least 95% of the plan’s assets, as of the last day of the previous plan year, were “qualifying plan assets”, broadly assets held by a regulated financial institution;
• the plan’s Summary Annual Report includes the required audit waiver disclosure; and
• the administrator provides copies of the financial institutions’ statements free of charge to any participant who asks.

A plan that misses the 95% test can still meet the waiver with an enhanced fidelity bond, but it then has to file the full Form 5500 rather than the 5500-SF.^[3]

Did the counting rule change in 2023?

Yes, and it is the rule now, not a pending change. For plan years beginning on or after January 1, 2023, defined contribution plans count only participants with account balances.^[4] Before that, eligible employees counted whether or not they had enrolled. The DOL estimated the change would move the number of defined contribution plans filing as small from about 613,290 to about 631,976.^[4] Articles written before 2023 that count eligible employees are out of date.

What happens the year your plan crosses 100?

That year’s Form 5500 needs an independent audit report attached, and for most plans it is the first one. A first audit covers ground a repeat audit does not, starting with the plan’s opening balances, so it is worth engaging an auditor well before July 31. What a first auditor actually looks at walks through it, and if the deadline is already close, see your options when the audit isn’t done.

Can a plan get back under 100?

Sometimes, because the count is set by balances rather than headcount. If the plan document allows it, a plan can pay out small balances of former employees without their consent. Since SECURE 2.0, a plan may set that limit as high as $7,000, up from $5,000.^[6] Balances over $1,000 paid out this way generally go to an IRA in the former employee’s name unless they choose otherwise.^[7] The count is taken on the first day of the plan year, so anything like this has to be finished before then. Whether it suits your plan, and whether the plan document needs amending first, is a question for your TPA or ERISA counsel.

Frequently asked questions