Terminating a 401(k) plan: the final audit and the final Form 5500

Last reviewed October 2026. General information about the rules, not legal or tax advice for a specific plan.

A terminating 401(k) plan still needs an independent audit for its final year if it had 100 or more participants with an account balance on the first day of that year. The final year ends when the last of the plan’s assets is distributed, and the final Form 5500 is due seven months later. Time it well and the last two years can be audited together.

Does a terminating plan still need an audit?

Yes. Whether a plan files as a large plan, and so needs an audit, is decided by the count on the first day of the plan year: participants with an account balance.^[2] A plan that starts its final year with 100 or more of them needs an audit for that year, even if every account has been paid out by the end of it.

Terminating the plan does not end the filing on its own. If the plan was terminated but not all of its assets were distributed, a Form 5500 must be filed for each year the plan has assets.^[1]

When is the final Form 5500 due?

The final plan year ends on the complete distribution of the plan’s assets, which usually makes it a short plan year. The final Form 5500 is due on the last day of the seventh calendar month after that year ends, and you check the final return/report box once all assets have been distributed or transferred to another plan.^[1] A Form 5558 extends the deadline by up to two and a half months.^[1]

Can the last two years be audited together?

Yes, if the final year lasts seven months or less. Under the DOL’s short plan year rule, the accountant’s report for the first of two consecutive plan years, one of which is a short plan year of seven or fewer months caused by termination, can be deferred.^[3] Then:

the Form 5500 for the earlier year is filed with its financial statements, an explanation of the short year, and a statement that the next report will include the audit for both years;^[3]
the final Form 5500 includes one accountant’s report covering both years, and identifies any material differences from the earlier year’s unaudited figures.^[3]

Example. A calendar-year plan pays out its last account on June 30, 2026, so its final plan year runs six months. Its 2025 Form 5500, due July 31, 2026, can go in without the auditor’s report. The final 2026 Form 5500 is due January 31, 2027, or April 15, 2027 with an extension, and carries one audit of 2025 and 2026 together.

Distribute later and the final year runs past seven months: the deferral is not available, and each year needs its own audit.

What does an auditor look at in a final-year audit?

The year’s usual audit areas, plus the termination itself. The IRS rules an auditor will test against:

Full vesting. All affected participants, meaning employees and former employees with an account balance on the termination date, must be 100% vested.^[4] Forfeitures of affected participants’ balances are the first thing to look for.
Timely distribution. All plan assets should be distributed as soon as administratively feasible, generally within 12 months of the termination date.^[4]
The plan amendment. The plan is amended to set a termination date and to update it for changes in the law.^[4]
The final contributions and expenses. Deferrals withheld before the end still have to reach the plan on time, and fees paid from the plan in its last year are tested like any other year’s.

What about a partial termination?

A plan can partially terminate without ending. Under Rev. Rul. 2007-43, a turnover rate of 20% or more in the applicable period, counting employer-initiated severances, creates a rebuttable presumption of a partial termination.^[5] When one happens, affected employees become fully vested in their accounts.^[5] Layoffs, a sale of a division and the run-up to a full termination are when an auditor checks for it.

What does Ledgerline audit?

401(k) and 403(b) plans, including final-year audits. We’re booking engagements for the coming season, starting December 2026. How a Ledgerline audit works.

Frequently asked questions

Does a terminated 401(k) plan still need an audit?

Yes, for its final plan year, if it had 100 or more participants with an account balance on the first day of that year, even if every account has been paid out by the end of it. A plan that is terminated but still holds assets keeps filing a Form 5500 every year.

When is the final Form 5500 due for a terminated plan?

The final plan year ends when all plan assets have been distributed. The final Form 5500 is due on the last day of the seventh month after that, or two and a half months later with a Form 5558 extension.

Can the last two years be audited together when a plan terminates?

Yes, if the final plan year lasts seven months or less. Under 29 CFR 2520.104-50 the accountant's report for the year before can be deferred, and the final Form 5500 then includes one audit report covering both years.

Do participants have to be fully vested when a 401(k) plan terminates?

Yes. The IRS requires all affected participants, meaning employees and former employees with an account balance on the termination date, to be 100% vested.

What is a partial plan termination?

Under Rev. Rul. 2007-43, employer-initiated turnover of 20% or more in a period creates a rebuttable presumption that the plan partially terminated, which makes affected employees fully vested in their accounts.

Winding down a plan?

The timing of the last distribution decides whether you need one audit or two. A short call is enough to work out which applies to your plan.

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