When Does Your 401(k) Plan Require an Audit?

As employee benefit plans grow, plan sponsors may eventually reach a point where an employee benefit plan audit becomes required. Generally, this happens when the plan’s participant count causes it to file as a large plan rather than a small plan for Form 5500 purposes. Understanding when that threshold applies is important because large-plan filing status affects Form 5500 filing requirements, plan administration, and compliance responsibilities. Knowing how participant counts are calculated and how the 80-120 participant rule works can help plan sponsors prepare before an audit becomes necessary.

What Triggers an Employee Benefit Plan Audit Requirement?

In general, an audit requirement is tied to the participant count reported for a plan’s annual Form 5500. Beginning with plan years starting on or after January 1, 2023, the determination is based on the number of participants with account balances at the beginning of the plan year to determine whether the plan files as a small plan or large plan. This was a key change from the prior methodology, which generally counted employees who were eligible to participate even if they did not have an account balance. Employee benefit plans that meet the applicable participant threshold for large-plan filing status must include an independent qualified public accountant’s report as part of their filing.

Employee benefit plan audits are intended to give participants, regulators, and plan stakeholders greater confidence that plan assets are being administered properly and reported accurately. As plans grow, the additional review helps verify that participant accounts, contributions, distributions, and financial reporting are being handled in accordance with applicable requirements.

For many plan sponsors, the first indication that an audit may be required comes when participant counts begin approaching key thresholds. Because participant numbers can fluctuate from year to year, understanding how those counts are determined is just as important as knowing the threshold itself.

How the Participant Count Is Actually Determined

Participant counts are not limited to employees currently making contributions to the plan. Beginning with plan years starting on or after January 1, 2023, the participant count is generally based on participants with account balances at the beginning of the plan year.

Many plan sponsors focus on active employees because they are the participants most visible in day-to-day plan administration. However, Form 5500 reporting rules take a broader view.

For Form 5500 reporting purposes, the participant count may include active employees with account balances, terminated employees who still have account balances in the plan, retired employees with balances, and others who still have assets in the plan.

The distinction can catch organizations by surprise. A company with 75 active contributors may have a significantly higher participant count once former employees and retirees with balances are included. Reviewing plan records regularly can help sponsors avoid unexpected compliance obligations.

The 80-120 Participant Rule and What Changes at the Threshold

The 80-120 participant rule provides flexibility for plans near the audit threshold. In certain circumstances, a plan with between 80 and 120 participants at the beginning of the plan year may be able to continue filing under the same category used in the prior year. For example, if a plan filed as a small plan in the prior year and has 105 participants with account balances at the beginning of the current year, it may be able to continue filing as a small plan and avoid large-plan filing and audit requirements. Conversely, if a plan filed as a large plan in the prior year and begins the current year with 95 participants with account balances, it may generally continue filing as a large plan until its participant count falls below 80.

The rule exists to prevent plans from moving back and forth between filing categories when participant counts fluctuate modestly from year to year. Without it, a plan that moves above or below a threshold by only a few participants could face changing reporting requirements on a regular basis.

Plan sponsors approaching the threshold should monitor participant counts carefully and understand how future growth may affect filing obligations. Reviewing Form 5500 filing and employee benefit plan audit requirements can help sponsors understand what to expect as participant counts increase.

Preparing for Your First Employee Benefit Plan Audit

Preparing for a first employee benefit plan audit starts with identifying the information auditors will need to review. Plan sponsors should gather key records, including participant census data, payroll information, contribution records, trust statements, and plan documents. Confirming that these records are complete and readily accessible before the audit begins can help avoid delays later in the process.

It is also important to review how participant data is maintained and whether plan operations align with governing documents. Discrepancies between plan records, payroll data, and administrative processes can lead to compliance issues, additional audit questions, and unnecessary delays.

Plan sponsors should communicate with third-party administrators, payroll providers, trustees, custodians, recordkeepers, and other key services providers early in the process to clarify responsibilities and coordinate information requests. Coordination among service providers can make the audit process significantly more efficient.

Many first-time audits identify opportunities to strengthen documentation, participant recordkeeping, and internal processes. Taking time to prepare for an employee benefit plan audit before the requirement takes effect can help reduce disruptions, improve audit readiness, and create a smoother experience for everyone involved.

How Insero Supports Employee Benefit Plans Approaching an Audit Requirement

Organizations nearing the audit threshold commonly have questions about participant counts, filing requirements, preparation timelines, and the documentation auditors will request. Addressing those questions before an audit becomes mandatory can help reduce administrative burden and give leadership more time to plan.

As participant counts grow, employee benefit plan audits become part of the compliance process for many organizations. Understanding the rules, monitoring participant counts, and preparing documentation in advance can make the transition significantly smoother.

Insero Advisors works with plan sponsors to navigate audit requirements, understand reporting obligations, and prepare for upcoming audits. Our team draws on extensive experience with employee benefit plans and the broader audit and assurance process to help organizations stay prepared as requirements evolve.

Not sure whether your plan will require an audit in the coming years? Schedule a consultation with Insero Advisors to discuss your employee benefit plan obligations.

Resources:

• https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500
• https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/reporting-and-disclosure-guide-for-employee-benefit-plans