When Does a 401(k) Plan Need an Audit?
If your company offers a 401(k) plan, you may have heard the term “plan audit” and wonder whether it applies to your organization. For many businesses, this isn’t a straightforward answer and getting it wrong could lead to penalties, compliance headaches and scrutiny from the Department of Labor (DOL).
Understanding when your 401(k) plan requires an independent audit is a critical part of benefits administration. Whether you manage the plan in-house or rely on a third-party administrator, knowing the rules can protect your organization and employees.
The Basic Rule: The 100-Participant Threshold
The DOL generally requires 401(k) plans that meet the definition of “large plan” to include an independent audit with their annual Form 5500 filing. Historically, the dividing line between small and large plans has been 100 participants.
However, the details of how that count is performed have changed significantly in recent years and many plan sponsors are still operating under outdated assumptions.
How the Counting Rules Changed in 2023
Before 2023, the participant count for determining audit eligibility included all employees who were eligible to participate in the plan, even if they had never contributed and carried a $0 balance. That approach meant that small and mid-sized employers found themselves requiring audits despite having a relatively modest actual plan participation.
The SECURE 2.0 Act brought important changes to Form 5500 reporting, including significant updates to how participants are counted. Starting with the 2023 plan year, plans count only participants who actually have an account balance. Employees who are eligible for company-sponsored plans but never enrolled are no longer counted.
The practical implication of this has been considerable, with the DOL estimating that the rule change removed the audit requirement for tens of thousands of smaller plans that had previously been under the old method. If your organization was near or just above the 100-participant threshold under the old counting method, it’s worth revisiting your count under the new rules.
Who Counts and Who Doesn’t
Under the current rules, the following individuals should be included in your participant count:
- Active employees who have any account balance in the plan.
- Terminated employees who still have a balance in the plan.
- Beneficiaries or alternate payees under a qualified domestic relations order (QDRO) who are receiving benefits.
Individuals who should be excluded:
- Employees who are eligible but have never contributed and have a $0 balance.
- Terminated employees with no remaining account balance.
An important note is that the participant count is taken as of the first day of the prior year plan, not the current year. For a calendar-year plan, a 2026 Form 5500 uses the participant count as of January 1, 2025. This lag can cause issues if a workforce has shifted significantly over the last 12 months.
The 80-120 Rule: A Buffer Zone for Growing Plans
For plans near the 100-participant threshold, a special provision known as the 80-120 rule provides some flexibility. Under this rule, a plan that filed as a small plan in the prior year may continue to file as a small plan in the current year, even if their participant count has grown, as long as the participant count as of the first day of the prior year plan remains below 121 participants.
What Happens During a 401(k) Audit?
If your plan qualifies as a large plan, your Form 5500 must include an opinion from an independent qualified public accountant (IQPA). An auditor examines the plan’s financial statements, internal controls and compliance with ERISA requirements.
Common areas to review as part of an audit include:
- Accuracy and timelines of participant contributions and employer matches.
- Application of plan eligibility and vesting rules.
- Completion and accuracy of participant account records.
- Compliance with plan document provisions.
Audits should not be seen as a penalty, but a compliance mechanism designed to protect plan participants and ensure the integrity of retirement assets. Failing to obtain a required audit when one is due or submitting an inaccurate audit can result in DOL enforcement activity and civil penalties.
Why This Matters for Outsourced HR
For organizations that rely on an outsourced HR team, the question of 401(k) audit eligibility is the type of compliance detail that can be easily overlooked without oversight. Plan administration touches payroll data, employee records and benefits systems simultaneously, so staying current on regulatory changes requires ongoing expertise rather than simply a one-time investment.
An experienced HR and audit partner brings the knowledge needed to track these thresholds year over year, while also being able to flag changes in headcount that could impact your audit status. This means that they can communicate with your plan administrator long before your Form 5500 is due. This kind of proactive oversight helps you avoid compliance surprises and ensures your plan is structured and administered in a way that holds up to scrutiny.
Want to learn more about our attest and audit services? Whether you need financial assurance or are exploring outsourced HR solutions, Brown Plus has the expertise to help. Contact us today.