80-120 Participant Rule: When a 401(k) Audit Is Required

The 80-120 participant rule is a Department of Labor provision that lets retirement plans hovering near the 100-participant audit threshold keep filing as a small plan, and avoid a mandatory audit, as long as they stay at or below 120 participants and filed as a small plan the prior year. Under ERISA, large plans with 100 or more participants generally must engage an independent auditor each year. The 80-120 rule creates a buffer zone so that once a plan qualifies as a small filer, it does not have to switch to large-plan status, and take on the cost of an audit, until it exceeds 120 participants. A 2023 regulatory change also redefined who counts as a “participant,” which shifted the audit threshold for tens of thousands of plans nationwide.

Why the 100-Participant Line Matters

ERISA and its implementing regulations require that any defined contribution plan with 100 or more participants at the beginning of the plan year file a complete Form 5500, including audited financial statements from an independent qualified public accountant. Plans with fewer than 100 participants generally qualify for the small-plan filing exemption on Schedule I of the Form 5500, which does not require an attached audit.

The dividing line is straightforward in theory, but in practice, plan headcounts can fluctuate year to year. Hiring a new class of employees or an acquisition can push a plan from 95 participants to 105 almost overnight. Without a buffer rule, that single-year jump would automatically require an audit for that plan year even if the growth was temporary. The 80-120 rule addresses exactly that problem.

The Basic Audit Trigger

For plan years beginning on or after January 1, 2023, the participant count is determined by the number of participants with account balances at the beginning of the plan year (more on that change below). If that number is 100 or more, you are generally filing as a large plan and an audit is required.

How the 80-120 Participant Rule Works

The 80-120 participant rule is codified under DOL regulations at 29 CFR 2520.104-46 and reflected in the annual Form 5500 instructions. The mechanics work like this.

If the participant count is below 80: The plan must file as a small plan. No audit is required (assuming the qualifying plan asset and bonding conditions are met).

If the participant count is 80 to 120: The plan may file in the same category it used the prior year. If it filed as a small plan last year, it can continue to file as a small plan. If it filed as a large plan last year, it must continue to file as a large plan.

If the participant count exceeds 120: The plan must switch to large-plan filing and attach audited financial statements.

The rule has no expiration. A plan that legitimately stays between 80 and 120 participants for five consecutive years can continue filing as a small plan all five years, as long as it filed as a small plan before entering that window. There is no “use it or lose it” restriction.

What the Rule Does Not Do

The 80-120 rule is a filing-category election, not a blanket audit exemption. A plan that crossed 120 participants and became a large-plan filer, then dropped back into the 80 to 120 band, must continue filing as a large plan. In that case, it cannot use the rule to return to small-plan filing until its participant count falls below 100. The rule preserves the status you already hold; it does not let you choose whichever status is more favorable.

The 2023 Change: Counting Only Participants With Account Balances

Before 2023, plan sponsors counted all eligible participants, meaning anyone who was actively employed and eligible to enroll, whether or not they had ever contributed a single dollar. A 50-person company with a plan open to all employees counted all 50 in its participant number, even if 15 of them had never enrolled.

The final rule for the 2023 Form 5500, published in the Federal Register on February 24, 2023 by the DOL, IRS, and Pension Benefit Guaranty Corporation, changed the counting method for defined contribution plans. For plan years beginning on or after January 1, 2023, a participant in a defined contribution plan is counted for the audit threshold only if they have an account balance at the start of the plan year.

Participants included in the count under the new method:

• Active employees with any vested or unvested account balance
• Former employees who still hold a balance in the plan
• Participants with outstanding plan loans (the loan balance counts as an account balance)
• Beneficiaries and QDRO alternate payees who are currently receiving benefits

Participants excluded from the count:

• Eligible employees who have never enrolled or contributed
• Employees who cashed out entirely and hold a zero balance

The DOL estimated that roughly 19,500 defined contribution plans that had been subject to audit requirements under the old counting method would be reclassified as small plans and no longer need an audit once the new method took effect. For plan sponsors whose participant counts include a large number of eligible-but-never-enrolled employees, the practical impact can be substantial.

An Example

Suppose a manufacturing company maintains a 401(k) with 95 employees who have contributed and hold balances, plus 30 employees who are eligible but have never enrolled. Under the old rules, the total participant count was 125, pushing the plan into large-plan territory. Under the rules effective for plan years beginning on or after January 1, 2023, only the 95 employees with balances count. The plan now falls below the 80 threshold and qualifies as a small filer, avoiding the audit requirement entirely.

The 80-120 Rule and Benefit Plan Audit Participant Count: Practical Planning

Understanding how the 80-120 participant rule interacts with the new counting method requires tracking three numbers at the start of each plan year:

1. The current participant count (using the balances-only method)
2. The count from the prior year
3. Whether the plan filed as a small or large plan last year

Scenario Planning

Current Count	Prior Filing	Result
Under 80	Small	Small plan, no audit required
80-120	Small	May continue as small plan, no audit
80-120	Large	Must continue as large plan, audit required
Over 120	Either	Must file as large plan, audit required

Plan sponsors should review participant counts well before the plan year begins. If the count is projected to cross 120, there may be time to understand whether the increase is structural (permanent headcount growth) or transitory (temporary workers, seasonal staff), and to budget accordingly for an audit engagement.

First-Time Filers

A plan filing its first Form 5500 has no prior-year filing category to rely on. In that case, the plan uses the participant count at the beginning of the plan year to determine whether to file as a small or large plan. If the count is 100 or more, an audit is required for that first year. If the count is 99 or fewer, the plan files as a small plan, and the 80-120 rule becomes available in subsequent years.

Audit Quality and SAS 136

If your plan crosses into large-plan territory, the audit itself is governed by AICPA Statement on Auditing Standards No. 136, “Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA.” SAS 136 became effective for audits of plan years ending on or after December 15, 2021. It clarified auditor responsibilities around plan instruments, participant data, and the qualified audit opinion format used for ERISA plans.

Historically, many benefit plan audits were performed as “limited-scope” engagements, where the auditor did not test investment information certified by a qualified custodian. SAS 136 renamed this scope restriction an “ERISA Section 103(a)(3)(C) audit” and imposed more explicit requirements on both the plan sponsor and the auditor around what certifications must be in place and what the auditor must still test regardless of the certification.

Selecting an auditor with dedicated employee benefit plan experience matters here. The AICPA’s Employee Benefit Plan Audit Quality Center plan sponsor resources provide tools and advisories for plan sponsors vetting prospective auditors. Modus’s employee benefit plan audit practice handles both first-year and recurring plan audits with a workflow designed to reduce the documentation burden on plan sponsors.

Small Plan Audit Waiver Conditions

Being in the small-plan filing category does not automatically mean no oversight at all. To qualify for the audit waiver under 29 CFR 2520.104-46, a small plan must satisfy an asset quality test: at least 95 percent of plan assets must be “qualifying plan assets” at the end of the preceding plan year. Qualifying plan assets include:

• Assets held by a bank, insurance company, or registered broker-dealer
• Qualifying employer securities
• Plan loans that comply with ERISA Section 408(b)(1)

If the 95 percent test is not met, the plan can still claim the waiver if any person handling the non-qualifying assets is bonded for at least 100 percent of the value of those assets.

The plan administrator must also disclose on the Form 5500 that it is claiming the small-plan audit waiver. Under Schedule I, the administrator certifies the qualifying asset condition.

For plans that hold non-standard assets such as real estate, employer stock outside the qualifying categories, or alternative investments held directly, careful asset analysis is required before assuming the waiver applies.

What Triggers a Move From Small to Large

Beyond the raw participant count, a few other situations can move a plan into large-plan filing territory regardless of the 80-120 rule:

• A plan merger that combines two smaller plans into a single arrangement whose combined balance count exceeds 120
• A corporate acquisition that brings over employees with existing balances
• A determination that assets held outside qualifying custodians fail the 95 percent test, making the waiver unavailable

Conversely, plan sponsors sometimes undercount their participant roster by not reviewing whether former employees have been paid out. If a terminated employee still holds a balance in the plan because no distribution was made and the account was never rolled over, that participant still counts. Regular plan housekeeping, including encouraging former employees to take distributions or roll over balances, can meaningfully affect the participant count.

Coordinating With Your Service Providers

Most third-party administrators (TPAs) and recordkeepers track participant-level data and can produce a participant count report that aligns with the DOL’s current counting methodology. Before the plan year ends, a plan sponsor should confirm with the TPA which employees held account balances as of the beginning of the year and reconcile that against the prior year’s filing category.

The plan auditor, if one is required, will independently verify participant data. Modus’s audit and assurance team builds this reconciliation directly into the engagement workflow, using source-linked workpapers that reduce back-and-forth with the plan sponsor and TPA.

For the DOL’s official guidance on Form 5500 requirements and the participant counting change, see the EBSA Fact Sheet on Changes for the 2023 Form 5500 and the eCFR text of 29 CFR 2520.104-46.

Related reading: Employee Benefit Plan Auditors: How to Choose the Right Firm

Frequently Asked Questions

What is the 80/120 participant rule for 401(k) audits?

The 80-120 participant rule is a DOL provision under 29 CFR 2520.104-46 that allows a retirement plan with between 80 and 120 participants to continue filing in the same category, small or large, as it used in the prior plan year. A plan that filed as a small plan last year and now has 95 participants can continue as a small plan without obtaining an audit. The plan must switch to large-plan filing, and have an audit, only when participants exceed 120.

How is the participant count determined for the 80-120 rule?

For plan years beginning on or after January 1, 2023, participant count is determined by the number of individuals with account balances at the beginning of the plan year. Eligible employees who have never contributed and hold no balance are excluded. Prior to 2023, all eligible employees were counted regardless of whether they held a balance.

What happens when a plan first crosses 100 participants?

If a plan’s participant count reaches 100 or more and the plan has never filed as a large plan before, the 80-120 rule does not yet apply. The plan files as a large plan for that year. From that point forward, once the plan is a large filer it continues filing as a large plan while the count stays between 80 and 120, and it may return to small-plan status only once the count falls below 100 at the start of a plan year.

Can a plan stay in the 80-120 window indefinitely?

Yes. There is no time limit on how long a plan may use the 80-120 rule. As long as the participant count remains between 80 and 120 each year and the plan filed as a small plan in the prior year, it may continue as a small plan without an audit.

Does a small plan still have any filing requirements without an audit?

Yes. Small plans still file a Form 5500 or Form 5500-SF annually. To claim the small-plan audit waiver, at least 95 percent of plan assets must be qualifying plan assets (or non-qualifying assets must be fully bonded). The plan administrator certifies the waiver condition on the Form 5500.

What changed in 2023 about how participants are counted?

Before 2023, plans counted all employees eligible to participate, whether or not they had ever enrolled or contributed. Starting with plan years beginning on or after January 1, 2023, plans count only participants with actual account balances at the start of the plan year. This change, implemented by a final rule published February 24, 2023, is estimated to remove roughly 19,500 defined contribution plans from the large-plan audit requirement.