As the administrator of a company 401(k) plan, one of your responsibilities is determining whether your plan is considered small or large for reporting purposes. That distinction matters because it determines whether your plan will need an annual 401(k) audit.
In general, the key question is participant count. If your plan crosses the relevant threshold, it may be required to file as a large plan and include an external audit. The rule that often creates confusion is the 80–120 participant rule.
Quick answer: If your plan filed as a small plan in the prior year, you may still be able to file as a small plan until participant count reaches 121 at the start of the plan year. That’s why the “magic number” to remember is 120.
If this is your first time navigating the requirement, start with our complete 401(k) audit guide for a broader overview of timelines, requirements and what to expect.
WHAT IS AN ELIGIBLE PARTICIPANT?
An eligible participant generally includes former employees with an account balance, current employees who actively participate, employees who are eligible but not currently participating, and plan beneficiaries.
When you add all these eligible participants up the magic number that you should keep in mind is “120”.
If your plan did not require an independent audit in the prior year and filed Form 5500 as a small plan, but now has 120 eligible participants, the plan may still be able to continue filing as a small plan. Once the count reaches 121 at the start of the plan year, however, the plan must generally file as a large plan and include an external 401(k) audit.
THE “80-120” PARTICIPANT RULE
Many plan sponsors search for the answer to a simple question: when is a 401(k) audit required? In most cases, plans with more than 100 participants are considered large plans. However, the 80–120 rule creates an important exception. If your plan filed as a small plan in the prior year and still has fewer than 121 participants at the start of the current plan year, it may continue to file as a small plan and avoid the audit requirement for that year.
Once participant count reaches 121 on the first day of the plan year, the plan is no longer eligible for that exception. At that point, it must file as a large plan and include an external 401(k) audit.
Preparing for this threshold is an important part of audit readiness. Use a 401(k) audit checklist to confirm your documentation and processes are in place before your plan is required to be audited.
Collaborate with Service Providers to Ensure an Accurate Employee Count
Review your participant count with your service provider to confirm that it is accurate. In many cases, the total is calculated from census information and plan records already in the provider’s system, but plan sponsors should still verify the count carefully.
It is especially important to double-check the calculation if your plan is close to the threshold. If the count comes out to 100, 101, or near 120, confirm that participants were not included incorrectly. A 401(k) audit is time-consuming and expensive, so it is worth verifying whether the requirement truly applies.
What Happens if the Number of Eligible Participants Falls below 120 to 100?
Although the 80–120 rule can delay the audit requirement for a plan that filed as a small plan in the prior year, once a plan becomes subject to the audit requirement, it does not automatically move back out of that category simply because the count later drops below 120. The relevant count is based on the number of participants as of the first day of the plan year.
Why are Plan Audits Required?
Annual audits are required by federal law to help protect plan participants and ensure retirement plans are being administered in accordance with applicable rules.
If your plan is approaching the threshold and you are unsure whether an audit is required, reviewing the participant count early can help you avoid unnecessary surprises. If you do need an audit, working with a specialized team can make the process more efficient and easier to manage.
If you need an external 401(k) audit for your plan, consider a specialized firm like Anders. We can provide a quality benefit plan audit that is efficient and accurate. For more information on how we can help, request a free consultation.