Understanding the 80/120 Rule: When a 401(k) Audit Is Required

Effective for plan years beginning after January 1, 2023, the Department of Labor (DOL) revised the rule of when a 401(k) plan is required to have an audit.

Previously, the threshold for a “large plan” (and therefore an audit) was based on the number of participants eligible to participate in the plan, which included participants that had never contributed and had no account balance.

Under the new rule, the threshold now counts only participants with an account balance as of the first day of the plan year.

Key Takeaways:

• Audit Required: 100 or more participants with account balances at the beginning of the plan year.
• No Audit Required: Fewer than 100 participants with account balances at the beginning of the plan year.

This rule change significantly reduces unnecessary audits for small and mid-sized employers, particularly for businesses whose plans have high eligibility but low participation rates.

The 80/120 rule helps your employee benefit plan maintain consistency from year to year:

• If your plan filed as a small plan last year, and this year it has fewer than 121 participants with account balances, it can continue filing as a small plan and skip the audit.
• If your plan exceeds 120 participants with balances, it will likely need to file as a large plan and obtain an audit.

Example:

Before the rule change, an employee benefit plan with 130 eligible employees, but only 20 with account balances, would have required an audit. Now, only participants with account balances are counted, so that same plan with 20 active accounts may no longer need an audit.

This change provides greater continuity and reduces the compliance burden for plan sponsors whose plans previously fluctuated between “small” and “large” plan filing requirements.

This rule applies to most defined contribution employee benefit plans, including:

• 401(k) single employer plans
• Profit-sharing plans
• 403(b) plans
• Pooled employer plans (PEPs)
• Multiple employer plans (MEPs); though MEPs must aggregate participant balances across employers
• Other similar defined contribution plans

At Froehling Anderson, our audit and assurance team conduct 401(k) plan audits for businesses of all sizes. Our proactive and personalized approach ensures your plan remains compliant and efficient.

Our Approach:

• Proactive Threshold Planning: We help you track your participant counts before the filing deadline to determine whether an audit is required.
• Collaborative Support: We work directly with your TPA, payroll provider, and recordkeeper to confirm counts and streamline the process.
• Industry Expertise: Our team performs 401(k) audits across multiple industries; from manufacturing to professional services, ensuring compliance with DOL and IRS standards.

Common Challenges We Help Solve:

• Confusion about who counts toward the participant threshold
• Unexpected audit requirements based on outdated guidance
• Balancing compliance costs with administrative efficiency

Q: Do we still count employees who are eligible but haven’t contributed?
A: Not anymore. As of 2023, only participants with account balances are counted.

Q: Can we avoid an audit if our plan is just barely over 100 participants?
A: Possibly. If your plan filed as a small plan in the prior year and has fewer than 121 participants with balances, it can continue filing as a small plan under the 80/120 rule.

Q: What happens if our plan exceeds 120 participants with account balances?
A: The 80/120 rule allows plans that filed as small in the prior year to continue doing so if the participant count remains at 120 or below. Once your plan exceeds 120 participants with account balances, it generally must be treated as a large plan and will require an audit. Consult with your CPA to confirm your filing status.

To determine whether your employee benefit plan needs an audit for the current plan year:

1. Verify your participant count: Only include those with account balances as of the first day of the plan year.
2. Document your findings: Keep records as part of your Form 5500 filing.
3. Consult your third-party administrator (TPA) or CPA: These professionals can help interpret your participant count and confirm your audit requirement.

If you’re uncertain whether your plan qualifies for an audit, our team can help evaluate your situation and guide you through the process from start to finish.

As trusted Minneapolis and St. Cloud, Minnesota based CPAs, we take pride in delivering thorough, efficient, and transparent audits that help protect your plan and your participants. Whether you’re preparing your first 401(k) filing or looking to streamline a recurring audit process, our experienced professionals are ready to help you plan ahead with confidence.

Let’s ensure your employee benefit plan meets every compliance requirement; efficiently and cost-effectively.

Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or audit advice. Please consult with your plan advisor or CPA for guidance tailored to your situation.