Does Your 401(k) Need an Audit? The 100-Participant Rule, and How to Avoid the Cost

When does a 401(k) need an audit?

Once your plan has 100 or more participants with an account balance as of the first day of the plan year, it becomes a large-plan filer and must attach an audit by an independent qualified public accountant to its Form 5500. Under 100, it files as a small plan and skips the audit. The line is drawn at the start of the year, so it is knowable in advance, which matters for planning.

What changed in 2023, and why it matters

This is the part many owners have not caught up with. For plan years beginning in 2023, a 401(k) counts only participants who actually have an account balance, not everyone who is eligible. Before the change, an eligible employee who never contributed and had a zero balance still counted toward the 100. Counting only funded accounts pushed nearly 20,000 plans below the threshold and out of the audit requirement.

In practice, a plan with 130 eligible employees but only 85 with balances is now a small plan with no audit. That is the first thing I check before anyone pays for an audit they may not owe.

The 80-120 rule: don't flip back and forth

The 80-120 rule keeps a plan from bouncing between small and large filer status year to year. If your plan filed as a small plan last year, it can keep filing as a small plan, and skip the audit, until the count of participants with balances reaches 121. It is a built-in cushion that buys a growing plan time before the audit actually kicks in.

What the audit costs, and the pooled way around it

Once you genuinely cross the line, a plan audit commonly runs $10,000 to $20,000 a year, every year, on top of your other plan costs. There is a structural way to remove it: a pooled plan. In a pooled arrangement, the audit is performed once at the plan level for the whole pool, so an adopting employer over 100 participants is covered without commissioning its own.

In that structure, a pooled plan provider we partner with acts as the named fiduciary and I serve as the 3(38) discretionary investment fiduciary, so the investment liability also comes off your committee. The difference between an advisor who recommends and one who decides is worth understanding here, and I cover it in 3(21) vs. 3(38).

What I do before you write a check

Three steps. First, I check the real count, participants with balances at the start of the plan year, because you may be under the line already. Second, if you are genuinely over it, I benchmark what the audit and the rest of the plan cost you today. Third, I show you whether a pooled structure removes the audit and lowers the total cost, or whether staying standalone is fine. You can see how I approach the plan-sponsor side on the 401(k) plan advisory page, and if you are earlier in the journey, the small business retirement plans page covers the smaller plan types.

The Department of Labor's guidance on the Form 5500 series is the primary source on filing and audit obligations.