Audit requirement screen
Does this plan need an audit?
For 2023+ defined-contribution plan years, the count changed. Inside 80–120, filing history can change the category — and the small-plan waiver remains a separate test.
What actually changed.
For plan years beginning before 2023, a defined-contribution plan counted every participant eligible to participate, whether or not they had ever put a dollar in. Plans with automatic enrollment, seasonal workforces or high turnover carried long lists of eligible employees with no account, and those employees pushed plans over the 100-participant line into large-plan filing and an audit.
For plan years beginning in 2023 or later, the count is participants with account balances at the beginning of the plan year. The change moved many plans from large-plan to small-plan filing status. Whether the IQPA examination and report requirement may be waived still depends on the separate waiver conditions.
- Who is counted
- Participants with an account balance at the beginning of the plan year. A terminated employee who still holds a balance is counted; an eligible employee who has never contributed and holds no balance is not.
- Above 120
- Large-plan filing. No election is available, and the return generally carries an IQPA report.
- Below 80
- Small-plan filing. No election is available. Whether the IQPA examination and report requirement may be waived turns on the waiver conditions.
- 80 through 120 inclusive
- The 100-participant rule still supplies the default. If a Form 5500 or Form 5500-SF annual return/report was filed for the prior plan year, the administrator may elect to file in that same category. Without a prior-plan-year annual return/report, no carry election is available. The election is the exception to the rule, not a replacement for it.
- A first annual return/report
- If no Form 5500 or Form 5500-SF annual return/report was previously filed, there is no prior category to carry and the plan uses its end-of-year count against the 100-participant threshold. A prior Form 5500-EZ does not count as a prior annual return/report, and first-return status does not by itself mean this is the plan’s initial plan year.
Why the same count gives opposite answers.
This is the part that generates the arguments. Two continuing plans each report 104 participants with account balances at the start of the 2025 plan year.
- Plan A filed large last year
- 104 is inside the band, and the default at 104 is large anyway. The election changes nothing: this is a large-plan filing.
- Plan B filed small last year
- 104 is inside the band. The default at 104 would be large, but because the prior return was small the administrator may elect to remain small — and then test the waiver.
A plan reporting 85 participants with account balances whose prior return was filed large is not required to carry that prior filing category. Because 85 is below 100, the default is small-plan filing; the administrator may decline the election to remain large and then test the separate audit-waiver conditions.
How 5500RADAR derives this from filings →Small plan does not mean no audit.
Filing as a small plan only makes the waiver at 29 CFR 2520.104-46 available. The waiver is conditional, and every condition has to hold. The two that are missed most often in practice are both in the first one.
- The 95% test, usually measured a year earlier
- At least 95% of plan assets must have been qualifying plan assets at the end of the preceding plan year. For an initial plan year, use the reasonable estimate prescribed by 29 CFR 2580.412-15 instead. The threshold is 95%, not a majority, and first-return status alone does not trigger the initial-plan-year estimate.
- Or section 412 bonding at full value
- If the 95% test fails, every person handling the non-qualifying assets must be bonded in accordance with ERISA section 412 and its regulations, with coverage at least equal to the full value of those assets. The ordinary section 412 minimum is generally 10% of the funds or other property handled, not 10% of plan assets. An existing section 412 bond satisfies the enhanced condition only when its coverage is at least the full value of the non-qualifying assets; otherwise coverage must be increased.
- The SAR has to say specific things
- Subject to the rule’s permitted exceptions, it must identify the regulated financial institutions holding qualifying plan assets and the amounts held. When non-qualifying assets exceed 5%, it must identify the surety company. It must also tell participants and beneficiaries that they may, without charge, examine or request the supporting statements and bond evidence and may contact the appropriate EBSA Regional Office if access is not provided.
- And the records must be available
- On request by a participant or beneficiary, the administrator must make the institution statements and bond evidence available for examination, or furnish copies, without charge.
What this screen will not do.
- Other plan types
- Defined benefit and health and welfare plans count participants differently and carry different exemptions. The small pension plan waiver does not reach welfare plans at all. 5500RADAR reads those filings; this screen does not model them.
- Earlier plan years
- Plan years beginning before 2023 used the eligible-participant method. Screening an older year with this tool would give the wrong category.
- Every exemption
- Plan-specific facts, other exemptions, short plan years, mergers and terminations all change the answer and none of them are asked about here.
- Your plan’s actual facts
- The screen tests what you typed. It has no access to the plan’s records, and a participant count that is wrong going in produces a category that is wrong coming out.
It is a screen, in the ordinary professional sense: it tells you which question to go and answer properly.
Common questions.
- How many participants before a 401(k) plan needs an audit?
- For 2023 and later plan years, a continuing plan counts participants with account balances at the beginning of the year. Above 120 is large-plan filing; below 80 is small; 80 through 120 inclusive is where the prior-year election lives, so the same count can produce either answer.
- Did the 2023 change mean fewer plans need an audit?
- For many plans, yes. Dropping eligible-but-zero-balance employees from the count moved a real number of plans out of large-plan filing, particularly plans with automatic enrollment and high turnover.
- Our count fell below 100 — can we stop the audit?
- Possibly, and that is the question worth asking. If the count is below 80 the category is small outright. Between 80 and 120 the election means you can decline to carry the prior large category. Either way the audit only goes away if the waiver conditions hold.
- How is a brand new plan counted?
- End-of-year participants with account balances against the 100-participant threshold. There is no prior return, so there is no election.
- Does a terminated participant with a balance still count?
- Yes. The test is an account balance, not employment.
- Do defined benefit or welfare plans use this?
- No. Different counting method, different exemptions.
The count is the easy half.
Screening one plan you already know takes a minute. The harder question is which plans in a book of business are crossing a threshold, which ones filed without the report attached, which ones changed auditor last year, and what the filed attachments actually say about any of them. That is the part 5500RADAR reads, from public DOL filings and the documents attached to them.
Bring a plan you already know and ask the question your current Form 5500 data cannot answer.