Does your 401(k) plan need an audit?

The answer turns on one number: how many participants held an account balance in the plan on the first day of the plan year. Here is how that count works, where the thresholds sit, and which exceptions move plans either side of the line.

A 401(k) plan needs an independent audit once it files as a large plan. For plan years starting on or after 1 January 2023, that means more than 100 participants holding an account balance on the first day of the plan year. Count 100 or fewer and the plan files as small, with no audit attached.

Reviewed by Debraj Hazra, CPA (USA), ACA (ICAEW, ICAI)

Last reviewed September 2026

§1

The large plan threshold

ERISA requires the sponsor of a large plan to attach an audit report from an independent qualified public accountant to its annual Form 5500. A 401(k), profit-sharing, or money purchase plan crosses into large plan territory once it counts more than 100 participants at the start of the plan year.

What feeds that count changed for plan years beginning on or after 1 January 2023. A defined contribution plan now counts only participants who actually hold an account balance on the first day of the year. Employees who are eligible but never enrolled, and hold nothing in the plan, drop out. Plenty of plans that used to file large now file small on an unchanged headcount.

In short

100 or fewer participants with an account balance at the start of the plan year: the plan files small and needs no audit. More than 100: the sponsor engages an independent auditor before the Form 5500 goes in.

§2

Who counts as a participant

The threshold is a headcount, and it reaches past the people currently deferring pay into the plan. Three groups carry a balance into the total.

Active: Current employees of the sponsor who are covered by the plan and hold an account balance. An employee who is eligible but has never contributed, and holds nothing in the plan, no longer lands in the total.
Retired or separated: Former employees who have left the sponsor and still hold a balance in the plan, or who are otherwise entitled to a benefit from it.
Deceased: Participants who have died, where a beneficiary holds the account balance or is entitled to receive it.

Defined benefit plans still count every eligible participant, balance or no balance. The narrower rule belongs to defined contribution plans, which is what almost every 401(k) is.

§3

Short plan years

A plan year running seven months or fewer gets a reprieve. Rather than commission an audit of a stub period, the sponsor may defer it to the following plan year. The obligation does not disappear: when that deferred audit arrives, it has to cover the short plan year as well as the full one after it. Sponsors who read the deferral as a waiver find out a year late.

§4

The 80-to-120 participant rule

Plans hovering near the line get room to breathe. Where the beginning-of-year participant count reported in Part II of the Form 5500 lands between 80 and 120, and the sponsor filed a Form 5500 for the prior year, the plan may file this year in the same category it used last year, large or small. The rule spares sponsors from flipping between Schedule H and Schedule I, in and out of an audit, as a handful of employees join or leave.

Worked example

A plan counting 110 participants that filed as small last year may file as small again and skip the audit. At 121 the exception closes: the plan files as large, attaches Schedule H, and needs an audit whatever it filed the year before.

§5

Getting the count right

Because one number decides the whole requirement, the count deserves more attention than most sponsors give it. A plan may cash out an inactive participant without their consent where the vested balance sits at $7,000 or less. SECURE 2.0 lifted that ceiling from $5,000 for distributions made after 31 December 2023. Sponsors sitting close to 100 sometimes process those small distributions before year end, which clears the balances and, with them, the participants.

To see where you stand, pull your most recently filed Form 5500 and read the beginning-of-year participant count in Part II. Above 100, an audit is coming. Between 80 and 120, check what you filed last year before you assume anything. Below 80, you owe no audit until the count reaches 120.

Thresholds and counting rules on this page are current as of the review date above. Your plan document and filing history decide how they apply, so confirm the position with your plan auditor before you rely on it.

Source documents, including the Form 5500 instructions, sit in our free 401(k) resources.