Who Needs a 401(k) Audit? Navigating the 100-Participant Threshold and the 80-120 Rule

Watching your business scale is immensely rewarding. You are hiring more talent, increasing revenue, and growing your company’s retirement plan. However, with that growth comes increased regulatory oversight from the Department of Labor (DOL) and the IRS.

If your company sponsors a 401(k) plan, you will eventually cross a critical compliance threshold: the requirement to attach an Independent Qualified Public Accountant (IQPA) audit report to your annual Form 5500 filing.

At Wilson & Associates CPA, we find that many Southern California business owners are caught off guard by their first 401(k) audit. Often, they receive a surprise notice from their Third-Party Administrator (TPA) in the middle of the summer, leading to a panicked, reactive scramble.

We believe in proactive advisory. Understanding exactly who needs a 401(k) audit—and more importantly, how the DOL counting rules have recently changed in your favor—is essential for accurate financial forecasting. Here is everything you need to know about your 401(k) audit obligations for 2026 and beyond.

Historically, the Department of Labor classified a retirement plan as a “large plan” if it had 100 or more eligible participants on the first day of the plan year. Large plans are required to undergo an independent financial audit.

However, thanks to recent legislative updates under the SECURE 2.0 Act, the way you count participants has drastically changed.

For plan years beginning on or after January 1, 2023, the 100-participant threshold is no longer based on who is eligible to participate. It is now based strictly on the number of participants who actually have an account balance.

This rule change was a massive win for business owners. It eliminated the audit requirement for thousands of small businesses that had high employee turnover or low plan participation rates, saving them significant administrative costs.

Getting your participant count right is critical. Miscounting can either trigger an expensive audit you don’t actually need or, worse, cause you to skip an audit you were legally required to file, resulting in severe DOL penalties.

• Active Employees with a Balance: Any current employee who has a balance greater than zero in the plan.

• Terminated Employees with a Balance: Former employees who have left the company but have not yet rolled over or cashed out their 401(k) funds. (This is a common trap for employers; former employees absolutely count toward your threshold).

• Beneficiaries: Deceased employees’ beneficiaries who maintain a balance in the plan.

• Individuals with Outstanding Loans: Even if a participant has withdrawn their funds, if they have an active, outstanding loan balance, they are counted.

Eligible Non-Participants: Current employees who have met the eligibility requirements to join the 401(k) but have chosen not to contribute and have a $0 balance.

If your participant count is hovering right around the 100 mark, you do not necessarily need an audit immediately. The DOL offers a crucial transition provision known as the 80-120 Rule.

This rule allows a growing plan to continue filing in the same category (Small Plan or Large Plan) it used in the previous year, provided the participant count is between 80 and 120 on the first day of the current plan year.

Let’s say you filed as a Small Plan (no audit required) in 2025. On January 1, 2026, your plan has grown to 115 participants with account balances. Under the standard rule, 115 is over 100, so you would need an audit. However, thanks to the 80-120 Rule, because you filed as a small plan last year and you are under 121, you can elect to file as a Small Plan again in 2026 and defer the audit.

The practical reality for a first-time filer is that your audit requirement doesn’t actually kick in until you hit 121 participants. Once you reach 121 participants with an account balance, you are classified as a Large Plan, and an independent audit is legally required.

Many small businesses join Pooled Employer Plans (PEPs) under the assumption that they will save money and avoid audit thresholds. However, the DOL applies an aggregation rule to PEPs.

If the combined total of participants across all employers in the PEP exceeds 100, the PEP must be audited. Because PEPs pool multiple companies together, they almost always exceed the threshold and require an audit from day one. If you are considering a PEP, make sure you understand how the audit costs are passed down to your business.

If your company is sitting at 95 or 105 participants, an audit is in your near future. Waiting until July to find an auditor is a recipe for disaster. First-year audits require substantial documentation, including the review of historical plan documents, payroll testing, and internal control evaluations.

At Wilson & Associates CPA, we partner with our clients long before the Form 5500 is due. We help you evaluate your participant counts in Q4, clean up your payroll and HR records, and seamlessly execute your 401(k) Plan Audit when the time comes.

We provide specialized, white-glove 401(k) audit services for high-net-worth businesses across San Diego, Los Angeles, and Orange County.

Schedule a Consultation Today to discover how Wilson & Associates CPA can keep your retirement plan compliant and your business thriving.