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Audit Preparation

401(k) plan audits, and why many plans no longer need one

Q: How do we know whether our plan needs an audit this year?

Count participants with account balances as at the first day of the plan year: active employees with a balance, plus terminated employees who still have money in the plan. If that number is 100 or more, you are generally a large plan and an audit is required, then check the 80/120 rule: if the count is between 80 and 120, you may elect to file in the same category as last year. If you have been audited before, recount. The 2023 change moved a lot of plans across the line.

Q: Do terminated employees with balances count?

Yes. The test is participants with account balances, not active employees. Former employees who left their money in the plan count toward the total. This catches out employers with high turnover who assume the count follows headcount. Cleaning up small dormant balances is a legitimate way to manage the number, but it has to be done properly under the plan document.

Since the 2023 plan year, participants are counted differently. The DOL estimates nearly 20,000 plans no longer need audits.

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Last reviewed 9 September 2026

The counting rule that changed

DOL EBSA. Form 5500 changes, plan years beginning on or after 1 January 2023

For defined contribution plans, the 100-participant threshold that determines large-plan filer status, and therefore the audit requirement, now counts only participants with account balances at the beginning of the plan year.

Previously it counted all eligible employees, whether or not they had ever contributed. For a plan with automatic eligibility and low take-up, the difference is dramatic.

The DOL estimated nearly 20,000 plans would cease to be large-plan filers as a result.

Who this affects most

Employers with high headcount and modest participation. A 150-employee company where 70 people have balances is now a small plan; under the old rule it was a large plan requiring an audit.

If your plan has been audited for years out of habit, it is genuinely worth recounting. The saving is not marginal.

Where an audit is required, it is performed by an independent plan auditor engaged by the sponsor. Wago Pop does not perform plan audits. We help the sponsor prepare: reconciling payroll deferrals to recordkeeper deposits, assembling the census and contribution support, and answering the auditor's requests.

The 80/120 rule still exists, and still confuses people

DOL Form 5500 instructions

If your participant count is between 80 and 120 at the beginning of the plan year, you may elect to file in the same category as the prior year.

So a plan that filed as a small plan last year and has crept to 110 participants may continue filing as a small plan, and therefore continue without an audit, until it exceeds 120.

It is an election, not an automatic outcome, and it only applies within that band. It is a frequently misunderstood provision in this area.

Key dates

Date	What
First day of the plan year	The date on which participants with account balances are counted
31 July	Form 5500 due for a calendar-year plan
15 October	Extended Form 5500 deadline, with Form 5558 filed
With the 5500	The audit report is attached to the filing: the plan is not compliant without it if an audit is required

An incomplete Form 5500 filing, one missing a required audit report, can attract significant penalties. This is not a deadline to discover late.

What a plan auditor examines, and what we help you have ready

Participant eligibility and enrolment, tested against the plan document
Contributions: employee deferrals, employer match, and whether deferrals were remitted timely
Distributions, loans and hardship withdrawals
Investment valuation and allocation to participant accounts
Compliance with the plan document as written, which is where findings often originate
Non-discrimination testing results
The Form 5500 itself, and the schedules attached to it

A very common finding

Late remittance of employee deferrals. The rules require deferrals to be deposited as soon as they can reasonably be segregated from general assets, and the small-plan safe harbour is seven business days.

It is an easy operational failure and a very visible one. If your payroll provider is depositing on a lag, that is worth checking before an auditor does.

Take this with you

Count your plan participants the way the DOL now counts them

For plan years beginning on or after 1 January 2023 the 100 participant test counts only participants with an account balance. Plenty of plans that filed as large plans no longer have to.

Who is counted, and who stopped being counted in 2023
The measurement date the count is taken on
The 80 to 120 rule, and when it lets you keep filing as you did last year
What to hand your third party administrator so the count is defensible

Keep reading

Service

Audit Preparation

Compilation vs review vs audit

Service

Payroll

Resource

Compliance calendar

Common questions

Not answered here? Ask us directly: we would rather explain it than have you guess.

How do we know whether our plan needs an audit this year?

Count participants with account balances as at the first day of the plan year: active employees with a balance, plus terminated employees who still have money in the plan. If that number is 100 or more, you are generally a large plan and an audit is required, then check the 80/120 rule: if the count is between 80 and 120, you may elect to file in the same category as last year. If you have been audited before, recount. The 2023 change moved a lot of plans across the line.

Do terminated employees with balances count?

Yes. The test is participants with account balances, not active employees. Former employees who left their money in the plan count toward the total. This catches out employers with high turnover who assume the count follows headcount. Cleaning up small dormant balances is a legitimate way to manage the number, but it has to be done properly under the plan document.

What drives the cost of a 401(k) plan audit?

The audit firm sets its own fee, and it turns on plan size, complexity, the number of payroll sources and the quality of the recordkeeper's reporting. Expect the first year to cost more than later years, because the auditor has no prior-year file and has to establish opening positions. Reconciled deferrals and a complete census before fieldwork reduce the hours the auditor has to spend, which is the part we help with.

Who actually arranges the audit: us or our recordkeeper?

You do. The plan sponsor is responsible for the audit, and the auditor is engaged by the sponsor, not the recordkeeper. Your recordkeeper or TPA will usually flag when the participant count approaches the threshold and will provide the data the auditor needs, but they cannot perform the audit and they are not responsible for obtaining it. Wago Pop does not perform it either; we can help you choose an independent plan auditor and prepare for the engagement.

We missed an audit in a prior year. What now?

The DOL operates a Delinquent Filer Voluntary Compliance Program with substantially reduced penalties for sponsors who come forward before being contacted. As with most compliance failures, the outcome is materially better when you self-correct. Talk to ERISA counsel before filing anything; we can help pull together the records the auditor and counsel will need.

How do we start?

Book a scoping call using the form on this page, or call us. We will ask about your participant count, your plan year, and what condition your payroll and plan records are in, then tell you what the preparation work involves and what it will cost before anything begins.

Book a scoping call

Twenty minutes, no charge. Tell us what you need and we will tell you what it involves, what it will take, and whether we are the right fit for it.

A short call with the person who would actually do the work.
A clear scope and a fixed quote before anything begins.
We reply to every enquiry within one business day.

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