Insight

The 401(k) audit rules changed in 2023

Q: Do former employees with balances still count?

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

The participant-counting rule changed for 2023 plan years. The DOL estimated nearly 20,000 plans dropped out; some still commission audits.

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Last reviewed 9 September 2026

This is one of the clearest cases in compliance where a rule change saved employers real money and a lot of them never found out.

What 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 whether an audit is required, now counts only participants with account balances at the start of the plan year.

Previously it counted all eligible employees, whether or not they had ever put money in.

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.

Automatic enrolment complicates this in the other direction, it drives account balances up, which pushes plans toward the threshold rather than away from it.

And the 80/120 rule still exists

If your count sits between 80 and 120 at the start of the plan year, you may elect to file in the same category as the prior year, so a plan that filed small last year and has crept to 110 may continue filing small, and continue without an audit, until it exceeds 120.

It is an election, not automatic, and it applies only within that band.

Worth twenty minutes

If your plan has been audited for years, recount on the current basis: active employees with a balance, plus terminated employees who left money in the plan.

If the number has moved below 100, or you qualify for the 80/120 election, you may have been buying an audit you do not need.

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Common questions

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

Do former employees with balances still count?

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

What if we have been audited unnecessarily for a couple of years?

There is nothing to unwind: the audits were performed and filed, and an audit is never invalid for having been voluntary. The useful action is forward-looking: recount for the current plan year and stop paying for something the rules no longer require.

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 preparing for a plan auditor involves and what it will cost before anything begins.

Book a scoping call

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