EBPs: The “100-Participant” Threshold

Understanding the 80-120 Rule and New Counting Methods

For many years, the threshold for a “large plan” audit was based on the number of employees eligible to participate, regardless of whether they actually put a single cent into the plan. This often forced small businesses with high eligibility but low participation into expensive audits.

Thankfully, the methodology changed for plan years beginning on or after January 1, 2023. Now, the audit requirement for 401(k) plans is determined strictly by the number of participants with an account balance. This means if you have 150 eligible employees but only 95 of them have active accounts or balances, you likely remain a small plan. The 80-120 rule acts as a “buffer zone” to prevent companies from flipping in and out of audit requirements due to minor annual headcount fluctuations.

Counting Participants: Who Actually Has a Balance?

One of the most common mistakes we see is plan sponsors failing to identify who counts toward that 100-participant mark. It isn’t just your current staff. To determine your employee benefit plan audit necessity, you must look at the total number of individuals with money in the plan as of January 1 (for calendar year plans).

This count includes:

• Active employees currently contributing to the plan.
• Active employees who are not contributing but have a balance from prior years.
• Retired or terminated employees who have left their funds in the plan.
• Beneficiaries of deceased participants who still have an account balance.

Managing these “orphan” accounts is vital. Many companies implement “force-out” or involuntary cash-out provisions for small balances (often those under $7,000) to keep their participant count below the threshold and avoid an unnecessary audit.

The Consequences of a Missed Audit

If your plan is classified as a “large plan” and you file a Form 5500 without the required independent CPA audit report, the DOL may consider your filing incomplete. An incomplete filing is often treated as if you never filed at all, which can trigger significant Department of Labor penalties.

As of 2026, these penalties can exceed $2,500 per day, with no maximum cap. Additionally, the IRS can impose separate fines for late or inaccurate filings. Beyond the financial impact, a missed audit is a red flag for regulators and can lead to a much more intrusive and stressful full-scale DOL investigation into your fiduciary practices.

Preparing for Your Transition to a Large Plan

If you’ve crossed the 120-participant threshold, the best strategy is to begin your annual retirement plan compliance review early. A first-year audit is naturally more intensive because your CPA firm must verify “opening balances”—essentially auditing the history of the plan to ensure the starting numbers are accurate.

To ensure a smooth transition, gather your plan documents, adoption agreements, and payroll records well before the July 31 deadline (or the October 15 extended deadline). Engaging an experienced auditor early not only helps you avoid the “audit fatigue” of a rushed deadline but also ensures your internal controls are robust enough to protect both the company and your employees’ futures.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.