401(k) Plan Audits and the 80-120 Rule

By Scott Garrison

For December year-end companies that have a 401(k) plan, April is the time of year you start gearing up for plan compliance and the annual audit, if your plan is required to have an audit.  It seems every year we pick up a new 401(k) audit during this period, and the company’s management did not budget for it and didn’t see it coming.  So, when does a company’s 401(k) plan cross that “line” to where it requires an audit?


Typically, a plan with over 100 eligible participants (eligible participants whether or not they participate – includes retired, deceased or separated employees who still have assets in the plan) as of the beginning of the plan year (i.e. January 1, for a calendar year plan) will have to file as a “large plan” which requires an audit (either full scope or limited scope based on how the assets are invested).  If the eligible participant count was less than 80 as of the beginning of the plan year, then there is no audit requirement for that year (see table below in the <80 row).  There is a rule called the “80-120 rule” that provides some relief for companies that fluctuate back and forth around the 100 participant threshold from year-to-year.  The rule allows plans with between 80 and 120 eligible participants, as of the first day of the plan year, to file the Form 5500 in the same category (“large plan” or “small plan”) as indicated on the prior year Form 5500 filing.


The table below illustrates most possibilities:


Number of eligible participants on 1st day of the plan year Financial schedule filed with prior year Form 5500 Options for current year Form 5500 Audit required?
<80 Does not matter Small Plan – Schedule I No
80-99 Small Plan – Schedule I Small Plan – Schedule I No
80-99 Large Plan – Schedule H Either – Schedule H or I Optional*
100-119 Small Plan – Schedule I Either – Schedule H or I Optional*
100-119 Large Plan – Schedule H Large Plan – Schedule H Yes
>120 Does not matter Large Plan – Schedule H Yes

* An audit would not be required since the Plan can file as a Small Plan (Schedule I) for the year.

We are here to help.  Please contact me with any questions about your company’s 401(k) plan or plan audit requirements.