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New 401(k) Audit Rule for Form 5500 is Good News for Small Businesses

Brian Furgala

August 7, 2023

Table Of Contents

401(k) plans must be audited by an independent qualified plan auditor if they are considered a 'large plan' for Form 5500 reporting purposes. Recent Department of Labor (DOL) changes to the Form 5500 will allow plans to count fewer participants when determining the need for an audit. The DOL expects the change to eliminate the audit requirement for 20,000 small business 401(k) plans - good news when you consider the cost, time, and effort of an audit for employers. 

The new participant counting method is effective for plan years beginning on or after January 1, 2023. Small businesses should understand how the method will affect their 401(k) plan's audit status. 

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Large Plans Must Be Audited; Small Plans Are Exempt

For Form 5500 purposes, 401(k) plans with 100 or more participants at the beginning of the plan year are considered a “large plan”, while plans with fewer participants are considered a “small plan.” Large plans must file an audit report with their Form 5500, while most small plans do not. 

However, there is an exception. The "80-120 Participant Rule” allows plans with between 80 and 120 participants at the beginning of the plan year to file the Form 5500 in the same category ("large plan" or "small plan") as the prior year filing. The rule would allow plans with fewer than 121 participants to be considered a small plan for the year if they were considered a small plan for the prior year. 

After the new DOL rule takes effect, fewer participants must be counted when determining the small or large plan status of a 401(k) plan. 

The New Method for Counting Participants

Under the current method, 401(k) plans must count all eligible participants, regardless of whether they had an account balance. With the new method effective for plan years beginning on or after January 1, 2023, plans must only count participants with an account balance. 

Here’s how the counting method change would affect the audit status of a small business 401(k) plan with 125 active (still employed) participants, 15 active participants with an account balance, and 5 terminated participants with a balance. 


Old Method 

New Method 

Participant count for 5500 purposes 

130 (125 active/5 terminated) 

20 (15 active/5 terminated) 

Audit Required? 



Reason for the DOL Change

The intention behind the new participant counting method is to reduce expenses for small businesses that establish and maintain 401(k) plans. The DOL is hopeful that the change will encourage more small businesses to offer retirement plans for their employees. 

Another factor considered by the DOL was the upcoming requirement of long-term, part-time (LTPT) employees being eligible for 401(k) plans. Although the LTPT requirement may increase the number of eligible participants, those participants may not contribute. The DOL believes the change to only counting participants with an account balance will relieve or eliminate the unintended result of a 401(k) plan being subject to an audit merely due to a law change. 

PEPs and MEPs Subject to the Same Rule

Under the initial SECURE Act in 2019, Congress invited the DOL to simplify audit requirements related to Form 5500 reporting requirements for PEPs or MEPs. Congress suggested that PEPs or MEPs with less than 1,000 participants in total should not be required to file an audit with its Form 5500 (if each participating employer has fewer than 100 participants). Many practitioners believed the DOL would accept Congress’ suggestion in subsequent guidance. 

PEPs/MEPs Must Aggregate Participating Employers

As a surprise to some, the DOL’s final regulations did not include the simplified audit requirements for PEPs or MEPs. PEPs and MEPs continue to be subject to the same audit requirement as single employer plans. However, for PEPs and MEPs, the 100 participant count is determined by aggregating all the participating employers together. 

For example, a PEP has 10 participating employers and each participating employer has 15 participants with an account balance in the PEP. An audit must be prepared each year for this PEP and the audit must be filed with its Form 5500. Due to the recent promotion of PEPs and MEPs, it is unlikely that any of them have less than 100 participants with account balances. 

The DOL did not create a special rule for PEPs or MEPs because it found no reason why they should have different audit requirements than single employer plans. The DOL believes aggregating all participating employers together ensures transparency and financial accountability for PEPs and MEPs, similar to the current rule for determining large plan status. 

Evaluating the Audit Cost of PEPs and MEPs

When comparing PEPs or MEPs to a single employer plan, small businesses should consider the cost, effort, and potential liability involved in an audit that would not otherwise apply. Asking the PEP or MEP provider the following questions can help: 

    • Is the cost of the audit included in administrative fees or is it an additional cost? 
    • Will I be required to provide information or assistance to the auditor performing the audit? 
    • Am I required to make changes based on findings in the audit? 
    • Who is responsible for penalties or interest if the audit is not timely prepared or filed? 

No 401(k) Audit Means Big Savings!

401(k) plan audits can cost $7,500 or more. In addition to the financial cost, employers must devote time and effort in working with the auditor to ensure accurate information is provided and the audit is timely completed.  

The new DOL method for counting plan participants for Form 5500 purposes will eliminate these costs for many small businesses.  That means fewer resources will be necessary for these businesses to help their employees save for retirement.

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