How many participants are needed for 401k audit?
A 401(k) plan is generally treated as a large plan once it has 100 or more participants with account balances under the Form 5500 counting rules, but exceptions can apply. The number comes straight from the Form 5500 rules. For a defined contribution plan, you do not use payroll headcount. Instead, you use the Form 5500 count of participants with account balances.
The Department of Labor Form 5500 instructions state that an active defined contribution plan uses line 6g(1). The line follows participants with balances on the 1st day of the plan year. If this is the very first return, you look at line 6g(2) — which counts balances on the last day of the plan year.
Who counts toward the participant total?
The 401k plan participant number might end up higher than the current employee headcount. Former workers stay in the count if they leave their money in the plan. Therefore, business owners cannot rely on payroll reports alone.
The Form 5500 instructions link the test directly to individuals with account balances. DOL guidance indicates that plans with 100 or more of these participants should attach audited financial statements to their Form 5500.
This group contain the below parties:
- Current employees with active balances
- Former employees who left funds in the plan
- Separated or retired individuals whose benefits stay in the plan
Does hitting 100 always mean an audit starts right away?
No. The biggest exception is the 80 to 120 participant rule. If the plan filed a Form 5500 last year & the new participant count lands in this range — you might get to keep your previous filing status. A plan that was filed as a "small plan" last year might stay in that category for the current year — provided the participant count is 120 or less.
What should plan sponsors review before filing?
Check the participant count at early stages instead of waiting for the deadline. A concrete review process contain the below elements:
- Confirming if the plan uses the beginning-of-year or end-of-year rule
- Verifying that former employees with balances are in the count
- Deciding if the 80 to 120 election applies to the situation
Dimov Audit is ready for review
If you are not sure whether the plan crossed the audit threshold, reach out to Dimov Audit today. We work with plan sponsors on participant counts and Form 5500 audit requirements as well as preparation before fieldwork.
