98 participants and counting. Do you need an audit this year?

If your plan is hovering near the 100-participant mark, you’re likely asking this question right now. The answer affects whether you’ll need to budget for a first-year audit or file as a small plan and avoid the requirement entirely. Getting the count right matters.

This guide covers everything you need to determine your 2026 audit status: how the participant threshold works, how the counting rules changed in 2023, what the 80-120 exception means for your plan, and how to budget based on where you stand today.

Already know you need an audit? See our employee benefit plan audit preparation guide for the full process and timeline.

The 100-participant Threshold

The Department of Labor (DOL) requires most 401(k) plans with 100 or more participants to attach an independent audit to their Form 5500 filing. 

The key detail most plan sponsors miss: the count is based on participants as of the first day of the prior plan year, not the current year. So for a 2025 Form 5500 filing, you’re counting participants as of 1 January 2024.

How The Counting Rules Changed In 2023

Before 2023, the DOL required plans to count every eligible participant, including employees who never contributed and carried a $0 balance. That rule pulled a significant number of small businesses into audit territory even when their actual plan membership was modest.

The SECURE Act changed that. Starting with the 2023 plan year, plans count only participants who have an account balance. Employees who are eligible but never enrolled don’t count. Neither do terminated employees with no remaining balance.

The practical impact was significant. The DOL estimates the rule change eliminated audit requirements for roughly 20,000 small plans. If your plan previously teetered near the threshold under the old method, it’s worth recounting under the new rules.

Who Counts And Who Doesn’t

Under the current rules, include in your count: active employees with any account balance, terminated employees who still have a balance in the plan, participants with outstanding plan loans (the loan balance counts), and beneficiaries or qualified domestic relations order (QDRO) alternate payees receiving benefits.

Exclude: employees who are eligible to participate but never contributed, and any account holding a $0 balance.

Here’s a concrete example. A company has 125 active employees. Of those, 110 are eligible for the plan, but only 15 have ever contributed. Five former employees still carry balances.

Under the old counting method, that’s 130 participants and an audit requirement. Under the current method, that’s 20 participants and no audit required. Same plan. Same workforce. Very different compliance obligation.

The 80-120 Rule: A Grace Period, Not A Loophole

Even if your participant count crosses 100, you may not need an audit right away. The 80-120 rule allows plans to maintain their prior year’s filing status as long as they stay within that band.

Here’s how it works in practice: if you filed as a small plan last year and your count this year falls between 80 and 120, you can continue filing as a small plan. The exception expires the moment you exceed 120 participants.

Three scenarios illustrate how this plays out.

  • Gradual growth: A plan starts in year one with 95 participants (small plan, no audit). In year two, the count grows to 108 participants. The 80-120 rule applies, so the plan files small again. Year three: 115 participants. Still within the band, still filing small. Year four: 125 participants. The exception no longer applies. The plan must file as a large plan and commission an audit.
  • Sudden jump: A plan has 85 participants in year one. An acquisition in year two pushes the count to 150. Because the jump cleared 120, the 80-120 rule doesn’t help. The plan must immediately file as a large plan and get an audit.
  • Coming back down: A plan at 125 participants completes an audit in year one. In year two, count drops to 105 participants. The 80-120 rule keeps the plan in large-plan status. Year three: 95 participants. Now the plan can return to small-plan filing without an audit.

The strategic value of the 80-120 rule is real but limited. It gives growing plans time to build documentation systems and select an auditor before the first formal engagement. For seasonal or transitional businesses with naturally fluctuating headcounts, it can provide meaningful breathing room. For companies growing rapidly, the window closes fast, and plans that rely on the exception to delay preparation often find themselves scrambling when they do cross 120.

Special Rules For PEPs And MEPs

Pooled Employer Plans (PEPs) and Multiple Employer Plans (MEPs) follow a different logic. These plans must aggregate participant counts across all participating employers. If the combined total across every employer in the arrangement exceeds 100, an audit is required, regardless of each individual employer’s size.

Consider a PEP with eight participating employers. Each employer has between 10 and 25 participants. On their own, each would file as a small plan. Together, the total reaches 117 participants and triggers an audit requirement.

This matters because PEPs are frequently marketed to small businesses as a lower-cost alternative to single-employer plans. Many employers join assuming they’ll stay well below the audit threshold. In practice, the aggregation rule means most PEPs need audits from inception, and the DOL applies the same oversight standard to pooled arrangements that it applies to large single-employer plans. If you’re evaluating a PEP, factor audit costs into your comparison, not just administrative fees.

What To Expect From A First-year 401k Audit

Before getting into the budgeting breakdown by participant count, it’s worth understanding why first-year audits cost more than ongoing ones.

A new auditor has to learn your plan. That means reviewing plan documents, understanding your payroll integration, testing internal controls, and building the workpaper structure that subsequent audits will rely on. That setup work typically adds a 30 – 50% premium over what you’ll pay in year two and beyond.

Year two is considerably more straightforward. The auditor already understands your plan design. The rollforward from prior year workpapers is faster. Most of that first-year premium doesn’t recur.

This has a practical implication: the earlier you engage a firm, the better positioned you are to manage that first-year cost. Auditors who specialize in employee benefit plans fill their calendars early. Reaching out six to nine months before your filing deadline gives you access to more firms, more competitive pricing, and a smoother onboarding process.

When To Start Budgeting Based On Your Current Count

Knowing where you stand today shapes how you plan for the next one to five years.

  • 70 – 85 participants: You’re likely three to five years away from an audit requirement, assuming steady growth. No immediate action needed, but note the trajectory and revisit annually.
  • 86 – 95 participants: An audit is one to three years out. This is the right time to research audit firms, understand what they’ll need from you, and start building cleaner documentation practices. Allocating initial budget as a future reserve is reasonable planning.
  • 96 – 105 participants: You may cross the threshold this year or next, which means a decision to make. Some plan sponsors in this range explore whether reducing eligible participants or encouraging distributions from terminated employees with small balances could keep them below 100. That’s a legitimate strategy, but it requires careful legal review and isn’t always practical. If you’re accepting the audit, engage a firm within six to nine months of your plan year end.
  • 106 – 120 participants (filed small last year): The 80-120 rule may protect you this cycle, but an audit is likely coming within one to two years. Use this time to implement documentation systems, research firms, and prepare as if the audit were already required.
  • 121+ participants: An audit is required now. If you haven’t engaged a firm, do it today. See our employee benefit plan audit preparation guide for the full process, what auditors will need from you, and how to get organized before fieldwork begins.

Streamline EBP Audits With Trullion

Most of the stress that comes with employee benefit plan audits isn’t about the audit itself. It’s about finding documents that should have been easy to locate, reconciling data that should have been reconciled months ago, and answering auditor requests that pull your team away from everything else on their plates.

Trullion helps plan sponsors stay audit-ready year-round, with centralized documentation and automated reconciliation that means no last-minute scramble. For audit firms, it structures fieldwork and keeps collaboration with plan management clear and contained.

The audit doesn’t get easier by accident. But it can get a lot more manageable with the right foundation in place.

See how Trullion simplifies EBP audits.

Key Takeaways

The audit requirement isn’t complicated once you understand the rules. A few things to keep in mind:

  • The 100-participant threshold counts only those with account balances, not all eligible employees. For many plans, that distinction alone eliminates the requirement.
  • The 80-120 rule gives you flexibility to maintain small plan status temporarily, but it isn’t a permanent workaround. Most growing companies will cross 120 eventually and should plan accordingly.
  • First-year audits cost more than ongoing ones. Early preparation, organized documentation, and early firm selection are the most practical ways to reduce that initial cost.

For most plans on a growth trajectory, the audit is an expected compliance step, not a surprise. The plans that manage it best are the ones that treated it that way from the start. Trullion helps make that preparation the default, not the exception.

Author

Katie Cavanaugh