On February 23, 2023 (wow, time flies!) the U.S. Department of Labor (DOL) Internal Revenue Service, and the Pension Benefit Guaranty Corporation announced changes to the Form 5500 Annual Return/Report of Employee Benefit Plan and Form 5500–SF Short Form Annual Return/Report of Small Employee Benefit Plan effective for plan years beginning on or after January 1, 2023.
We previously covered how these updates impact plan audit requirements and Form 5500 filing in our posts on the new 401(k) audit rules for 2023 and 2024. But even now, many plan sponsors are still asking:
- What changed in the participant-count methodology?
- Does the 80-120 Rule still apply?
Here’s what you need to know!
What Changed?
Previously, if a retirement plan had 100 or more eligible participants as of the first day of the plan year, it triggered an audit requirement—even if some participants had no account balance (that means $0 in the account). This meant old employees who never contributed or had never rolled over their balances still counted toward the audit threshold. The Department of Labor (DOL) however identified the range of 80–120 participants as a grey area in which a company is given flexibility when it comes to filing status and has the option to continue as a ‘small’ plan or elect ‘large’ plan status.
Starting in 2023, only participants with an actual account balance are counted. If your plan had many inactive or zero-balance participants, you may now fall below the 100-participant audit requirement and no longer need an audit.
Still not sure where you stand? Use the chart below to help determine whether your plan meets the audit requirement under the updated participant-count methodology.
Do You Still Need an Audit?
| Number of Participants at Beginning of Current Year | Requirements Followed for the Previous Year Form 5500 | Requirements to Be Followed for the Current Year Form 5500 |
| 80 – 99 (inclusive) | Small plan | Small plan |
| 80 – 99 (inclusive) | Large plan | May elect to file Form 5500 again as a large plan or switch to a small plan |
| 100 – 120 (inclusive) | Small plan | May elect to file Form 5500 again as a small plan or switch to a large plan |
| 100 – 120 (inclusive) | Large plan | Large plan |
| More than 120 | Large plan | Large plan |
| More than 120 | Large plan | Large plan |
How Do the New Rules Impact the 80–120 Rule?
The 80-120 Participant Rule still applies under the new participant count methodology. Here’s how it works:
| Rule | Before January 1, 2023 | After January 1, 2023 & Onward |
| Who is counted? | All eligible participants (including those with $0 balance) | Only participants with an account balance (even if inactive) |
Updated Examples Under New Rules:
Scenario #1 –
Let’s say your 401k plan had 115 eligible participants as of January 1, 2023, but 10 had $0 balances. Under the new rules, your new count would be 105 participants (only those with balances).
Because you fall within the 100–120 range, you have the following scenarios depending on if you’re a growing company, or downsizing:
- Growing Company – If in the previous year you filed as a small plan, the 80–120 rule allows you to continue filing as a small plan and skip the audit.
- Downsizing Company – If in the previous year you filed as a large plan requiring an audit, the 80–120 rule requires you to continue filing as a large plan.
Scenario #2 –
Let’s say your 401k plan had 121 eligible participants as of January 1 2023, but 22 had $0 balances—meaning you previously required an audit. Under the new rules, your new count would be 99 participants (only those with balances).
Because you’re now under 100, the 80–120 rule allows you to switch to a small plan and skip the audit.
What Should You Do Next?
- Review Your Plan’s Participant Count: If your plan regularly fluctuates between 100–120 participants, check if you are now below the threshold.
- You can plan ahead in the current plan year by finding this number in your previously filed Form 5500-SF line 5c(2) or Form 5500 line 6g(2).
- Confirm with Your Third-Party Administrator (TPA): They can provide updated participant counts under the new rule.
- Discuss with Your CPA or Auditor: Even if an audit is no longer required, regular plan compliance reviews are still recommended to help catch errors, ensure fiduciary responsibility, and reduce the risk of penalties or corrections.
Want more clarity on your plan? We’ve got you covered. Contact LSL, and we’ll help you determine whether your plan still requires an audit under the new rules.
