When is a 401(k) Audit Required? Threshold & Participant Limits
A 401(k) plan is subject to an annual audit once it reaches a size that classifies it as a large plan under ERISA reporting rules.
In most cases, this determination is based on whether the plan has 100 or more participants with account balances at the beginning of the plan year, which also affects how the Form 5500 filing must be completed.
What is a 401(k) Audit?
A 401(k) audit is an independent examination of your plan’s financial statements and underlying records.
It is performed by a qualified public accountant who is not part of the company or plan administration team to review:
- participant balances
- contributions and remittances
- loans and withdrawals
- trust and custodian statements
- fees, expenses, and investment activity
- plan disclosures and supporting schedules
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Check EligibilityReasons For 401(k) Audit
1. Participant count reaches 100 or more
A 401(k) plan usually becomes audit-relevant when it has 100 or more participants with balances at the start of the plan year.
| Participants with Balances | Audit Requirement |
|---|---|
| 85 participants | Usually no audit required. |
| 102 participants | Audit likely required. |
| 150 participants | Audit required. |
The count is based on participants who actually have money in the plan, not just employees who are eligible.
2. The plan is treated as a large filer
Plans are generally classified as either:
- Small Plans typically under 100 participants
- Large Plans – 100+ participants
Once a plan crosses the large-plan threshold, it must file a more detailed Form 5500 with audited financial statements.
Larger plans get more scrutiny because they hold more assets and affect more workers.
3. A new plan grows too quickly
New plans are not automatically exempt from audit rules. If a startup or new plan grows fast and hits the participant threshold, an audit may still be required.
4. The plan falls outside the 80–120 participant rule
The 80–120 rule can help plans avoid flipping between small-plan and large-plan status every year.
| Prior Year Status | Current Participants | Audit Required? |
|---|---|---|
| Small Plan | 105 | Often No |
| Small Plan | 118 | Often No |
| Small Plan | 125 | Usually Yes |
| Large Plan | 90 | Usually Yes |
But once the participant count moves beyond that range, the audit requirement usually becomes clear again.
5. Former employees and beneficiaries push the count higher
Many employers forget to count people who are no longer active employees.
Former employees with
- Balances
- Retirees
- Beneficiaries, and
- Terminated participants
..still count in many cases, and that can push the plan over the audit threshold.
| Category | Count |
|---|---|
| Active Employees | 70 |
| Former Employees with Balances | 25 |
| Retirees with Balances | 10 |
| Beneficiaries | 5 |
| Total Count | 110 |
Even though only 70 employees actively work for the company, the plan may still require an audit because the participant count exceeds the threshold.
Plans That May Be Exempt
Not every retirement plan has to go through a full annual audit. Some plans are exempt or conditionally exempt from the annual audit requirement.
1. Small plans that qualify for a waiver
A plan with fewer than 100 participants at the start of the year can skip the audit if it meets strict conditions, such as
- 95% of plan assets must be in qualifying plan assets
- Provide special disclosures in its Summary Annual Report and
- Make certain records (financial statements of the custodians) available to participants on request.
If all of the criteria are met, the plan can omit the independent audit for that year even if it would otherwise be large.
2. One-participant plans
A plan that was small last year can remain a small filer with no audit, even if the current count is between 80 and 120.
This is not a exacly a true exemption, but prevents an audit until participants exceed 120.
3. Church and governmental plans
Church plans and governmental plans are exempt from ERISA and therefore do not file Form 5500 at all, so audit rules do not apply.
4. Plans that stay under the threshold
If a plan remains small and does not trigger an exception, it usually does not need an annual independent audit.
That said, being exempt from the audit does not mean being exempt from good records. Small plans still need solid controls.
What Happens During a 401(k) Audit?
A 401(k) audit follows the general GAAS framework but focuses on ERISA-specific elements. Broadly, the auditor performs the following steps:
Step 1: The auditor reviews the plan
The auditor looks at the plan document, trust agreement, summary plan description, amendments, and prior-year filings to understand how the plan is supposed to operate.
Step 2: Records are requested
Typical requests include:
- census data
- payroll reports
- contribution remittance records
- participant account statements
- loan reports
- distribution records
- trust and custodial statements
- committee minutes and plan notices
Step 3: Deposit and Transaction Testing
The auditor compares payroll deferrals to deposits, checks whether employer contributions were handled correctly, reviews loan activity, and samples participant records to confirm that transactions were processed properly.
Step 4: The report is issued
The completed audit becomes part of the Form 5500 filing package, along with any required schedules and statements.
The process can feel repetitive, but it’s part of the process. It is designed to catch mismatches that would be easy to miss in day-to-day administration.
How Much Does a 401(k) Audit Cost?
| 401(k) Plan Audit Scenario | Typical Annual Audit Cost (USD) |
|---|---|
| First-time audit (100–200 participants) | $8,000 – $12,000 |
| Small to mid-sized plan | $8,000 – $15,000 |
| Mid-sized plan (500–1,000 participants) | $10,000 – $20,000 |
| Large or complex plan | $15,000 – $30,000+ |
| Very large plan (thousands of participants) | $30,000+ |
A smaller plan may pay on the lower end, while a more complex plan with more participants, more payrolls, multiple locations, or unusual investment features may cost much more.
Several things tend to drive the price:
- number of participants
- number of transactions
- plan complexity
- data quality
- how organized the records are
- How much back-and-forth does the auditor need
How often Do You Need an Audit?
For a large 401(k) plan, I would say every year.
| Situation | Audit Needed? | Frequency |
|---|---|---|
| Plan has fewer than 100 participants | No | No audit required |
| Plan reaches 100+ participants (first trigger) | Yes | Audit starts that year |
| After first time becoming a large plan | Yes | Every year (annual audit) |
| Plan fluctuates around 80–120 participants | Maybe | Depends on prior-year status (80–120 rule) |
| Plan stays under 100 consistently again | No (eventually) | Can stop if it qualifies again |
If the plan meets the threshold, the audit is part of the annual filing cycle.
401(k) Audit FAQs
Participants include active employees, retirees receiving benefits, and terminated employees with balances, and exclude zero-balance participants and QDRO alternate payees, with counts generally taken at the start of the plan year and aggregated across controlled groups.
The 80–120 rule lets a plan that filed as small last year stay small if participant counts remain between 80 and 120, allowing continued use of Form 5500-SF until it exceeds 120.
Yes, if the plan is large, a final Form 5500 must include an audit, while small plans may file without one if all assets are distributed and the plan is properly terminated.
No, safe harbor status does not affect audit requirements, which depend on plan size and filing status.
No, one-participant plans filing Form 5500-EZ are generally exempt from audits.
Yes, controlled group employers must combine participants for counting, while unrelated companies count separately.
Late filings may trigger penalties, but the audit and corrected Form 5500 must still be submitted.
The audit report is attached to Form 5500 for large plans and supports required financial and compliance reporting.
Errors are usually corrected through plan amendments or formal correction programs, depending on severity.
Yes, small plans can choose a voluntary audit for added compliance assurance even when not required.
