When an ERISA plan needs an audit: participant counts and the 80-120 rule

• Apply the participant count that decides large plan or small plan status for each plan type
• Use the 2023 account-balance counting method for defined contribution plans
• Apply the 80-120 participant rule in 29 CFR 2520.103-1(d)
• Identify the conditions for the small plan audit waiver in 29 CFR 2520.104-46

The basic rule

ERISA section 103(a)(3)(A) requires the plan administrator to engage an independent qualified public accountant (IQPA) to examine the plan's financial statements and schedules and express an opinion. The DOL's regulations then sort plans into two filer categories based on participants at the beginning of the plan year:

• Large plans (100 or more participants) file Form 5500 with Schedule H and attach the IQPA's report (29 CFR 2520.103-1(b)).
• Small plans (fewer than 100 participants) file under 2520.103-1(c), usually with Schedule I or on Form 5500-SF, and can avoid an audit if they meet the waiver conditions in 2520.104-46.

So the audit question is mostly a counting question.

Who counts as a participant

Defined contribution pension plans. For plan years beginning on or after January 1, 2023, the DOL changed the count used to decide large or small plan status. A defined contribution plan now uses the number of participants with account balances at the beginning of the plan year (Form 5500 line 6g(1)), not every eligible employee. A plan filing its first return uses the number with account balances at the end of the year (line 6g(2)). An eligible employee who never deferred and has no employer contributions has no balance and drops out of the count. The total participant count on line 5 still includes eligible employees; only the large-plan test changed.

Defined benefit plans and welfare plans. These use the line 5 count of participants at the beginning of the year. For welfare plans, an individual becomes a participant on the earliest of the date the plan designates, the date the individual becomes eligible for a benefit subject only to the covered contingency, or the date the individual contributes (29 CFR 2510.3-3(d)(1)). Former employees on continuation coverage count. Covered dependents do not.

The 80-120 rule

If a plan has between 80 and 120 participants (inclusive) at the beginning of the plan year, the administrator may elect to file in the same category it filed for the prior year (2520.103-1(d)). A plan that filed as small last year with 118 participants this year can file as small again and skip the audit, if it meets the waiver conditions. A plan that filed as large last year with 85 participants may keep filing as large, but nothing requires it to. The rule works only toward the prior year's category; it cannot move a plan from small to large status, and it does not help a plan at 121 or more. Use the 80-120 rule guide for edge cases.

The small plan audit waiver

A small pension plan avoids the IQPA requirement under 2520.104-46 only if, among other conditions, at least 95 percent of plan assets are qualifying plan assets, or anyone handling non-qualifying assets is bonded for at least the value of those assets. Qualifying plan assets include qualifying employer securities, participant loans meeting 408(b)(1), assets held by banks, insurance companies, registered broker-dealers and similar regulated institutions, and shares of registered investment companies. The plan's summary annual report must also disclose the institutions holding the assets and tell participants how to get the statements.

Other exemptions

Welfare plans that are unfunded, fully insured, or a combination of the two, and that meet the conditions in 2520.104-44, are exempt from the audit requirement regardless of size. A large health plan paid from the employer's general assets often needs no audit. A plan with a trust or a VEBA usually does.

Common mistakes

• Counting all eligible employees for a 401(k) plan year after 2022.
• Using the end-of-year count for an existing plan.
• Applying the 80-120 rule to move from small to large, or to a plan above 120.
• Treating a self-funded health plan with a trust as exempt because "health plans are exempt."

The Form 5500 audit requirement calculator runs these tests.

Brightwater Manufacturing 401(k) Plan: audit or no audit?