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These changes, along with the application of the rules regarding 401k audit requirements to Form 5500, redefined how the number of participants is counted starting with plan years beginning after January 1, 2023, and these rules remain fully in effect for 2025–2026 filings.
Whether you are a plan sponsor or an advisor, understanding these changes is critical to ensuring compliance and avoiding unnecessary audits. Let’s go over the key points and examine steps you can take to help clients adapt to these requirements.
What changes have occurred to the 401k audit rules?
The Department of Labor issued formal guidance in February 2023, introducing a significant change in how plans determine whether an audit is required. These 401k assessment rules continue to govern Form 5500 filings for 2025 and 2026.
Here’s what you need to know:
Changes to Fund Balances from Eligible Participants:
401k audit requirements
401k audit requirements are now based on the number of participants with account balances as of the first day of the plan year, rather than the total number of eligible employees.
Only participants who actually have money in the plan are counted. Account balances must be reported in a designated section of Form 5500 or Form 5500-SF.
This includes:
- Active employees with funded accounts
- Former employees who still maintain plan balances
Eligible employees without balances are no longer included in the audit count.
New Audit Thresholds
Plans with 100 or more participants with account balances on the first day of the plan year generally require a 401k audit and must file Form 5500 with audited financial statements.
This update significantly reduced audit exposure for many plans that previously crossed the threshold based on total eligibility rather than funded accounts.
Impact on Projects
The Department of Labor estimates that more than 19,000 plans that previously required audits no longer need one under the revised rules.
Many of these plans still have more than 100 eligible participants but fewer than 100 funded accounts, eliminating the audit requirement. This impact continues to apply through 2025 and beyond.
80/120 RULE
The 80/120 rule still applies, but it now applies to participants with account balances, not total participants.
If a plan filed as a small plan in the prior year and has between 80 and 120 participants with balances at the start of the current year, it may continue filing the same form (for example, Form 5500-SF) without triggering a new audit requirement.
Why 401ks Need an Assessment
The Department of Labor uses participant account balances as a more accurate measure of plan complexity and operational risk, while also reducing unnecessary administrative burden.
For many plans, this change results in:
- Fewer required audits
- Lower compliance costs
- Simplified plan administration
However, ongoing evaluation is still required to ensure regulatory compliance and optimize plan management.
Filing guidance that remains relevant in 2025–2026:
- Fewer than 100 participants with balances → Eligible to file Form 5500-SF (audit generally not required)
- 80–120 participants with balances → May continue filing the same form as the prior year
- 121 or more participants with balances → Must file Form 5500 with audited financial statements
How to Help Clients Track 401k Audit Requirement
While it is too late to adjust balances retroactively for plan years that already began, there is still time to prepare for upcoming plan years.
Here are practical steps you can take to help your clients:
Help clients develop a consistent process to track participant account balances as of the first day of each plan year and review this count annually. By assisting with account cleanup, documentation, and audit readiness, you can help clients avoid unnecessary audits and simplify plan administration.
Respect retirement planning, and if you need help preparing, please contact us. Together, we can ensure clients remain compliant while minimizing administrative and audit costs.
Over 100? Do a quick calculation of the balance count.
Contact Former Employees:
- Remind former employees with larger balances to review their 401(k) accounts
- Encourage rollovers or distributions where appropriate to reduce inactive balances
Update Plan Information:
If the plan does not include an automatic cash-out provision, help your client update the plan document.
- The small-balance involuntary cash-out limit increased from $5,000 to $7,000, effective January 1, 2024
- This $7,000 threshold remains in effect for 2025–2026
- This provision allows plans to remove small inactive balances, helping reduce participant counts for audit purposes
Explore More: Retirement Planning: Building a Secure Future
