In general, if the number of participants at the beginning of the year is at least 100, any qualified retirement plan covered under ERISA is required to have an annual audit done along with the annual Form 5500 filing. That limit is increased to 120 participants provided you did not have an audit done the prior year.

An audit requires that a lot of work be performed by the audit firm and the expense often ranges between $20,000–25,000 per year.

Prior to 2023 any person eligible for the plan was considered a “participant” whether they participated or not. We have seen many organizations where only 40 or 50 people had an account balance in the 401k plan—however they had over 130 people who were eligible.

Good News! Pre-2023, those plans would be required to have the expensive audit, but starting in 2023 the way we count participants changed. A “participant” is now considered to be a person who has an account balance in the plan. Eligible employees who elect not to participate no longer count toward the 120-person audit threshold. If a plan includes only 40 or 50 people with balances, an audit is longer required.

Will your TPA notify you of changes like this or will you pay again for an expensive annual audit you don’t really need?