You’ve built a successful business and offered employees a solid retirement plan. Your workforce is growing, participation is strong, and everything seems to be running smoothly. Then you receive a notice from your third-party administrator: your plan now has enough eligible participants to require an independent audit. If this is news to you, you’re not alone.
Understanding when your retirement plan crosses the threshold that triggers an Employee Retirement Income Security Act (ERISA) audit requirement is critical for plan sponsors. Missing this requirement can result in rejected Form 5500 filings, Department of Labor (DOL) penalties, and increased regulatory scrutiny.
What Is an Employee Benefit Audit?
An employee benefit plan audit is an independent examination of your retirement plan’s financial statements and operations, performed by a qualified CPA with no conflicts of interest. The audit is tied directly to your annual Form 5500 filing, which discloses your plan’s financial condition and compliance information to federal regulators. When your plan qualifies as a “large plan,” you must include audited financial statements with that filing.
During an audit, the independent CPA reviews participant data, contribution and distribution accuracy, internal controls, and compliance with plan documents. Many large plans qualify for a limited-scope audit under ERISA section 103(a)(3)(C), in which investment information certified by a qualified custodian is excluded from the auditor’s examination, reducing cost and complexity.
When is an Audit Required?
Prior to 2023, plan size for Form 5500 reporting purposes was generally based on all eligible participants, including employees who were eligible but had never enrolled in the plan. Beginning with plan years starting on or after January 1, 2023, the Department of Labor changed the methodology to count only participants with account balances when determining whether a plan is considered a small or large plan.
How Participated Counts Are Determined Today
For plan years beginning on or after January 1, 2023, plan sponsors determine large-plan status by counting only participants with account balances as of the first day of the plan year. This count includes:
- Active employees with account balances
- Terminated employees with account balances
- Retired participants with account balances
- Beneficiaries with account balances
Employees who are eligible to participate but have not enrolled and do not have an account balance are not included in the count.
As a result, some plans that previously required audits may now qualify as small plans and be exempt from the annual audit requirement. Plan sponsors should work with their recordkeeper or advisor to confirm their participant count each year.
The 80-120 Participant Rule
ERISA provides a transition rule that offers limited flexibility for plans. If your plan’s participant account is between 80 and 120 participants at the beginning of the plan year, you may file Form 5500 in the same category you used in the prior year.
For example, if you filed as a small plan last year and now have 105 participants with account balances, you may continue filing as a small plan this year. Conversely, if you filed as a large plan last year and now have 95 participants with account balances, you may still be required to file as a large plan.
Because the rule depends on prior-year filing status, maintaining accurate historical records matters.
Why Audits Matter
While an audit requirement may feel like a regulatory hurdle, it serves an important purpose. Your retirement plan holds your employees’ hard-earned money. An independent audit provides assurance that contributions are calculated and deposited correctly, that account balances are accurate, that distributions comply with plan terms, and that internal controls are functioning. It also helps you fulfill your fiduciary duty under ERISA and can identify opportunities to strengthen plan operations before small issues become costly problems.
How Yeo & Yeo Can Help
If you’re unsure whether your plan requires an audit or you’re looking for a more experienced audit partner, our Employee Benefit Plan Audit team can help. We’ll review your participant count, explain which exceptions may apply to your situation, and coordinate the audit process to minimize disruption to your HR and accounting teams. Early conversations make the entire process smoother and help ensure your Form 5500 filing stays on track.
Contact Yeo & Yeo today to discuss your plan’s audit requirements and how we can help you meet them with confidence.
