New Participant Count Rules for When an Audit Is Needed

Understanding when an employee benefit plan requires an audit has always been an important aspect of compliance for plan sponsors. Recent updates to the Department of Labor’s (DOL) rules have changed how plan size is determined for audit purposes, impacting which plans are classified as “large” and therefore subject to an annual audit requirement. 

These changes aim to simplify reporting requirements and better align audit thresholds with the number of participants who actually have account balances. For plan administrators, understanding the revised rules is critical to ensuring compliance with the Employee Retirement Income Security Act (ERISA) and avoiding potential filing issues. 

What Changed Under the New Rules 

Historically, whether a plan required an audit depended on the number of eligible participants at the beginning of the plan year — including both active employees and those eligible but not participating. This often led to plans being classified as “large” even if only a small number of employees were actively contributing or maintaining balances. 

Under the new rules, effective for plan years beginning on or after January 1, 2023, the participant count is now based on the number of individuals with an account balance at the beginning of the plan year. 

This adjustment means fewer plans will fall into the “large plan” category and therefore will not be required to undergo an annual audit. The change is designed to reduce administrative burden and compliance costs for smaller plans that do not hold assets for a large number of participants. 

Counting Participants in the First Year of a Plan 

For a newly established plan, the participant count is determined as of the end of the plan’s first year. This approach ensures that plan sponsors have an accurate representation of participation before being required to consider audit implications. 

For example, if a plan is created mid-year and only a handful of employees enroll before year-end, the plan will not need to estimate eligibility counts at inception. Instead, it will use the actual participant count as of the end of that first plan year to determine its filing and audit requirements for the following year. 

This clarification provides helpful flexibility for new plan sponsors and aligns the timing of the participant count with when meaningful data is available. 

The 80/120 Rule Still Applies 

Typically a plan is considered a large plan when the number of participants reaches 100. However, the 80/120 participant rule continues to provide stability from year to year by preventing unnecessary fluctuations in audit status. 

Under this long-standing rule, if a plan filed as a “large plan” in the previous year and begins the next year with between 80 and 120 participants, it can keep the same filing status as the prior year. In other words, a plan that was audited last year may continue to be audited, and one that was not may continue without an audit, provided it falls within that range. 

This rule helps minimize administrative disruption by allowing consistency in reporting, even when participant counts fluctuate slightly. 

What This Means for Plan Sponsors 

The new participant count rules are a welcome simplification for many employers, particularly smaller organizations that historically qualified as “large plans” due to inactive or eligible non-participants. However, it is still essential for plan sponsors to: 

• Review participant data regularly to ensure accuracy in annual filings. 

• Monitor headcount changes throughout the year to anticipate when an audit may become necessary. 

• Coordinate with service providers and auditors early to confirm filing requirements before deadlines. 

Maintaining accurate participant records and understanding how these new thresholds apply can help plan administrators avoid compliance challenges and streamline reporting obligations. 

Partnering for Compliance and Clarity 

As regulations evolve, staying informed on the details that affect plan reporting and audit requirements is key to maintaining compliance. 

At Brady Martz, our Employee Benefits team helps plan sponsors interpret regulatory updates, determine audit applicability, and prepare for annual reporting with confidence. To learn more about how the new participant count rules may affect your plan, contact our team today.