When Do Retirement Plans Need a Financial Statement Audit?

Each year, I review the audit requirement rules with pension professionals in all the specialties: investment advisors, third party administrators, recordkeepers, plan consultants, and more. This year, after our conversation, Renee Mrosowski from Summit Group Retirement Planners sent me an excellent summary of our conversation for my review. Her clear methodology is worth sharing, so if you are not sure whether your client’s plan needs an audit, follow her step-by-step summary and the answer will be clear:

Audit Rules: 80-120 and counting methodology

1. Count participants with balances (not forfeitures, not eligible) on the first day of the plan year.
   1. If between 80-120 people with balances, look at the prior year’s Form 5500 filing.
   2. If you filed a small plan Form 5500 last year, file as a small plan filer again.
   3. Repeat annually (it’s not limited to the first year) and continue to do this until the count exceeds 120 participants with balances on the first day of the plan year.
   4. The first year that you exceed 120 participants with balances, you no longer have the small plan filer exemption and must do an audit.
   5. EXAMPLE:
      1. Plan Origination Date = 4/10/2020
      2. Plan Year End Date = 12/31/2025
      3. Count Participants with Balances as of 1/1/2025
         1. If count is over 80 but under 120, and they filed as a small plan for the 2024 Plan year: file as a small plan (Short Form, no audit) for 2025.
         2. If count is over 80 but under 120, and they filed as a large plan for the 2024 Plan year: file as a large plan (Long Form, with an audit) for 2025, but only if the number of account balances is 100 or more. If the number of account balances drops below 100, then the plan will likely opt to file as a small plan. It is not typical to use the 80-120 exception when a shrinking large plan goes under 100 account balances. (Updated bullet with more detail 10 14 2025)
         3. If the count is over 120, file as a large filer for 2025.
      4. In Subsequent Years, repeat the process.
2. The 80/120 exception is not available to Brand New Plans (in their first year.)
   1. There is no prior year Form 5500 to refer back to.
   2. Since you cannot look at the prior year, you use the number of account balances on the last day of the plan’s first plan year.
   3. EXAMPLE:
      1. Plan Origination Date = 4/10/2025
      2. Plan Year End Date = 12/31/2025
      3. Count Participants with Balances as of 12/31/2025
3. The 80/120 exception is not available to Welfare plans (Vision, Health & Welfare) because they don’t file a Form 5500 when they are small so there is no prior year 5500 to refer to.
   1. Only count participants who have selected coverage; not dependents or eligibles.
   2. If you have a wrap document that includes all the benefits, you file a single 5500.
   3. If you have separate documents for each benefit, you file a 5500 for each one.
   4. If the plan is in a VEBA Trust, you must have an audit if you have over 100 participants.
   5. Fully insured, self-funded, or combination fully insured or self-funded plans don’t require an audit, regardless of size, because there is no “plan” to audit, the company has all the assets and pays all the bills from its own funds, unless there is a VEBA Trust.
4. At what point can you go back to being a small plan filer?
   1. When they go under 100 as of the first day of the plan year. (99 or less gets you out of the audit requirement.)
   2. If the plan is shrinking and it falls under 100 as of the first day of the plan year, they do not have to look back at the prior year when there was an audit done.
      1. Plan sponsors don’t normally invoke the 80-120 exception to get themselves another year of the audit requirement.
      2. Once the plan has less than 100 accounts on the first day of the plan year, they apply the general rule and apply as a small plan.

As Renee explained so well above, the 80-120 exception works well for a growing plan, but not so well for a shrinking plan. As an auditor, it doesn’t hurt my feelings when plan sponsors avoid the audit requirement. However, if a plan tends to teeter over and under the plan audit requirement, it may be wise for the plan sponsor to engage the auditor to perform agreed upon procedures in the off years to facilitate the test of opening balances when the plan goes back to needing an audit and as insurance that operations have remained compliant.

For additional iterations of how to properly count account balances, please refer to our previous blog called Form 5500 Participant Count: Cash or Accrual Basis? To Audit or Not to Audit?, where I discussed intriguing topics such as:

• whether a participant is deemed to have an account balance on the date of a plan merger;
• when the recordkeeper records a transfer-in on the settlement date after January 1st, for a transfer-out of another plan on December 31st of the previous year;
• MEP and PEP spinoffs;
• Profit sharing contributions made after year end attributable to the prior year.

The Rules are Simple, Not Easy

Like most rules affecting retirement plan administration, the participant balance counting rules are simple, they are just not easy.

This content was posted by Maria Hurd, CPA, RPA in collaboration with Renee Mrosowski | Summit Group Retirement Planners