80-120 Participant Rule: Audit Relief for Plan Sponsors

One of the most common Form 5500, “Annual Return/Report of Employee Benefit Plan,” questions employee benefit plan sponsors ask is whether the plan will require an audit in a given year. In many cases, the answer depends on whether the plan is filed as a small plan or large plan under Employee Retirement Income Security Act of 1974 (ERISA) annual reporting rules.

For plans near the 100-participant threshold, the 80-120 Participant Rule can help sponsors keep the same filing category from year to year and, in some cases, avoid triggering an audit.

Why does small- versus large-plan status matter?

• Small plans. These plans have fewer than 100 participants at the start of the plan year and do not require an annual audit if they meet the small-plan audit waiver conditions, which generally are:
  • At least 95% of plan assets at the end of the prior year consist of qualifying plan assets, or any nonqualifying assets are covered by an ERISA fidelity bond in an amount equal to their value.
  • The plan provides the required enhanced Summary Annual Report or Annual Funding Notice disclosures.
  • The plan administrator makes regulated financial institution statements and any required bond evidence available to participants upon request.
• Large plans. These plans have 100 or more participants at the start of the plan year and generally must attach an independent qualified public accountant (IQPA) report to the Form 5500.

Beginning with plan years starting on or after Jan. 1, 2023, defined contribution plans generally count only participants with account balances at the start of the year for this threshold, which has provided meaningful relief to many sponsors.

What is the 80-120 Participant Rule?

The Form 5500 instructions describe a specific exception – the 80-120 Participant Rule. If the number of participants at the beginning of the plan year is between 80 and 120, and a Form 5500 was filed for the prior year, sponsors may elect to file in the same category (small or large) as in the prior year.

In other words, this rule is designed to keep plans from bouncing back and forth between small and large status when participant counts fluctuate around 100.

When can the 80-120 Participant Rule be applied?

Plans may rely on the 80-120 Rule if all of the following criteria are met:

• The participant count at the beginning of the plan year is at least 80 but not more than 120.
• A Form 5500 (or Form 5500-SF, “Short Form Annual Return/Report of Small Employee Benefit Plan,” as applicable) was filed for the prior plan year.
• The filer elects to file in the same category (small or large) as in the prior year.

Filers do not have to check a special box for this rule. The election is effectively made when the form and schedule to file are chosen.

A simple example

Assume the following for a defined contribution plan:

• At the start of 2024, the plan had 92 participants with account balances and filed as a small plan.
• At the start of 2025, the plan had 112 participants with account balances.

Because 112 is between 80 and 120, the sponsor may continue to file as a small plan for 2025, assuming the plan meets the other small-plan waiver conditions. Alternatively, the sponsor may elect to file as a large plan for 2025, in which case an audit generally is required and an IQPA report must be attached to the Form 5500.

Key benefits for plan sponsors

Using the 80-120 Rule can help:

• Avoid triggering the audit requirement in years when participant counts hover above 100
• Smooth out year-to-year fluctuations in participation due to hires, terminations, or rollovers
• Potentially save significant fees and internal time associated with an audit

Sponsors may use the rule in multiple consecutive years as long as the participant count remains within the 80-120 range and prior year filing conditions are satisfied.

Limitations and common pitfalls for plan sponsors

Keep these guardrails in mind:

• The rule requires a prior year Form 5500 to anchor the election and is not available for first-year filings.
• Once a sponsor files as a large plan, the plan stays large until its participant count falls below 100 at the start of a year. Only then may it move to small-plan status.
• To avoid an audit, the plan must still satisfy the small-plan audit waiver conditions already described.

Accurate participant counts and consistent application of the rule are critical. Misclassifying plan size can lead to Department of Labor or IRS inquiries, corrected filings, and additional cost.

Practical steps for plan sponsors

Each year, plan sponsors and oversight committees should take the following actions:

• Confirm the participant count at the start of the plan year using the current Form 5500 instructions (particularly for defined contribution plans).
• Compare that count to prior year filing status (small versus large) to determine if the 80-120 Rule applies.
• Evaluate audit waiver eligibility for small plans.
• Document the decision to apply or not apply the 80-120 Rule for the year.
• Coordinate early with the third-party administrator, recordkeeper, and plan auditor to align on classification and timing.

When used as intended, the 80-120 Participant Rule can be a strategic tool for managing plan compliance and audit costs.