If you're a plan sponsor, you’ve likely heard of the "80-120 rule" when it comes to retirement plan audits — but what does it really mean, and how does it apply across different plan types like 401(k), 403(b), and ESOPs?
This misunderstood rule can affect whether or not your retirement plan is required to file audited financial statements with your Form 5500.
In this blog, we’re breaking it down in plain English so you can stay compliant and avoid unexpected audit headaches.
What Is the 80-120 Rule?
The 80-120 participant rule is a provision that gives some flexibility to retirement plans that are hovering around the 100-participant audit threshold.
In the context of audits, the "80-120 rule" provides a special exception for plans that fall between 80 and 120 eligible participants. An eligible participant count is based on the number of participants with account balances as of the beginning of the plan year. The 80-120 rule allows these plans to continue filing their Form 5500 in the same category — either as a small or large plan — based on how they filed the previous year. This rule helps prevent unnecessary audit requirements for plans whose participant counts fluctuate slightly around the 100-participant threshold.
Here’s how it works:
- If your plan filed as a “small plan” (fewer than 100 eligible participants) in the prior year, you can continue filing as a small plan until the participant count hits 121.
- If your plan had 100+ participants in the prior year and filed as a “large plan,” you must continue to do so until the count drops below 100.
This gives some breathing room to plans that fluctuate year to year — but also makes it very easy to misfile.
How the Rule Applies to Different Retirement Plans
Let’s look at how the rule shows up across plan types:
401(k) Plans
401(k)s often trigger the audit requirement quickly due to automatic eligibility provisions. Watch for:
- Part-time employees who became eligible mid-year
- Former employees with small balances
403(b) Plans
Audit thresholds are calculated similarly, but 403(b) plans have unique rules when it comes to counting legacy contracts or contracts outside of the plan sponsor's control (often for schools and not-for-profits). It’s critical to assess contract ownership and control in addition to headcount.
ESOPs
While ESOPs follow the same participant counting rules, additional considerations like employer stock valuation and ERISA compliance can lead to more complex audit requirements. If your ESOP also includes 401(k) features, you may trigger multiple audit thresholds.
Real-World 80-120 Rule Examples
Scenario A:
- Last year: 98 eligible participants (small plan)
- This year: 115 eligible participants
- No audit is required yet — you can still file as a small plan under the 80-120 rule.
Scenario B:
- Last year: 122 eligible participants (large plan)
- This year: 105 eligible participants
- Audit still required — you stay classified as a large plan until the count dips below 100.
Common Pitfalls to Avoid
1. Forgetting to cash out low-balance terminated participants.
Another common error is failing to manage small account balances for separated employees. Without a proactive cash-out strategy, these balances can linger for years, unnecessarily inflating your participant count and triggering an audit requirement. Effective January 1, 2024, the SECURE 2.0 Act increased the cash-out limit from $5,000 to $7,000.
2. Misclassifying the plan size on the Form 5500.
Misfiling your Form 5500 based on incorrect participant counts is also more common than you might think. Sponsors sometimes toggle between large and small plan filings from year to year without applying the 80-120 rule correctly, which can raise red flags with the Department of Labor (DOL).
3. Not coordinating early with your auditor or recordkeeper.
Lastly, plan sponsors often wait too long to engage their audit firm — especially when their participant count hovers close to the threshold. That delay can lead to rushed filings, missed deadlines, or incomplete audit documentation.
Stay Ahead of the Audit Requirement — and Avoid DOL Surprises
Whether your retirement plan is approaching the 100-participant threshold or you’ve just crossed into “large plan” territory, timing and preparation are everything. Don’t wait until the end of the year to figure out if an audit is required.
Start by reviewing your participant data now — including inactive participants and terminated employees with balances. Evaluate your plan’s cash-out provisions to see if there’s an opportunity to reduce your eligible participant count before the plan year closes. Most importantly, talk with your plan recordkeeper and engage your audit firm early so you have time to plan and avoid missteps.
Need help navigating the 80-120 rule or confirming your plan’s audit requirements? Our team works with 401(k), 403(b), and ESOP sponsors across industries to ensure accurate filings, complete audits, and full compliance with DOL expectations. Contact us today to set up a consultation and stay ahead of your retirement plan obligations.