What is the 80-120 rule for 401k audit?
The 80-120 rule is a distinct filing election for Form 5500. If the plan has between 80 and 120 participants, the option is available to use the exact filing category from the previous year rather — than changing it immediately. The distinction is important: retaining small-plan status means you may bypass the audit requirement for that year. Conversely, if the plan remains in the large-plan category, an audit is generally required.
How does the 80-120 rule work?
The rule relies on 2 main indicators:
- The current participant count
- The filing category the plan used last year
If the participant total sits between 80 and 120 — and a Form 5500 was filed for the prior year — the plan might file under that exact same category. In other words:
- A plan filed as "small" last year might remain "small" this year if the participant count is 120 or fewer
- A plan filed as "large" last year will remain "large" this year if the count is 80 or more
The official Form 5500 instructions refer to this as the "80-120 Participant Rule"
Who counts for the 80-120 rule?
For defined contribution plans like a 401(k), the count does not equal the total payroll headcount. The Form 5500 instructions target participants who actually have account balances.
For existing defined contribution plans, the calculation uses line 6g(1), which looks at participants with account balances at the beginning of the plan year. For a brand-new defined contribution plan, taxpayers use line 6g(2) — taking the end-of-year count instead.
This total covers former employees who leave their money in the plan. Because of this, the business could employ fewer than 100 active workers but still land in a participant range that alters the filing status.
Does the 80-120 rule always remove the audit requirement?
No. This rule does not erase audit requirements on its own. It simply enables the plan to maintain the previous filing category.
If a plan remains a large plan, an audit is generally still part of the Form 5500 filing. If it remains a small plan, the audit requirement generally does not apply — unless another filing rule changes the result.
What mistakes do plan sponsors make with this rule?
One error plan sponsors make is counting just active employees. Sponsors also mistakenly assume the rule automatically grants small-plan status. It doesn't — the prior-year filing status remains the deciding factor. The first-year counting metric is another oversight. For a new defined contribution plan, the filing test requires the end-of-year account balance — not the beginning-of-year number.
How can Dimov Audit help?
Dimov Audit works directly with plan sponsors to deliver direct answers well before Form 5500 deadlines. We are ready to review the participant count, verify if the 80-120 rule applies to the situation, and perform the audit if the filing status demands it. Contact Dimov Audit today to discuss the plan as well as the exact filing requirements.