A retirement plan can skip its annual ERISA audit under the small plan audit waiver when it has fewer than 100 participants with account balances at the start of the plan year and either holds at least 95 percent of its assets with regulated financial institutions or carries an enhanced fidelity bond covering the rest. The waiver also requires specific disclosures in the Summary Annual Report. Miss any piece and the plan is treated as if no audit was filed at all, which is expensive: a full plan audit typically runs $12,000 to $18,000 or more each year, and a rejected Form 5500 draws penalties from both the Department of Labor and the IRS.
The 100-Participant Threshold
ERISA requires the administrator of every covered plan to engage an independent qualified public accountant, but the statute lets the Secretary of Labor waive that requirement for plans filing a simplified annual report.1Office of the Law Revision Counsel. 29 USC 1023 – Annual Reports The dividing line in practice is 100 participants, measured on the first day of the plan year. At or above 100, the plan files as a large plan and must include a full audit report with Form 5500. Below 100, it files as a small plan and can claim the waiver if the asset and disclosure conditions are met.
How Participants Are Counted
For plan years beginning on or after January 1, 2023, defined contribution plans count only participants who actually have account balances at the start of the plan year. Eligible employees who never enrolled, or who carry a zero balance, no longer count.2U.S. Department of Labor. Changes for the 2023 Form 5500 and Form 5500-SF Annual Return/Reports
The shift changes classifications. A company with 130 eligible employees but only 85 who actually hold balances is now a small plan. Under the old method the same plan would have been large and required an audit.
The 80-120 Participant Rule
Small workforce swings around the 100 mark do not force a plan to flip categories every year. If the participant count at the beginning of the plan year is between 80 and 120, a Form 5500 or 5500-SF was filed for the prior year, and the administrator elects to stay put, the plan can file in the same category (small or large) it used last year. A plan that filed as small last year and now has 115 participants with balances can keep filing as small and keep the waiver.
The Two Asset Paths to Qualify
Being under the participant threshold is necessary but not enough. The plan must also satisfy one of two asset conditions in 29 CFR 2520.104-46.
Path 1: 95 Percent Qualifying Plan Assets
The easier route requires at least 95 percent of the plan’s assets to be qualifying plan assets, meaning assets held or issued by a regulated financial institution: a bank, insurance company, or registered broker-dealer. Mutual fund shares, certificates of deposit, guaranteed investment contracts from insurance companies, and publicly traded securities held by a registered broker-dealer all qualify.3eCFR. 29 CFR 2520.104-46 – Waiver of Examination and Report of an Independent Qualified Public Accountant Most 401(k) plans built around standard mutual fund lineups clear this test without any special action.
Path 2: Enhanced Fidelity Bond
When non-qualifying assets exceed 5 percent of the plan (limited partnerships, private equity, directly held real estate, or other holdings not managed by a regulated institution), the administrator can still claim the waiver by obtaining an enhanced fidelity bond. The bond must cover the full value of all non-qualifying assets, not just the portion above 5 percent. The bond amount is based on the fair market value of those holdings at the end of the previous plan year.3eCFR. 29 CFR 2520.104-46 – Waiver of Examination and Report of an Independent Qualified Public Accountant
This enhanced bond is separate from the baseline fidelity bond every ERISA plan already carries for anyone who handles plan assets. Both need to be in place.
One consequence of going the enhanced-bond route: the plan cannot file the simplified Form 5500-SF. It must file the full Form 5500 with Schedule I.4U.S. Department of Labor. 2025 Instructions for Form 5500-SF
Disclosures the Waiver Requires
The waiver is conditioned on giving participants specific information in the Summary Annual Report, on top of standard SAR content:5eCFR. 29 CFR 2520.104-46 – Waiver of Examination and Report of an Independent Qualified Public Accountant
- The name of each regulated financial institution holding qualifying plan assets and the amount that institution reported at plan year end.
- If the plan relies on the enhanced fidelity bond, the name of the surety company issuing it.
- A notice that participants can request, free of charge, copies of the financial institution statements and evidence of the fidelity bond.
- A notice pointing participants to the DOL Employee Benefits Security Administration regional office if they cannot obtain those documents.
Skipping any of these can invalidate the waiver for that plan year. If a participant requests the underlying statements or bond evidence, the plan has to hand them over promptly and at no cost.
Which Form to File When the Waiver Applies
Small plans claiming the waiver have two filing options:
- Form 5500-SF, available when at least 95 percent of assets are qualifying plan assets (not through enhanced bonding), 100 percent of assets are invested in eligible assets with readily determinable fair market value, the plan holds no employer securities, and the plan is not a multiemployer or pooled employer plan. Schedules I and H are not attached.4U.S. Department of Labor. 2025 Instructions for Form 5500-SF
- Form 5500 with Schedule I, for small plans that qualify for the waiver through enhanced bonding or that otherwise fall outside the 5500-SF criteria.6U.S. Department of Labor. 2025 Instructions for Form 5500 Annual Return/Report
Either form goes through EFAST2 by the last day of the seventh month after the plan year ends (July 31 for calendar-year plans). When the waiver applies, the audit report is simply omitted from the filing package, and the system will prompt the filer to confirm waiver eligibility.
What Happens If You Get It Wrong
If the waiver conditions are not met and the plan files without the required audit report, the DOL treats the filing as rejected, which is the same as never having filed. Two agencies then have penalty authority.
Under ERISA Section 502(c)(2), the DOL can assess up to $2,670 per day for failure to file the annual report, with no cap. The figure is adjusted periodically for inflation.7U.S. Department of Labor. Fact Sheet: Adjusting ERISA Civil Monetary Penalties for Inflation The IRS imposes a separate penalty of $250 per day under IRC Section 6058, capped at $150,000 per return, waivable for reasonable cause.8Office of the Law Revision Counsel. 26 USC 6652 – Failure to File Certain Information Returns
A plan that realizes it has fallen behind can self-correct through the Delinquent Filer Voluntary Compliance Program, which drops the DOL daily penalty to $10 and caps it: $750 per filing and $1,500 per plan overall for small plans ($750 per plan for small plans sponsored by a 501(c)(3)), and $2,000 per filing and $4,000 per plan for large plans.9U.S. Department of Labor. Delinquent Filer Voluntary Compliance (DFVC) Program DFVCP payments cannot come from plan assets; the employer or sponsor pays out of its own funds.10Federal Register. Delinquent Filer Voluntary Compliance Program Given the gap between the uncapped statutory penalty and the DFVCP figures, self-correction is almost always the right move for a plan that has missed a filing.