The 80-120 Rule: The 100-Participant Line and the Audit Election

The 80-120 rule lets a benefit plan with between 80 and 120 participants on the first day of the plan year file the same category of Form 5500 it filed the year before, even if the participant count has crossed the 100-person line that normally separates small plans from large plans. The point is stability. Without the rule, a company that hires or loses a handful of employees could flip between simplified small-plan reporting and full large-plan reporting every year, and the flip into large-plan status brings an independent audit that typically runs $10,000 to $25,000 along with substantially more detailed financial disclosures.

The 100-Participant Line the Rule Sits On

Federal regulations divide benefit plans into two filing categories based on one number: 100 participants as of the first day of the plan year.¹ Below the line, a plan is a “small plan” and files simplified reports, usually on Schedule I, and may qualify to skip the independent audit entirely. At or above the line, a plan is a “large plan” and files Schedule H with detailed financial information plus an auditor’s report attached.²

The Form 5500 itself is the combined annual return that goes to the Department of Labor, the IRS, and the Pension Benefit Guaranty Corporation. One threshold, two very different sets of obligations. That gap is what the 80-120 rule is designed to soften.

How the Election Works

Under 29 CFR 2520.103-1(d), if a plan has between 80 and 120 participants (inclusive) at the start of the current plan year, the administrator can elect to file the same category of annual report the plan filed for the prior year.³ The election runs in both directions. A plan that filed as small last year can keep filing as small even after growing to as many as 120 participants. A plan that filed as large can stay large even if it slips below 100.

The direction that saves real money is small-to-large. A company that filed as a small plan with 95 participants last year and now begins the year with 108 can continue filing simplified reports without engaging an auditor, as long as the count stays at 120 or below. If the plan was eligible for the Form 5500-SF (Short Form) the prior year, it can file the SF again.⁴

Two limits matter. First, the plan must have filed a Form 5500 for the prior year, so a brand-new plan cannot use the rule. A first-year plan that starts with 100 or more participants files as a large plan from day one. Second, the rule has a hard ceiling at 120. Once the participant count exceeds 120 at the start of a plan year, the election disappears and the plan must file in whatever category its actual count dictates.

Who Counts as a Participant

Everything about the 80-120 rule depends on getting the count right. Participants are counted as of the first day of the plan year, and the definition sweeps in more people than administrators often expect:⁴

Active participants — employees currently working in jobs covered by the plan and earning or retaining credited service, including anyone eligible to make 401(k) deferrals.
Retired or separated participants — former employees who have left the company but are entitled to receive benefits in the future.
Deceased participants — individuals who have died but whose beneficiaries are currently receiving or entitled to receive plan benefits.

Administrators typically pull this data from payroll records, the plan’s recordkeeper, and historical employment files. Anyone with a legal claim to plan assets belongs in the count, even if they left the company years ago.

The 2023 Change for 401(k) and Other Defined Contribution Plans

For plan years beginning on or after January 1, 2023, the DOL changed how defined contribution plans count participants for the 100-participant threshold. Plans now count only participants who actually have account balances, not everyone who is merely eligible to participate.²

The impact on growing companies is real. Under the old method, a 401(k) plan might count 110 participants because 110 employees were eligible, even though only 85 had enrolled and funded accounts. Under the new method, that same plan counts 85 and comfortably qualifies as small. The revised count feeds directly into the 80-120 rule: if the account-balance-only number lands between 80 and 120, the election is available.

This change applies to defined contribution plans only. Defined benefit pension plans still count all individuals covered by the plan regardless of whether they have an account balance.

Staying Small Does Not Automatically Mean No Audit

Filing as a small plan under the 80-120 rule does not by itself waive the independent audit. Small plans have to meet additional conditions under 29 CFR 2520.104-46 to qualify for the waiver, and plans using the 80-120 rule to stay small can claim the waiver only if they satisfy those same requirements.⁵⁶

The core requirement is where the plan’s money sits. At least 95% of plan assets must be “qualifying plan assets,” meaning they are held by a regulated financial institution such as a bank, insurance company, or registered broker-dealer. If more than 5% of assets fall outside that category, any person handling those non-qualifying assets must be covered by a fidelity bond equal to at least the value of those assets.

The plan also has to include specific disclosures in its Summary Annual Report: the name of each financial institution holding qualifying assets, the dollar amounts held at each institution as of the plan year end, and a notice telling participants they can request copies of the institution statements and bond evidence at no charge. Skipping the disclosures means the waiver does not apply, even if the asset test is met.

What Happens When the Plan Grows Past 120

Once a plan begins a year with more than 120 participants (or opens its first year at 100 or more), large-plan requirements take over. The centerpiece is the mandatory annual audit by an Independent Qualified Public Accountant, whose report gets attached to the Form 5500.⁴ Large plans file Schedule H, which requires detailed reporting of plan assets, liabilities, income, and expenses, along with supplemental schedules listing assets held at year-end and any reportable transactions.

The accountant must be both qualified (a CPA or licensed public accountant) and independent of the plan and its sponsor. Independence means the accountant and their firm cannot hold financial interests in the sponsor, serve as an officer or employee of the sponsor, or maintain the plan’s financial records.⁷ Using the same firm to keep the books and conduct the audit disqualifies the audit. A Schedule H filing without the required audit report is treated as incomplete, and under ERISA a rejected annual report is treated as if it were never filed at all, which exposes the administrator to daily penalties.⁸

Running the Rule Each Year

The annual decision is not complicated. On the first day of the plan year, count all participants using the method that matches the plan type: account balances only for defined contribution plans, all covered individuals for defined benefit plans. If the count falls between 80 and 120 and a Form 5500 was filed for the prior year, the plan can keep filing in the same category as last year. Small stays small; large stays large.

Where administrators get tripped up is the counting itself. Forgetting terminated employees who still have account balances, or missing beneficiaries of deceased participants, can produce a count that is artificially low. If the DOL later determines the true count exceeded 120, the plan should have filed as large, and the administrator faces penalties for the incomplete filing. The safer approach is to include anyone with a plausible claim to plan assets and then apply the 80-120 rule to that accurate number.

For plans that have been hovering near the top of the range for several years, the 80-120 rule buys time, not permanence. Once the count crosses 121, the move to large-plan filing is unavoidable, and budgeting for audit fees, lining up a qualified independent accountant, and building the internal processes to support Schedule H reporting is much easier before the threshold is crossed than after.

1
eCFR. 29 CFR 2520.103-1 – Contents of the Annual Report
2
U.S. Department of Labor. Changes for the 2023 Form 5500 and Form 5500-SF Annual Return/Reports
3
eCFR. 29 CFR 2520.103-1 – Contents of the Annual Report – Section: Special Rule
4
Department of Labor. 2025 Instructions for Form 5500 Annual Return/Report of Employee Benefit Plan – Section: What To File
5
eCFR. 29 CFR 2520.104-46 – Waiver of Examination and Report of an Independent Qualified Public Accountant for Employee Benefit Plans With Fewer Than 100 Participants
6
U.S. Department of Labor. Frequently Asked Questions On The Small Pension Plan Audit Waiver Regulation
7
Federal Register. Interpretive Bulletin Relating to the Independence of Employee Benefit Plan Accountants
8
Office of the Law Revision Counsel. 29 USC 1132 – Civil Enforcement