Is Your Client Approaching the 401(k) Audit Threshold? What Financial Advisors Should Be Watching Before Year-End

If you work with retirement plan sponsors, you have likely heard a version of this before: “We just found out we need a 401(k) audit. No one saw this coming.” By the time that realization surfaces, the plan year is already closed, Form 5500 preparation is underway, and what should be a manageable, routine process becomes compressed and reactive.

This situation is more common than it should be, and it rarely comes down to complexity. Most plan sponsors are focused on running their business. Payroll, hiring, plan design, and participant experience take priority, while audit thresholds tend to sit in the background. As a result, the requirement for a 401(k) audit often surfaces late in the process, typically when a recordkeeper, TPA, or advisor identifies it during Form 5500 preparation. In most cases, the trigger was not a single event. It was gradual growth that went unmonitored.

What actually drives the audit trigger

At a high level, the rule seems straightforward. Plans generally require a 401(k) audit once they reach 100 participants. Where confusion comes in is how that number is calculated and what actually counts toward the threshold.

What counts toward the 401(k) audit threshold:

• Participant count is measured on the first day of the plan year
• All participants with account balances are included
• Terminated employees with remaining balances are still counted

That last point is where many surprises come from. Even when hiring slows or overall headcount feels stable, balances left behind by former employees can quietly push a plan over the audit threshold. Because of that, there are often early indicators that a plan is getting close, even if it does not feel that way operationally.

Key indicators advisors should be watching:

• Growth that looks healthy but adds participants quickly. Auto‑enrollment, eligibility changes, and hiring trends can accelerate counts faster than sponsors expect.
• Terminated participants with lingering balances. This is often the silent driver. Balances don’t leave just because employees do.
• Assumed filing status from prior years. The 80–120 participant range is especially sensitive. Prior‑year filing treatment is often carried forward without a second look, sometimes incorrectly.

For financial advisors, this creates a clear opportunity to step in earlier and provide guidance. The goal is not to overcomplicate the process, but to stay aware of a few key drivers that tend to move plans toward audit requirements.

When audit exposure is identified early, organizations benefit from:

• More manageable timelines and fewer last-minute requests
• Better coordination between advisors, TPAs, and auditors
• Clear expectations heading into year-end and filing season
• Reduced disruption across HR, payroll, and finance teams

When it surfaces late, the opposite tends to happen. Work compresses into filing season, coordination becomes reactive, and plan sponsors are left trying to catch up under pressure. In most cases, the difference is not the level of difficulty. It is whether the issue was identified early enough to plan for it.

A simple question can bring this into focus quickly: how many participants had account balances on January 1, and what filing status was used last year? Advisors do not need to be audit specialists to ask it, but the answer often reveals whether a plan is approaching audit territory or already there.

The Bottom Line

401(k) audit exposure builds over time, often quietly. Advisors who stay ahead of it help their clients avoid surprises, reduce disruption, and move into year-end with greater clarity and control. For those who want an additional perspective, Redpath works alongside advisors and plan sponsors to review audit readiness early, identify potential exposure, and keep the process predictable and well managed.

Contact us today to learn more.