DOL Regulation 2520.103-8: Small Plan Audit Waiver

The Employee Retirement Income Security Act (ERISA) requires employee benefit plans to undergo an annual audit by an independent qualified public accountant, which is a considerable undertaking for plan sponsors. The Department of Labor (DOL) provides an exemption for certain small pension plans through Regulation 2520.103-8, allowing them to waive this audit requirement.

This waiver is not automatic. It is contingent upon the plan administrator satisfying a precise set of conditions designed to protect the plan’s financial integrity. Failure to meet any of these requirements nullifies the exemption for that plan year, subjecting the plan to standard audit rules.

Eligibility for the Audit Waiver

A plan is considered a “small plan” if it covers fewer than 100 participants on the first day of the plan year. This count includes active employees, retired or separated employees still receiving or entitled to future benefits, and the beneficiaries of deceased participants.

To account for fluctuations in workforce size, the DOL’s “80-120 Participant Rule” allows a plan with between 100 and 120 participants to continue filing as a small plan, provided it did so in the preceding year. For example, if a plan had 95 participants in 2024 and grew to 110 participants in 2025, it could still be treated as a small plan for 2025.

This rule provides administrative continuity and prevents plans from needing to switch between large and small plan filing statuses due to minor increases in participant numbers. Once a plan is required to file as a large plan because it exceeds the 120-participant threshold, it must continue to do so until its participant count drops below 100.

Conditions for Waiving the Audit

Meeting the participant threshold is the first step, but securing the waiver requires satisfying additional conditions. A primary condition involves the plan’s fidelity bond. Under ERISA section 412, plans are typically bonded for at least 10% of the plan assets handled, with a maximum of $500,000.

To qualify for the audit waiver, the plan must either hold at least 95% of its assets as “qualifying plan assets” or obtain an enhanced fidelity bond. If a plan holds less than 95% of its assets in qualifying forms, any person who handles the non-qualifying assets must be bonded for 100% of the value of those specific assets. This enhanced bond provides extra security for assets not held by regulated financial institutions.

“Qualifying plan assets” include assets held by banks, insurance companies, or registered broker-dealers. This also covers mutual fund shares, secured participant loans that meet regulatory requirements, and qualifying employer securities. If a plan holds assets that do not fit these descriptions, such as investments in limited partnerships or certain real estate, it may fail this condition.

Required Participant Disclosures

When a plan administrator uses the audit waiver, they must provide participants with specific disclosures in the Summary Annual Report (SAR). The SAR, which summarizes the financial information filed on the plan’s Form 5500, must include the following:

• A statement that the plan is eligible for and has elected to use the audit waiver under DOL Regulation 2520.103-8 for the plan year.
• The names of the financial institutions, such as banks or insurance companies, that hold the plan’s qualifying assets.
• The name of the surety company that issued the plan’s fidelity bond.
• A notice informing participants and beneficiaries of their right to request, free of charge, copies of the fidelity bond and any statements from the financial institutions that hold the plan’s assets.

Consequences of Non-Compliance

Failing to satisfy any condition for the audit waiver forfeits the ability to waive the audit for that specific plan year. The plan administrator must then promptly engage an Independent Qualified Public Accountant (IQPA) to conduct a full-scope audit of the plan’s financial statements. The plan sponsor bears the full cost of this engagement.

The completed audit report must be attached to the plan’s annual report, filed on Form 5500, Schedule H. This means the plan cannot use the simplified filing forms available to small plans, such as Form 5500-SF. The non-compliance effectively changes the plan’s reporting status for the year to that of a large plan.