Important changes to Defined Contribution Plans’ Form 5500 and Form 5500-SF Annual Return/Reports were released by the Department of Labor, Internal Revenue Service, and the Pension Benefit Guaranty Corporation. These changes are effective for plan years beginning on or after January 1, 2023.
Participant count methodology for independent audits
Amongst the updates, the DOL announced changes to the participant count methodology for Defined Contribution plans that is used to determine whether an audit will need to be conducted by an independent accountant.
What is the new participant count methodology?
For Form 5500 purposes, the participant count is determined as of the first day of the plan year. For the first year of this change, a calendar year plan will use January 1, 2023 to determine whether a plan meets the small plan threshold. Only participants with a balance as of the first day of the plan year will need to be included in the participant count used to determine whether an audit is needed rather than counting all eligible individuals.
What is the benefit of this new rule?
This may be good news for small plan filers who are approaching the independent audit requirement. To file as a small plan, the plan must have filed as a small plan in the previous year and have 120 or fewer participants as of the first day of the plan year.
Additionally, current large plan filers subject to an audit may actually fall below the audit requirement under the new rules. A large plan filer that falls below 100 participants with a balance will have an option to file as a small plan and there would be no independent audit requirement. While there are benefits to having an independent entity review your plan, there could be considerable savings in both costs and administration if the plan chooses to file as a small plan.
Reminder on the 80/120 Rule
The rule allows small plan filers to continue to do so as long as they stay at 120 participants or below. Once a plan becomes a large plan filer and is required to conduct an independent audit, it must continue to be audited until the plan falls below 100 participants. At that point, the employer has the option to file as a large plan and include the audit or to file as a small plan and not include the audit. If a plan is below 80 participants, it must file as a small plan.
Other Things to Keep in Mind
In light of the pending SECURE Act’s long-term part-time eligibility provision and the encouragement of automatically enrolled plans, you may wish to consider the new 5500 rule in your plan design strategy. Beginning in 2024, the automatic rollover of terminated participants with account balances rules are changing to permit automatic rollovers of a former employee’s account if the balance is $7,000 or less. This change from the $5,000 threshold may help to reduce your participant count.
If you have any questions regarding the new 5500 rules, please reach out to your Sentinel contact.
