A revision regarding which qualified retirement plans need independent audits when filing Form 5500 takes effect this year. The update concerns how plan participants are counted and it determines what qualifies as a large plan or a small plan.
It is a game-changer for small businesses that offer defined contribution retirement plans and has a significant impact on plan sponsors, as the audit—which must be performed by an independent qualified plan auditor—is complex, time-consuming, and costly.
BEFORE: All eligible individuals were counted, even if they elected not to participate and did not have an account in the plan.
Under that rule, any plan with 100 or more “participants” at the beginning of the year was considered a large plan and was required to file an audit report. That also included terminated participants with balances remaining in the plan.
NOW: The count is based solely on the number of participants who opted in and have account balances in the plan.
This new guideline also excludes an upcoming requirement (part of the SECURE Act) of long-term, part-time employees who may become eligible for but do not contribute to their employer’s plan, since it only counts actual plan participants with account balances. That SECURE Act provision could increase participant headcount for many plans quite substantially and affect Form 5500 reporting audit duties for employers. The announced changes—an action of the U.S. Department of Labor (DOL)—address that concern.
How does this change Form 5500 filing?
Under the new counting methodology, defined contribution retirement plans with fewer than 100 participants with account balances at the start of the plan year are considered small plans and do not have to file an audit report with Form 5500.
The change benefits many small businesses that will now be excluded from the audit requirement, saving them time and money, and removing a potential barrier to the establishment and maintenance of a retirement plan.
The changes (released in February of this year by the DOL, Internal Revenue Service, and the Pension Benefit Guaranty Corporation) are effective for plan years beginning on or after January 1, 2023. Note that since Form 5500 is filed by the end of the seventh month after the end of the plan year—which in general is July for calendar-year plans—filing of the 2023 forms generally will not begin until July 2024.
You can read more about this final phase of Form 5500 updates on the FuturePlan website.
An Exception to The New Rule
Based on the “80-120 participant rule,” plans that have 80 to 120 participants at the start of the plan year are allowed to file Form 5500 in the same plan status category (“large” or “small”) as the prior year filing. Your Intac FuturePlan consultant can provide additional details about this exception and how the DOL’s new participant count revision affects your workplace retirement plan.