In February, the Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) made final changes to the 2023 Form 5500. These changes will be effective for plan years beginning on or after January 1, 2023. The change highlighted here is the new participant-count methodology for determining eligibility for small plan simplified reporting options.
Form 5500 Changes: Small Plan Reporting Methodology
The DOL, IRS and PBGC revised Form 5500 and Form 5500-SF and their instructions based on a new methodology related to the participant threshold for determining when a defined contribution plan may file as a small plan (eliminating the audit requirement). Currently, the number of participants, including account balances and individuals eligible but not participating in the plan at the beginning of the year, determines the audit requirement. Under the new 5500 changes, only the number of account balances at the beginning of the year will determine the audit requirements.
This change means that defined contribution plans that currently have an audit requirement but have fewer than 100 account balances in the plan (as of the beginning of the year) will no longer have an audit requirement starting with the 2023 plan year.
Form 5500 Changes: Pros and Cons
In weighing the pros and cons of making this change, the DOL recognized that the SECURE Act’s provision of adding long-term, part-time employees to the plan could carry the unintended consequence of subjecting small plans to costly annual reporting obligations, especially if many of them choose not to participate. Comment letters received by the DOL in support of the change noted that employers could increase their contributions rather than incur the expense of a quality auditor. Commenters also noted that current audit requirements deter plan formation.
Comment letters that expressed concerns over the change focused on the fact that small plans are particularly vulnerable to control, compliance and operation errors, and the change would deter employers from encouraging participation in retirement plans.
The DOL considered all comment letters and attempted to find the right balance of all interests, including promoting the establishment of secure retirement savings, especially by small businesses, while minimizing related costs. With this revision, an estimated 19,000 plans will no longer need to file as a large plan with an associated audit requirement. The DOL believes that plans are treated more equally based on account numbers rather than plans of similar size being treated differently based on the number of individuals eligible to participate.
The overriding message expressed by legislators with the passage of SECURE and SECURE 2.0 is to encourage retirement savings. The governing bodies hoped to reduce the expenses for small employers to establish and maintain a retirement plan, thereby encouraging more employers to offer workplace retirement plans. If you have questions on how these new Form 5500 changes will impact your retirement plan’s audit requirements, please get in touch with us.