Employee benefit plans play a crucial role in providing retirement and other benefits to employees. These plans are subject to specific reporting regulations, including filing the IRS Form 5500. Recently, there have been significant changes to Form 5500 and its instructions that will affect the audit requirements for many small plan sponsors.

Understanding the Current Audit Requirements

Under the existing guidelines, determining whether a plan qualifies as a large or small plan filer is primarily based on the total participant count at the beginning of the plan year. A plan with more than 100 participants, regardless of whether they have elected to participate or have an account balance, is considered a large plan. Conversely, a plan with fewer than 100 participants is a small plan.

Large plan filers are required to file Form 5500 and attach an audited financial statement prepared by an independent qualified auditor. On the other hand, qualifying small plans are allowed to file Form 5500-SF, a simplified version of the form that does not require an audit.

Changes to Participant-Counting Methodology

One of the key changes to Form 5500 is the participant-counting methodology for determining plan audit requirements. Under the new guidance, effective for plan years beginning on or after January 1, 2023, the participant count will only include participants with account balances as of the first day of the plan year. This means that eligible participants who are not actively contributing or do not have an account balance will no longer be considered in the participant count.

This change is expected to significantly impact the audit requirements for employee benefit plans, especially for defined contribution plans such as 401(k) and 403(b) plans. For example, if a plan had 150 eligible participants, but only 75 had account balances at the beginning of the plan year, the plan would not be subject to the audit requirement for that year.

Cost Savings and Reduced Audit Requirements

The change in participant-counting methodology is anticipated to reduce the number of employee benefit plans requiring an annual audit. Based on the 2020 Form 5500 filings statistics, the Department of Labor (DOL) estimates that thousands of plans will no longer require an audit beginning with the 2023 annual filing, resulting in cost savings of over $30 million for small benefit plans nationwide.

This change is particularly beneficial for small plan sponsors who may find the cost of an audit burdensome. By reducing the audit requirements, plan sponsors can allocate their resources more efficiently, allowing them to focus on providing quality employee benefits.

Additional Changes to Form 5500

In addition to the changes in the participant-counting methodology, the revised Form 5500 and its instructions introduce several other modifications. These changes aim to enhance transparency, improve reporting, and streamline the filing process for employee benefit plans.

Breakout of Administrative Expenses on Schedule H

The new instructions require plan sponsors to provide a more detailed breakout of administrative expenses paid during the plan year on Schedule H of Form 5500. This additional reporting will help increase transparency of fees and expenses to beneficiaries, participants, and other users of the plan's financial information.

Consolidated Form 5500 for Defined Contribution Retirement Plan Groups

Certain groups of defined contribution retirement plans will have the option to file a consolidated Form 5500 as a new Direct Filing Entity called a "DCG" (Defined Contribution Retirement Plan Group). These DCGs will generally be subject to the same reporting requirements as other large plans. However, each plan within the DCG will still be subject to a separate audit at the plan level by an independent qualified public accountant.

Improved Reporting for Pooled Employer Plans (PEP) and Multiple Employer Plans (MEP)

The revised Form 5500 includes improved reporting requirements for Pooled Employer Plans (PEP) and Multiple Employer Plans (MEP). These changes aim to enhance the accuracy and completeness of reporting for these types of plans, ensuring better compliance and oversight.

Implications for Plan Sponsors

The revised participant-counting methodology, in particular, offers cost savings to plan sponsors by reducing the number of plans requiring an annual audit. This change aligns with the goal of promoting efficiency and reducing administrative burdens.

However, it's crucial to stay informed of and compliant with the updated reporting requirements. Working with knowledgeable benefit plan auditors and consultants can help plan sponsors navigate these changes, ensure accurate reporting, and maintain compliance with the Department of Labor, IRS, and ERISA rules and regulations.

Also, a pooled employer plan (PEP) may be a beneficial option for your company’s retirement plan. Contact us to learn more about how our team can help you find a plan that best fits your needs.

• Positivity, Includer, Maximizer, Harmony, Consistency

Tom Helligso

Audit Shareholder

Tom Helligso is an Audit Shareholder at Lutz. He began his career in 1994. He specializes in providing assurance, financial reporting, and consulting services to privately-held companies in various industries as well as employee benefit plans.

402.827.2066

thelligso@lutz.us

Connect on LinkedIn

• Harmony, Responsibility, Deliberative, Achiever, Relator

Kelly Martinson

Tax Shareholder

Kelly Martinson is a Tax Shareholder at Lutz. She began her career in 1995. Kelly provides business and individual tax consulting and compliance services to clients with a special interest in retirement plans. Her in-depth knowledge and attention to detail make her a valuable asset to her clients, enabling them to make informed decisions, ensure compliance with evolving regulations, and minimize tax liabilities effectively.

402.496.8800

kmartinson@lutz.us

Connect on LinkedIn