For plan years beginning on or after January 1, 2023, The United States Department of Labor (DOL), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation have announced changes to the form 5500 which impact the methodology for determining the size of a plan (large or small) and thus if an audit of the retirement plan is necessary.
Previously, a defined contribution plan with 100 or more participants at the beginning of the plan year was considered a large plan, and was required to submit audited financial statements with their form 5500 filing. Participants were defined as participants with an account balance and employees that were eligible but elected not to participate.
Under the new guidance for defined contribution plans, the number of participants with account balances at the beginning of the plan year will be used to determine the size of the plan and if an audit is required or not. The determination no longer includes the eligible but not participating employees.
Under both the previous and revised guidance, there is an 80/120 exception to the rule. This exception states that if the number of participants is between 80 and 120 and a form 5500 was filed for the prior plan year, you may elect to complete the form 5500 in the same category.
Newly formed plans, with an effective date during 2023, will use the number of participants with account balances at the end of the year to determine if they are a large or small plan.
For over 19,000 plan sponsors, this change means that they will no longer have to bear the cost of an audit. Plan sponsors may want to review participants with account balances to determine if this number can be reduced.
One way to reduce the number of plan participants is to review the plan for terminated employees. If a terminated employee has a balance less than $7,000, you may be able to force them out of the plan. If this ability is not already allowed per the plan document, the plan document can be amended to include it. After a 30-day written notice, the third-party administrator and recordkeeper will coordinate the roll out of the balance from the plan. When this occurs, the participant’s balance is automatically rolled into an IRA in their name. For employees with balances greater than $7,000, an outreach program can be implemented to provide them information about rolling out the plan.
Mahnaz Cavalluzzi, CPA
Director
Mahnaz has been a member of Cerini & Associates’ audit and consulting practice area for over 8 years where she focuses on serving nonprofit organizations, education, and healthcare clientele. Mahnaz has experience in financial statement audits, financial statement reviews, tax return preparation, cost report filing, and other consulting. Mahnaz brings her expertise, diversified background, and helpful approach to all of her engagements.