In February 2023, the U.S. Department of Labor (DOL), IRS, and the Pension Benefit Guaranty Corporation released a Federal Register Notice announcing changes to the Form 5500, Annual Return/Report of Employee Benefit Plan, for periods beginning on or after January 1, 2023. One of the key changes is to the counting methodology for determining the 100-participant threshold, which generally triggers the need for an audit by an independent qualified public accountant (IQPA).
Current Guidance
Under current guidance, a defined contribution retirement plan with 100 or more participants at the beginning of the plan year is generally considered a large plan for Form 5500 purposes and, therefore, should include a financial statement audited by an IQPA with the Form 5500 filing. Participants are defined as eligible employees (regardless of whether they are participating) and all other individuals with balances in the plan.
One exception to this requirement is the “80-120 Participant Rule.” Under this rule, 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, i.e., large plan or small plan, as was filed for the prior year.
NOTE: There are plans with stub periods that could defer their audit period to the subsequent financial statement periods and that deferral of a plan subject to audit has not changed.
New Guidance (Effective January 1, 2023)
Under the new guidance, the 100-participant threshold and 80-120 Participant Rule remain in place for defined contribution employee benefit plans. However, a defined contribution employee benefit plan will only consider the number of participants with account balances, as of the beginning of the plan year, when determining whether it is a large or small plan for Form 5500 purposes. The determination will no longer be based on the number of eligible participants. As a result, some plans that previously met the audit requirement may no longer require an audit based on the new guidance.
While the participant count at beginning of the year typically determines whether a plan is considered a large plan or small plan, there is one exception under the new guidance. In their initial year for plans with an effective date during 2023, newly formed plans will base their determination (of large versus small plan) on the number of participants with account balances at year-end.
Expected Impact
The DOL expects this change to minimize costs and burdens for smaller plans and their sponsors. The DOL also expects this change to eliminate the audit requirement for approximately 20,000 defined contribution employee benefit plans.
Examples
Examples of application of the new guidance include the following:
| Example | New Plan? | Eligible Participants @ Beginning of Year | Participants With Account Balances @ Beginning of Year | Participants With Account Balances @ End of Year | Prior Year Plan Type (Large or Small) | Large Plan With Audit Requirement? |
|---|---|---|---|---|---|---|
| Plan A | No | 300 | 150 | 175 | Large | Yes |
| Plan B | No | 300 | 130 | 70 | Large | Yes |
| Plan C | No | 150 | 75 | 85 | Large | No |
| Plan D | No | 150 | 85 | 95 | Large | No |
| Plan E | No | 1101 | 90 | 90 | Small | No |
| Plan F | Yes | 200 | 0 | 130 | N/A | Yes |
| Plan G | Yes | 200 | 0 | 1012 | N/A | Yes |
Key Takeaways for Plan Sponsors
The changes apply to plan years beginning on or after January 1, 2023 and cannot be retroactively applied. While these 2023 changes have been announced, the 2023 Form 5500 is not yet available. However, this should not prevent plan sponsors from starting to think about their participant counts (including the number of eligible participants and the number with account balances) and how they may impact an audit requirement going forward. Plan sponsors also should consult with their third-party providers (record-keepers, auditors, etc.) as deemed necessary.
If you have any questions or need assistance, please reach out to a professional at FORVIS.
- 1Plan E never had more than 120 participants in the plan and, therefore, always utilized the 80-120 rule to be exempt from the audit requirement.
- 2Plan G has an audit requirement since it has 100 or more participants with account balances as of the end of their first year. They would not be able to apply the 80-120 rule and use the threshold of 120 since they would not have had a prior-year filing.