While it is not common for regulatory compliance requirements to lessen over time, in February 2023, the Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) revised the 2023 Form 5500 instructions to provide relief to smaller plan sponsors. A significant change was made to the methodology for determining who is considered a participant for reporting purposes for defined contribution plans. Under the new methodology, which is effective for plan years beginning on and after January 1, 2023, plans are only required to count participants with an account balance at the beginning of the plan year. Under the prior methodology, plans were required to count eligible participants, even if they have not elected to participate in the plan.
Why is this good news? Form 5500 filing generally considers a defined contribution plan with 100 or more participants at the beginning of the plan year a "large plan", while a plan with fewer participants is considered a "small plan." Large plan filers must submit an independent audit report with their Form 5500 filing. The audit requirement, which is aimed at ensuring the plan meets guidelines and regulations set forth by the IRS and DOL results in additional effort and costs to administer a plan. The participant count methodology change is expected to significantly reduce the number of plans that meet the definition of a large plan which have an annual audit requirement.
We recommend plan administrators start conversations now with your third-party administrator to determine the potential short-term and long-term impact of this rule change. Even if a plan sponsor determines that the plan is no longer required to be audited, they may consider continuing to have their plan audited if they believe that their participant count may fluctuate in and out of having an audit requirement in future plan years. We recommend proactively discussing the new rules with your auditor before determining your approach on future Form 5500 filings.
