The Department of Labor (DOL) recently issued final rules on changes to the 2023 Form 5500 and 5500-SF for employee benefit plans. One critical change is how the DOL will count plan participants and the count’s effect on the need for the plan to undergo an annual audit. With new requirements from the SECURE Act that may increase the number of eligible but inactive participants, the DOL’s rule change attempts to assess plan participants more accurately.
Beginning on January 1, 2023, plans will start counting the number of eligible participants with plan balances on the first day of the plan year. Those with balances must be included in the participant count to determine whether an audit is required. Previously, plans would need to count all eligible participants regardless of their plan activity.
Who is affected?
Currently, any plan with 120 or more eligible participants requires an independent plan audit. With this new counting rule, plans may see a reduction in the participant count based on the plan’s usage by employees. For those plans already requiring an audit, if the rule change modifies the participant count below 100 participants, large plan filers would no longer need the audit but may continue to have one.
This change is beneficial for small plan 5500 filers nearing the independent audit requirement. The new counting rule allows small plan filers to continue filing as such so long as the plan stays at 120 participants or less. If a plan is below 80 participants, it must file as a small plan.
What is the benefit?
By reducing the participant count and making it more difficult to trigger the audit threshold, small plans can avoid the financial costs of a plan audit. Depending on the plan and the auditor, the savings can be several thousand dollars which may not be an insignificant percentage of the plan’s overall costs.
In 2024, SECURE 2.0 allows plans to automatically roll over former employees’ accounts if the balance is $7,000 or less. This bump from $5,000 may increase the number of rollovers and reduce the participant count even more.
The SECURE Act also implements eligibility for certain long-term, part-time employees. It is expected that many of these newly eligible employees may not wish to participate in the plan. Under the old counting rules, they would be considered a participant. With the new counting rule, they will only be counted towards the audit requirement if they have an account balance with the plan.