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2023 Form 5500: New Schedule R Compliance Questions

The Form 5500 series, developed jointly by the Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC), is used to satisfy annual reporting requirements under Title I and Title IV of ERISA and under the Internal Revenue Code (IRC). It is an annual informational filing required for most ERISA employee benefit plans and is utilized as a compliance, research, and disclosure tool by various agencies, participants/beneficiaries, the private sector, and others. It is also used by the DOL, IRS, and PBGC to select plans for examination and to gauge overall trends in retirement plans.

During 2023, the DOL announced that there would be several modifications to the 2023 Form 5500 series (i.e., forms filed in 2024), including a change in the participant count methodology, an expansion of the administrative expense categories on Schedule H, and the addition of Schedule MEP. This writing will focus on another notable change: the addition of three new IRS compliance questions on Schedule R. The new questions are specific to the satisfaction of coverage and nondiscrimination requirements, as well as the timely adoption of required updates to the plan’s legal documents. There is a possibility that these questions could be used by the regulatory agencies in the review and examination selection process, so it is important to fully understand and accurately complete them.

New Compliance Questions

The three new compliance questions (listed below with commentary) are in Part VII of the 2023 Schedule R that must be completed by both small plan and large plan filers. Note: Schedule R is not filed by small plan filers that are eligible to use Form 5500-SF (Short Form) or Form 5500-EZ (One Participant); however, the same compliance questions are included in Part VIII of Form 5500-SF. For one participant plan filing Form 5500-EZ, the only applicable compliance question relates to the pre-approved plan document and is included in Part V, Item 12.

Item 21a (Nondiscrimination testing) – Does the plan satisfy the coverage and nondiscrimination tests of Code sections 410(b) and 401(a)(4) by combining this plan with any other plans under the permissive aggregation rules?

IRC Sections 410(b) and 401(a)(4) govern whether the plan benefits enough Non-Highly Compensated Employees and whether the benefits, rights, and features provided under the plan are provided on a nondiscriminatory basis. If there are no other retirement plans in existence, the answer to this question would be “No.” However, if there are multiple retirement plans maintained by the same employer or related employers treated as a single employer due to Controlled Group or Affiliated Service Group status, permissive aggregation may apply.

Item 21b (ADP testing) – If this is a Code section 401(k) plan, check all boxes that apply to indicate how the plan is intended to satisfy the nondiscrimination requirements for employee deferrals and employer matching contributions (as applicable) under Code sections 401(k)(3) and 401(m)(2).

All 401(k) plans are required to satisfy certain nondiscrimination rules on both employee deferrals and/or employer matching contributions. This question will help the IRS determine how plans are complying with the requirements. Safe harbor 401(k) plans (including Qualified Automatic Contribution Arrangements) will select the “Design-based safe harbor method” option, while tested plans will select either “Prior year ADP test” or “Current Year ADP test.” If the plan does not have 401(k) plan provisions, “N/A” should be selected.

Item 22 (pre-approved plans/opinion letters) – If the plan sponsor is an adopter of a pre-approved plan that received a favorable IRS Opinion Letter, enter the date of the Opinion Letter and the Opinion Letter serial number.

Most retirement plans use third-party administrators or service providers that provide the plan sponsor with an adoption agreement and corresponding basic plan document that has been through the IRS approval process. However, it is the responsibility of the plan sponsor to ensure compliance with mandatory restatement requirements. The last required restatement period was known as “Cycle 3,” and required defined contribution plan sponsors (other than 403(b) plans) to execute the updated plan documents by July 31, 2022. If a plan is established after that date, the pre-approved plan documents will be compliant with the Cycle 3 version. To correctly answer this compliance question, the plan’s adoption agreement must be matched with the correct IRS Opinion Letter. Third-party administrators may have multiple adoption agreements depending on the plans that they service (e.g., a standardized profit-sharing plan, a non-standardized profit-sharing plan, a standardized 401(k) plan, or a non-standardized 401(k) plan). Each of the adoption agreement types will have their own IRS Opinion Letter with a specific serial number, so it is important that you use the correct serial number in your answer. It would be prudent to confirm with your document provider which one is correct before completing this item.

Filing a complete and accurate Form 5500 is one of the most important requirements for maintaining a qualified retirement plan. Most plan sponsors use a third-party administrator to assist with the preparation of the form; however, it is ultimately the plan sponsor’s responsibility to review the filing before submission. Submitting an inaccurate form could result in rejection and increase the compliance risk. The DOL and IRS could also implement fines for inaccuracies or missing information. Taking extra steps to double-check your filing can save you a lot of headaches, and may even prevent an unwanted letter from the IRS or DOL.

Please contact us if you have questions about the information outlined above; our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more on our Employee Benefit Plan services page.

About the Author

Steph Kramer

Steph joined McKonly & Asbury in 2016 and is currently a Manager in the firm’s Audit & Assurance Segment. Steph audits a broad spectrum of employee benefit plans, including 401(k), 403(b), retirement, profit sharing, health and… Read more

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