Does Your “Small” Retirement Plan Still Need an Audit?

Regulatory authorities are always looking for ways to promote retirement readiness with tax incentives and other means to ensure that employees have access to retirement plans and are participating. However, they do not want to unnecessarily burden plan sponsors from forming a retirement plan or continuing its administration. A recent change in regulations has been enacted to continue to help alleviate a reporting burden for small plan sponsors. In the Federal Register, the DOL, IRS, and PBGC published several changes to the 2023 Form 5500 and instructions, one of which relates to the participant count methodology. This change has the potential to impact the audit requirement for many small plan sponsors.

Participant Count Methodology

Under the current methodology, the determination of whether an employee benefit plan qualifies as a large or small plan filer is based on the participant count at the beginning of the plan year. The current participant count includes 1) active participants with account balances, 2) terminated participants with account balances, and 3) employees that are eligible to participate but are not actively contributing and do not have an account balance in the plan. Generally, plans with a participant count of 100 or more are considered large plans. Large plans are required to file Form 5500 and attach an audited financial statement with an opinion issued by an independent qualified auditor. In contrast, plans with less than 100 participants are considered to be small plans. They are permitted to file Form 5500-SF, a simpler and less costly filing that does not require an independent auditor’s opinion to be attached.

New Counting Methodology

Under the new guidelines, effective for plan years beginning January 1, 2023, or later, the participant count will only include active participants with account balances. This change in methodology is expected to reduce the number of employee benefit plans requiring an annual audit, particularly 401(k) and 403(b) defined contribution plans.

The 2023 Form 5500 will be updated by splitting Part II, Line 6g into two parts. Line 6g(1) will be used to report the number of participants with account balances as of the beginning of the plan year, and Line 6g(2) will be used to report the number of participants with account balances at the end of the year. There are no other changes to the Form 5500 filing requirements.

Plan sponsors that are near the 100-participant account balance threshold may want to consider force outs of small account balances, as permitted by plan provisions. Further, as a result of the SECURE 2.0 Act of 2022, starting in 2024, plans can adopt rules that permit the mandatory distribution of small accounts up to $7,000 (the current limit is $5,000).

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 about our Employee Benefit Plan Audit services by visiting our website.

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