The Department of Labor (DOL) recently changed the way it counts the number of plan participants in employee benefit plans to determine whether a plan is required to have an annual audit. This change will affect Form 5500 documents and instructions, specifically the simplified Form 5500 reporting, for 2023. This new rule is intended to simplify the process for plan sponsors and lower the burden on small plans. Here is everything you need to know:
New Rules
Prior to the new ruling, plans with fewer than 100 participants could capitalize on the simplified Form 5500 reporting, which did not require an audit by an independent qualified public accountant. However, plan sponsors still had to determine eligibility by participant count or account balance.
Under the new rules, plan sponsors may exclude from the overall participant count certain employees who are eligible in the plan yet not actually enrolled. Specifically, this allows plan sponsors to only count participants and beneficiaries who are enrolled at the start of the plan year, excluding employees who are eligible, although may not yet meet the plan’s eligibility requirements; employees who haven’t made deferral contributions yet; or terminated employees who have not yet received distributions from the plan year.
Impact of New Rules and Reasoning Behind the Change
The DOL believes this change will benefit a large majority of plans currently filing as large plans, reducing this number by almost 19,500 and saving small plan sponsors millions of dollars in the long term.
The DOL has taken into consideration the increasing costs of plan audits. Before, small plans were challenged with the cost of audits outweighing their benefits for participants. In the eyes of the DOL, these new rules appropriately balance audit costs for smaller plans. By allowing the exclusion of certain employees from the participant count, some small plans can avoid time-consuming and costly annual audit requirements. This is effective immediately for plan years beginning on or after January 1, 2023.
This change is ground-breaking for plan sponsors under 100 account balances, and will pave the way for larger employers who wish to offer plans or those who wish to expand eligibility amongst existing plan sponsors, without the worry of triggering an audit. It’s important to note, however, this rule only applies to plans with fewer than 100 participants. Plans with more than 100 participants are still subject to existing rules and will require an annual audit regardless of which employees are enrolled in the plan.
If you have further questions or are in need of assistance enacting the changes in participant count for plan audits, reach out today for further explanation.