In February 2023, the Department of Labor, IRS and Pension Benefit Guaranty Corporation jointly released Federal Register notices that announced changes to the 2023 Form 5500. Among these changes for defined contribution plans is a change in the participant counting methodology used to determine whether or not an audit report is needed with the Form 5500 filing. This new way of determining participant counts, which is effective for plan years beginning on or after January 1, 2023, is expected to reduce the number of plans that require audits.
As a general rule, plans with a participant count of 100 or higher at the beginning of the plan year are subject to an audit. Below outlines which employees “count” for the audit determination under the old rules versus the new:
|Employee Count Method Prior to January 1, 2023
|Employee Count Method Beginning January 1, 2023
|All employees who were eligible to participate in the plan — even if they were not actively participating and did not have an account balance.
|Only active and terminated employees with account balances.
|Terminated employees with account balances.
By no longer counting employees who don’t actively participate in the plan or have an account balance, plan participant counts are expected to decrease — making it less likely some plans will reach the audit threshold.
To determine if your company’s plan will require a 2023 audit, you can reasonably estimate the participant count for a calendar year-end plan as of January 1, 2023, by checking the number of participants with account balances as of December 31, 2022, on their Form 5500 as filed. The number of participants with account balances is unlikely to change significantly between these two dates.
This change does not impact the need for plans to still consider the “80/120” participant rule. Under this rule, plans with total participants between 80 and 120 have the option to file the same Form 5500 as the prior plan year. This means that plans with more than 100 participants, as determined under the new counting rules, will generally be required to continue to have an audit if one was required in the prior year.
Initiate discussions with your third-party administrator, recordkeeper, and/or adviser well in advance of the next filing deadline, which is October 15, 2024, for 2023 calendar year-end plans, to timely engage an independent auditor if an audit is required. Since these counts are based on beginning of the year numbers, you can likely make the determination now.
Contact Trinette Simon at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.