Methodology Changes on Form 5500 Will Impact Your Business
Calling for a Recount
By Kara Graves, CPA
On Feb. 23, 2023, the Department of Labor, the IRS, and the Pension Benefit Guarantee Corp., in conjunction with the Employee Benefits Security Administration, released requirement changes to Form 5500, Annual Return/Report of Large Employee Benefit Plans, and Form 5500-SF, Annual Return/Report of Small Employee Benefit Plans.
There are many changes to Form 5500 for 2023. One of the more critical changes relates to how the participant count is calculated at the beginning of a plan year. The count is used to determine whether a plan requires an audit by an independent accountant. Typically, a benefit-plan audit is required for all large plans with more than 100 participants at the beginning of the plan year.
Before Jan. 1, 2023, the participant count included both active employees eligible to participate and terminated, vested employees with balances still in the plan. Using this calculation method, plans needed to include all employees currently employed and eligible for the plan, regardless of whether they were participating in the plan.
“Effective Jan. 1, 2023, plan sponsors will only need to consider participants (active and terminated) with account balances when calculating the number of participants at the beginning of the plan year. This means those active employees eligible to participate who have never contributed to the plan and/or received employer contributions will not be counted.”
Under the old rule, an audit was required for a plan with 100 or more of both active employees eligible to participate and terminated, vested employees with account balances. Even if a plan had fewer than 100 participant accounts with balances, an audit could still be required due to the eligible and not-participating employees.
Effective Jan. 1, 2023, plan sponsors will only need to consider participants (active and terminated) with account balances when calculating the number of participants at the beginning of the plan year. This means those active employees eligible to participate who have never contributed to the plan and/or received employer contributions will not be counted. As a result, some plans might be able to file as a small plan.
Plan sponsors should be aware of these changes and review their plan counts closely with their third-party administrators under this new methodology for the 2023 plan year. Plans with fewer than 100 plan account balances as of Jan. 1, 2023 (for calendar-year-end plans) will not need an audit, even if they previously did under the old rules.
What does this mean for plans that are hovering around the 100 account-balance mark during 2023? If your plan has 100 or more participant account balances on Jan. 1, 2023 (calendar-year-end plans), an audit is still required for 2023, but there are some steps that can be taken to reduce plan participants for Jan. 1, 2024 (the next plan audit measurement date for calendar-year-end plans).
Plan sponsors should be reviewing terminated employees with participant account balances of $5,000 or less. The plan sponsor should review with their third-party administrator the existing plan provision that allows the plan to force out terminated participants with balances of $5,000 or less. This plan provision could be utilized to reduce the participants with balances, which could potentially remove the audit requirement in the future.
Kara Graves, CPA is a senior manager and the Employee Benefit Plan Audit Niche leader at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.