Effective January 1, 2023, the DOL changed the methodology for determining whether a defined contribution plan is considered a “large plan” for Form 5500 purposes and would therefore be subject to an audit performed by a qualified independent accountant.

For Plan years beginning before January 1, 2023, a defined contribution plan was considered a large plan if there were at least 100 individuals who were eligible to participate in the plan as of the beginning of the plan year (individuals who have met the plan’s age and service requirements). Now, for 2023 Plan years and beyond, a defined contribution plan is considered a large plan if there are at least 100 participants with an account balance as of the beginning of the plan year.

What this means is that employees of a business who are eligible to participate in their employer’s retirement plan, but who do not actually contribute or keep money in the plan, are no longer counted for purposes of determining whether a defined contribution plan is subject to audit. The DOL passed this change with the expectation that several thousand plans which previously required an audit would no longer need one.

Considering this rule change, we recommend that businesses who find themselves slightly above the new audit threshold investigate and determine the number of terminated employees who still hold balances in their plans. Since these individuals are included in the count as long as their money remains in the plan, encouraging them to withdraw their balances may provide employers with the ability to forgo the annual audit.

However, businesses hovering around the audit threshold should also consider their outlook moving forward. If a business in this situation expects to hire more individuals in the near future, it may be advisable to still perform the annual audit for the 2023 plan year even if it is not technically required. The reason being that if, for example, the business elects to pass on the 2023 audit only to find that an audit is required again for 2024, that 2024 audit will require additional time and effort in order to gain assurance regarding the plan balances for both years.

Lastly, businesses need to be aware of the regulations within the SECURE and SECURE 2.0 Acts concerning part-time workers, and how they could affect their retirement plan participation numbers moving forward. Under the terms of the SECURE Act, starting with Plan years beginning on or after January 1, 2021, part-time employees who complete at least 500 hours of service in three consecutive years must be given the opportunity to participate in the Plan. Therefore, a part-time employee who works at least 500 hours in each of 2021, 2022 and 2023 must be given the opportunity to participate in the Plan as of January 1, 2024. Under the terms of the SECURE 2.0 Act, effective January 1, 2025, the service requirement for part-time employees is reduced from three years to two years. Therefore, a part-time employee who works at least 500 hours in each of 2023 and 2024 must be given the opportunity to participate in the Plan as of January 1, 2025.

What this means is that businesses with a significant number of part-time workers may soon reach the audit threshold if enough of them elect to participate in the retirement plan.

In summary, it is now critical that employers who sponsor defined contribution retirement plans closely monitor the number of participants with account balances in the plan, evaluate whether the audit threshold is met or could be met in the near future, and prepare accordingly. On the Form 5500, this number can be found on Line 6g of Page 2 of the form.

If you have any questions or concerns regarding these rule changes, please feel free to contact us.

 

 

By: Joe Bishop