New Rules May Eliminate Your 401(K) Audit
Article submitted by Gary Remer, Dawda Mann Member
The U.S. Department of Labor, the Internal Revenue Service and the Pension Benefit Guaranty Corporation announced changes to the audit requirements of the 2023 Form 5500 Annual Return/Report of Employee Benefit Plan. To understand a significant aspect of this, we start with the basic rule that a 401(k) plan must be audited when it has more than 100 “eligible participants” on the first day of the plan year, with an exception under the “80-120” Participant Rule (discussed later). This basic rule has not changed, but the methodology for counting eligible participants is now more favorable to the sponsor of the 401(k) plan trying to avoid the expense of an audit.
Under the old rule, the number of participants was based upon those eligible to elect to have contributions made under a 401(k) plan, even if they elected not to participate and do not have an account balance in the plan. This meant that there could be a 401(k) plan where 10 office employees elected to participate, and 200 shop works elected not to participate but an audit would still be required.
The new rule changes who is deemed an eligible participant under a 401(k) plan. Instead of using all those eligible to participate, the 401(k) plan filers will look at the number of participants/beneficiaries with account balances as of the beginning of the plan year when determining if they are eligible for small plan reporting options with no audit required.
The U.S. Department of Labor regulations include a special “80-to-120 participant rule,” which states that if the number of participants at the beginning of the year is between 80 and 120, and a Form 5500 was filed for the prior plan year, the plan may file a 5500 in the same category (small or large plan) as the year before. A plan that files a small filer 5500 for the plan year is not subject to the required large plan audit until it exceeds the 120-participant threshold at the beginning of a plan year.
That analysis estimates that there would be a reduction of 19,442 large plan filings for defined contribution pension plans. Each plan would save an estimated $7,500 (or more) on audit expenses.
For more information, contact Gary Remer, firstname.lastname@example.org