By Alina Mouscher, CPA – Supervisor, Accounting & Assurance
Reporting requirements for employee benefit plans are changing, effective for plan years beginning on or after January 1, 2023. If you are a small business employer sponsoring a 401(k) plan for your employees, your plan may no longer require an audit for the plan years beginning on or after January 1, 2023. The Department of Labor (DOL) estimates that under the new rules, approximately 19,500 plans will no longer require an annual plan audit.
What are the reporting requirements for 401(k) plans?
Generally, plans with 100 or more participants at the beginning of the plan year are considered “large plans,” and those with fewer than 100 participants are considered “small plans.” The distinction is important because there are different reporting requirements for large and small plans.
Large plans are required to file form 5500. Generally, the form requires that an audited financial statement be attached to the form. To comply with the requirement, the plan must engage an independent qualified public accountant and undergo an audit.
Small plans can file a shorter and simpler form 5500-SF and are generally not required to undergo an audit.
How were participants previously counted?
Under the previous rule, as defined by the form 5500 filing regulations, “participants” include all employees who are eligible to participate in the plan (even if they choose not to participate), and those who were retired or separated, but had balances in the plan.
As an example, the following is Sample Company’s 401(k) plan information at the beginning of a plan year:
- Total of 200 employees
- 150 employees who are eligible to participate in the plan
- Of the 150 eligible employees, 50 employees are participating in the plan, have balances in the plan, and are making deferrals
- 10 employees who were terminated or retired but still have balances in the plan
Under the previous rule, as defined by the form 5500 filing regulations, the plan’s participant count would be 160 (150 eligible employees plus 10 terminated employees) and the plan would be considered a large plan. The plan would need to undergo an annual audit, with the audit opinion and the audited financial statements attached to the form 5500 filing.
How are participants counted under the new rule?
Under the new rule, the participant count, as defined by the form 5500 filing regulations, includes only those who have balances in the plan at the beginning of the plan year. In the above Sample Company example, the count would be 60 (50 active participants with balances plus 10 terminated employees with balances). Since the participant count is below 100, the plan would generally be considered a small plan, would be able to file form 5500-SF, and would not need an audit.
Consider all the facts before deciding that your plan does not need an audit.
Please be aware that in some circumstances, the plan might have fewer than 100 participants yet still not be eligible to file as a “small plan.” Always consult with an employee benefit plan professional before determining whether your plan is required to undergo an audit.
If you have any questions about your plan’s participant count or would like additional information, please contact the MichaelSilver employee benefit plan advisors at 847.982.0333.
Alina Mouscher, CPA, is a Supervisor with MichaelSilver’s Accounting and Assurance department where she provides audit, review, and compilation services for corporations, not-for-profit organizations, and employee benefit plans. She holds a Master of Science in Accounting and a Bachelor of Science in Accounting from the University of Illinois at Chicago.