Financial Reporting Changes for Some Small 401(k) Plans

By Destiny Flood, PP&Co Audit Partner 

The U.S. Department of Labor, Internal Revenue Service, and the Pension Benefit Guaranty Corporation recently announced changes to the Form 5500 Annual Return and Form 5500–SF Short Form Annual Return effective for plan years beginning on or after January 1, 2023. One of the most significant changes involves the participant-counting methodology for determining eligibility for simplified reporting requirements available to individual small plans (generally for plans with fewer than 100 participants).  

Here’s What You Need to Know

Previously, individual 401(k) and 403(b) plans with greater than 100 eligible participants were required to file Form 5500 accompanying an annual audit. Plans with fewer than 100 eligible participants could file the short form 5500 (5500-SF), which does not require an annual audit. The counting methodology of eligible participants is an important definition; eligible participants include all employees who are eligible to participate in the plan, regardless of whether they are actually actively participating in the plan. 

The new changes revise the counting methodology for determining the 100-participant threshold for small plan simplified reporting alternatives, including the annual audit requirement. The counting methodology for defined contribution retirement plans will now be based on the number of participants with account balances at the beginning of the plan year (or end of plan year for initial plan years). Accordingly, certain plans that were previously required to obtain annual 401(k) audits will no longer be required to do so, and certain plans will not be able to file Form 5500-SF. This change is intended to reduce expenses for small plans and encourage more small employers to offer workplace retirement savings plans to their employees. 

What does this mean for your company’s 401(k) or 403(b) Plan? If your plan has fewer than 100 active participants for plan years beginning January 1, 2023 (those who have account balances in the plan) you can most likely forgo the annual audit requirement. (i.e., for Form 5500 and audits that will be filed on or near October 15, 2024). Note that participants who have made contributions in prior years, but cease making contributions for the current plan year, who have not requested distributions of their account balances will still be counted, as they will have account balances. 

These changes came about as part of some of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which requires that certain long-term, part-time workers must be permitted to make elective deferrals for plan years beginning on or after January 1, 2024. Since the SECURE Act will have a significant increase in eligible participants, the changes were made in part to help ease financial reporting requirements. You can find additional information regarding the changes HERE. 

Have questions or need assistance with your particular situation? The experienced audit professionals at PP&Co can help. Contact us at info@ppandco.com or (408) 287-7911.