To inspire more employers to offer retirement savings plans, a regulatory change has reduced the number of employee benefit plans required to obtain an audit report with Form 5500, “Annual Return/Report of Employee Benefit Plan.”
For plan years beginning on or after January 1, 2023, only plans that have 100 or more participants with account balances at the beginning of the plan year are now counted as a “large plan,” and therefore subject to audit requirements. Previous regulations specified that all eligible employees needed to be counted in determining whether a specific plan was large (whether or not they participated in the plan).
Reduced Administrative Burden and Costs
This change means fewer retirement savings plans will need to obtain a Form 5500 audit, saving them the cost and administrative requirements associated with an external audit.
Plans with fewer than 100 participants that have account balances will instead be able to file the Form 5500-SF. This form has fewer schedules and disclosure requirements than Form 5500.
In its Regulatory Impact Analysis, the U.S. Department of Labor estimated more than 19,000 of the nation’s 149,000 large plans, nearly 13%, would no longer be classified as large plans.
In addition to reducing administrative burdens and costs for smaller plans, the new threshold was designed to encourage more small businesses to offer retirement plans to employees.
The 80/120 Participant Rule Remains
The “80/120 participant rule,” which was not affected by the 2023 changes, offers an important exception related to Form 5500 filing requirements for employee benefit plans. The 80/120 rule allows plans with between 80 and 120 participants at the beginning of the plan year to file Form 5500 in the same category (large or small) as they did in the previous year.
Under this rule, a plan that filed as a small plan in the previous year can maintain that filing status until it reaches 121 participants. Similarly, any plan that filed as a large plan in the previous year can continue to file as a large plan until it drops below 100 participants.
The rule provides consistency and flexibility for plans hovering around the 100-participant threshold, allowing them to avoid switching between large and small plan status (along with the associated changes in filing requirements) from year to year.
Expected Changes for 2025 Filings
Looking ahead to the 2024 plan years, the Department of Labor is expected to make additional changes under the 2022 SECURE Act (known as SECURE 2.0) designed to simplify plan administration while making retirement plans more accessible and attractive to employees.
For instance, effective January 1, 2025, the definition of a Long-Term Part-Time employee is scheduled to change to include part-time employees who worked at least 500 hours in two consecutive years (rather than the three years required in 2024). This eligibility is determined by looking at hours worked since January 1, 2021.
While this change could expand the number of employees eligible to participate in a plan, the administrative cost is likely to be offset for many plans by the reduced “large plan” criteria outlined above.
Also starting in 2025, companies that request an extension for filing Form 5500 with the Department of Labor will be able to do so electronically, rather than having to file a paper form.
To discuss the filing changes and potential implications for your employee benefit plan, contact us.
