Beginning with the 2023 Form 5500 – Annual Return/Report of Employee Benefit Plan, the method for determining when a defined contribution plan (e.g. a 401(k) or 403(b) retirement plan) may file as a small plan will be revised. Small plan filers do not require an annual audit by an independent qualified public accountant (IQPA).

Currently, a defined contribution (DC) plan determines whether or not they file as a small or large plan based on the number of participants with account balances as of the beginning of the plan year, plus the number of participants eligible to participate but have elected not to participate. Starting with the 2023 Form 5500, a line will be added to report participants with account balances at the beginning of the plan year. This will now be used to determine whether the plan files as a small or large plan. In general, a DC plan is considered a small plan if less than 100 participants at the beginning of the plan year.

Despite opposition from public accountants, as well as the American Institute of Certified Public Accountants (AICPA), primarily due to past experience with small employers that tend to lack the resources to adequately administer and monitor the operations of the retirement plan, this revision to the Form 5500 will result in significantly less plans requiring an annual audit by an IQPA. The regulators state within the recent publication posted to the Federal Register that the change was made in hopes of reducing expenses for small employers and to encourage more employers to offer workplace-based retirement plans. In addition, the regulators cite the change was also made partly as a result of the SECURE Act (discussed in this article), which will now provide long-term, part-time employees the opportunity to participate in the retirement plan, and likely add to the number of participants eligible to participate but opt not to participate in the plan.

An estimated 86,800 plan audits are filed annually with the Department of Labor. Analysis conducted by the regulators estimates a reduction of almost 20,000(1) large plan filings for DC plans (an approximate 23% reduction in plan audits currently being performed) due to this change in methodology for how plan participants are counted for Form 5500 purposes.

(1) – Based on Federal Register Document 2023-02653 published February 24, 2023.

Contact the professionals at Gilliam Bell Moser LLP for additional information.

Eric Grant, CPA