Changes to the Audit Threshold Counting Methodology
mATTHEW aREY, jd – rETIREMENT aDVISOR, pARTNER
In late February, the Internal Revenue Service (IRS), Department of Labor (DOL), and the Pension Benefit Guaranty Corporation offered final form revisions impacting retirement plans effective for plan years 2023. Complied in Notice 2023-026531, the revisions relate to statutory amendments to the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code (IRC)—amended through Setting Every Community UP for Retirement Enhancement Act of 2019 (SECURE Act). Although there are several changes in the Notice, the focus of this article is to make Plan Sponsors aware of a change in the methodology for counting participants related to a Defined Contribution Plans 5500-filing. SECURE Act requires that employers who sponsor a retirement plan, allow long-term, part-time employees access to defer compensation into their plan. In general, any employee that works more than 500 hours in any three-year consecutive period must be allowed to defer compensation into their plan.2 SECURE Act 2022 changes the consecutive counting period shortening it to two years instead of three. This provision was a major catalyst for industry participants calling on administrative agencies for review of the impact on required ERISA reporting. Specifically, industry called for reviews of the 5500 and 5500-SF instructions.
Prior to the new regulatory guidance, in general, any employer offering a retirement plan had to make an information filing to the IRS and DOL called the 5500 and generally required an Independent Qualified Public Accountant (IQPA) to include an audit report with the 5500-filing.3 Historically, the IRS and DOL allowed for a waiver of the IQPA if plan participants were under 100 participants. Another rule, colloquially referred to as the “80-120” rule allowed plans to avoid an IQPA and allowed the plan to file under its prior year filing status (5500 v. 5500-SF) when participants were between 80-120. The combination of the 100-participant count and the “80-120” rule allowed for most plan sponsors to avoid an IQPA when their prior year reporting was an 5500-SF and their participant count was below 120.4 For plan years before 2023, a participant was any “eligible” participant as defined under the employer’s plan document consistent with ERISA. For practical purposes, this included active participants with a balance, terminated participants (with a balance), and anyone eligible to defer into the plan.
After reviewing the likely impact of long-term, part-time employees to the eligibility participant counting methodology, the DOL and IRS reviewed their prescribed methodology and finalized new regulations. Plan sponsors may now count in 2023 as “participants” those with balances under the plan (active and terminated participants with a balance), instead of those that are “eligible” as defined under the plan document. The counting methodology applies to both 5500 and 5500-SF and to the “80-120” rule for participant counting.5 “Defined contribution plan filers, in general, will look at the number of participant/beneficiaries with account balances as of the beginning of the plan year when determining if they are eligible for small plan reporting options e.g., the Form 5500-SF.” 6
Plan sponsors should review their counting methodology to be in-line with the DOL and IRS new regulations. As always, your L&H advisor and relationship manager are here to assist you with smooth operation of your retirement plan. Your L&H advisor will be mentioning this at the next upcoming meeting, but feel free to reach out to discuss if you have any specific questions or concerns.7
- 26 CFR Part 301 (Department of Treasury), 29 CFR Part 2520 (Department of Labor), and 29 CFR Part 4065 (Pension Benefit Guaranty Corporation); Notice 2023-02653.
- SECURE Act 2.0, Section 125 this three year measurement period is reduced to two years with the effect that long-term, part-time workers must be treated as meeting the time in service requirements to participate in Code section 401(k) qualified cash or deferred arrangements and, as added by section 125 of the SECURE Act 2.0, Code section 403(b) plans once they have worked two consecutive years (with at least 500 hours of service per year) effective for plan years starting on or after January 1, 2025.
- ERISA Section 103(a)(3)(A). Other DOL Regulations are applicable for less than 100-participants in certain plans. Please confer with your accountant or attorney for more information.
- DOL Reg. Section 2520.103-1(d)
- Notice 2023-02653 p. 63. “Confirming changes are also made to the short plan year filings and the “80-120” Participant Rule instructions to reflect this new counting method. See Appendix C for details on changes to forms and instructions related to this audit-related participant counting method change.
- Notice 2023-02653 p. 63.
- L&H does not practice law or tax. Please consult with your appropriate tax adviser to review your specific facts and circumstances. Although licensed to practice law, the author of this article, does not provide legal services to clients. Attorney client privilege does not apply to communications.