Retirement plan administration is not a costless endeavor. Plan sponsors must administer the retirement plan following plan provisions, legislative requirements, and participant elections. To help administer the plan, plan sponsors hire service providers to help with recordkeeping, custody of assets, investment advisor tracking, and auditing the plan. Regulatory authorities want to promote retirement readiness with tax incentives and gentle nudges to ensure that participants have access to retirement plans and are participating, but don’t want to unnecessarily burden plan sponsors from forming a retirement plan or continuing its administration. A recent change in regulations has been enacted to continue to help alleviate a reporting burden for small plan sponsors.
Background
ERISA Section 103 and 104 requires an annual report for an employee benefit plan to be filed with the DOL, with some limited exceptions. As part of the annual report requirement, an independent qualified public accountant (IQPA) needs to perform an examination of the annual report. As previously noted, the DOL understands that the regular annual reporting requirements may be more burdensome to small plan sponsors, so a simplified reporting option is allowed for plans that generally cover fewer than 100 participants.
It seems easy enough, but the caveat comes with the definition of plan participant. A participant was defined not only as an employee who has a balance in the plan, but an employee eligible to participate in the plan. This participant count methodology caused some of our clients to have to be audited although they had ten participants with balances in the plan. I may be one of the rare auditors to think this, but this seemed overly burdensome and not completely necessary.
What Changed?
Addressing this burden, on February 24, 2023, the Department of Labor, Internal Revenue Service, and Pension Benefit Guaranty Corporation published in the Federal Register final Form 5500 changes. The changes identified are applicable to plan years beginning January 1, 2023, for the 2023 Form 5500 Annual Return/Report of Employee Benefit Plan.
One change relates to the participant count methodology.
What’s the Current Methodology?
As previously mentioned, the current methodology of determining participants for the annual reporting requirements counts participants at the beginning of the plan year. The definition of a participant includes employees of the plan sponsor that are actively participating in the plan and employees of the plan sponsor not actively participating but are eligible to participate. A little needlessly burdensome.
Changes to the Participant Count Methodology
The final rule posted in the Federal Register removes employees of the plan sponsor not actively participating, but eligible to participate. Therefore, in my client example with ten participant account balances, the plan sponsor now is eligible for the simplified reporting requirements, which does not include an audit requirement.
As we discussed, the reason for this change as noted in the final rule is to “minimize costs and burdens on small pension plans and sponsors of those plans, and the interest in promoting the establishment of retirement plans, by small businesses, to provide a workplace retirement savings option for their employees.”
The number of plans that are considered large under the current methodology as documented in the final rule indicates there are 86,744 large defined contribution plans and 613,290 small defined contribution plans. Using the new participant count methodology, and ending year participant account balances at the end of 2022, an estimate identifies that there would be 68,057 large plans and 631,976 small plans. The rule change would keep around 18,699 defined contribution plans from having to be considered large and which would be required to have the more expanded large plan filing requirements, including a costly audit from being incurred. The DOL believes “it is striking the right balance among the interest in providing secure retirement savings for participants and beneficiaries, the interest in minimizing costs and burdens on small pension plans and sponsors of those plans, and the interest in promoting the establishment of retirement plans, especially by small businesses, to provide a workplace retirement savings option for their employees.”
How Will the Form 5500 Change?
There was one problem and that was the Form 5500 did not report participant account balances at the beginning of the year. Currently, Line 6g of the Form 5500 reports only end of year participant account balances. This will be updated in the 2023 Form 5500 by splitting line 6g into two parts, which now includes a Line 6g(1) to report number of participants with account balances as of the beginning of the plan year and Line 6g(2) to report number of participants with account balances at the end of the year, which will fix this problem. A plan sponsor will use Line 6g(1) to determine the filing requirement for that particular plan year.
| g(1) Number of participants with account balances as of the beginning of the plan year (only defined contribution plans complete this item) | 6g(1) |
| g(2) Number of participants with account balances as of the end of the plan year (only defined contribution plans complete this item) | 6g(2) |
There will not be any changes to the actual filing requirement. Small plan filers will still be those that cover fewer than 100 participants at the beginning of the plan year and large plan filers will still be those that cover 100 or more participants at the beginning of the plan year. Additionally, a limited exemption for plans with participants between 80-120 will also still apply. The only change is that the term “participants” now includes only those with account balances at the beginning of the year. This will be a favorable change to small plan sponsors like my client that had only ten participant account balances.
