Small Colorado employee benefit plan sponsors that have been challenged by the rules and requirements of an ERISA audit will receive important relief this year. A recent change by the Department of Labor (DOL), IRS, and the Pension Benefit Guaranty Corporation will allow many to qualify for simpler reporting options. The change specifically addresses how participants are to be counted when determining whether an annual audit is required. Under new regulations, only those actively participating in a plan are to be included when counting participants. This change will not only make plan administration easier but reduce overall costs. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key details below.
Prior Audit Requirements
Employee benefit plans need to file an annual report with the Department of Labor (DOL) under ERISA Sections 103 and 104. Not only that but an independent qualified public accountant (IQPA) is needed to examine the annual report and conduct an audit, which can be a big undertaking for a small plan.
Plans with 100 participants or fewer were eligible for simpler reporting options. However, the trouble came with the definition of a participant. Under the old rule, the definition of participants was quite broad and included both employees with a plan balance and those eligible to participate regardless if any savings had accumulated. This meant that many were required to conduct an annual audit even though activity was very limited.
What is the New Rule for Participant Counts?
Plan years beginning January 1, 2023, are now subject to new rules that will exempt many smaller plans from the more burdensome reporting requirements. On February 24, 2023, the Federal Register final Form 5500 changes were published, which included alterations to the methodology behind participant counts.
Instead of counting all employees who are eligible to participate, the new ruling only includes those who are actively participating. Even if 100 employees are eligible, if only 10-20 employees are participating, for example, the company is not subject to the large plan audit requirements. This is a significant change over the past few years and plan sponsors need to carefully review participant records when determining whether an audit requirement exists.
What is the Resulting Impact?
The goal behind the revision is to reduce the burden associated with reporting, as well as the plan filing costs. The DOL estimates that businesses stand to save $95 million annually with this change. The final ruling also states that 18,699 additional defined contribution plans would be considered small because of this update.
The Form 5500 will also be altered slightly in response to these changes. Participant account balances will now be split into two lines – 6g(1) and 6g(2) to report changes between the beginning and end of the year participant account balances. The filing requirements will then be determined by looking at the number on Line 6g(1). If plans have fewer than 100 participants at the beginning of the plan year, they will continue to be able to report using small plan requirements. While the definition has shifted, these requirements based on threshold are the same.
The new participant counting methodology will certainly make it easier for certain Denver plan sponsors to maintain compliance. Before making any changes, It is important to consult with a qualified advisor to determine if you will be impacted. If you have questions or need assistance with your next ERISA audit, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.