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New Participant Counting Methodology

Form 5500 - Denver CPA

In late 2022, Congress passed the SECURE 2.0 Retirement Savings Act, also known as the SECURE Act 2.0. The legislation expands and enhances many of the reforms mandated in the SECURE Act of 2019. This includes an expansion of automatic enrollment, another increase in the RMD age, increased catch-up contribution limits, emergency 401(k) distributions, and even changes to Form 5500. However, the most important change impacting Denver plans is the update to the participant counting methodology. Under the recently revised rules, plans are only required to count the number of participants with an account balance when determining if an annual audit is required. Since the changes are effective for plan years starting in 2023, it’s likely many will no longer be subjected to the audit requirement. To help clients, prospects, and others, WhippleWood CPAs have provided a summary of the key details below.

Prior DOL Regulations

Under prior rules, a plan was required to undergo an annual audit if the number of participants exceeded 100. A participant was defined as an individual who is actively employed with a company and is eligible to participate. It did not matter whether any funds had been contributed to the plan. This meant that many plans were required to complete a plan audit even when there were less than 100 active plan participants. Some exceptions were arising from the 80/120 rule.

New DOL Regulations

Under new regulations, a plan must still undergo an audit if the total number of participants exceeds 100. However, the definition of a participant has significantly changed. Starting with the 2023 filings, a participant is defined as an eligible employee who actively contributed to the plan. The reason for the change is to reduce the cost of plan administration. In fact, the DOL estimates there will be a reduction of 19,942 plans required to conduct an annual audit. In addition, it is expected that each plan could save an estimated $7,500 or greater on audit expenses.

Additional Reporting Requirements

The DOL has also updated Form 5500 which requires more plan information to be reported on an annual basis, including:

  • Schedule H Plan Expenses – This has been updated to include new categories under administrative expenses reported in the Income and Expenses section. The update includes lines for actuarial expenses, audit, legal, custodial, valuation, and other fees. This will enable the DOL to oversee the costs more closely for various services.
  • Schedule R Updates – This has been updated to include several new IRS tax compliance questions. The inquiries relate to non-discrimination testing, Actual Deferral Percentage (ADP) testing, and pre-approved IRS determination letters. There was also a change to Line 19 requiring the disclosure of additional asset allocation for certain defined benefit plans.
  • New Schedule MEP – This has been added for multiple employer plans and requires new information about participating employers to be provided. This includes information on the percentage of total contributions and aggregate account balance details. There are also questions relating to Pooled Employer Plans and compliance with Form PR filing requirements.

Contact Us

The updated regulations provide important financial and compliance relief to small retirement plans. Despite the additional information that needs to be reported on IRS Form 5500, the changes help to make plan administration less costly. If you have questions about the information outlined above or need assistance with your next plan 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.