A New Way to Count Participants in Individual Account Retirement Plans
Retirement Plan Puzzle Picture

Employers who sponsor retirement plans for their employees face annual reporting requirements that may involve significant expenses. One of these is the requirement that a plan be audited annually by an independent qualified public accountant (IQPA). A recent development may ease this burden to some extent for the 2023 plan year and later plan year filings.

Earlier this year the U.S. Department of Labor (DOL) issued Notices concerning annual reporting for defined contribution plans, including 401(k) and 403(b) plans. Among the notable rule changes is a revised method for determining the status of a plan as a “small plan” (i.e., having fewer than 100 participants at the beginning of the plan year), and whether the plan is eligible for exemption from the IQPA  audit requirement.

The DOL requires sponsors of employee retirement benefit plans required to file the annual Form 5500 series of returns to include an audit report from an IQPA unless the small plan exception is applicable. The current rule for determining small plan status requires counting all eligible employees, even if they have not elected to participate and do not have an account balance in the plan.  Thus an employer with fewer than 100 actual plan participants may be required to have an IQPA audit the plan.

Now, for plan years beginning on or after Jan. 1, 2023, the participant counting method for defined contribution plans will be based on the number of participants with account balances as of the beginning of the plan year. The DOL indicates that this change is intended to reduce expenses for small plans and encourage more small employers to offer workplace retirement savings plans to their employees.

It is important to note that for both 2022 and 2023 (and later plan years), a plan may qualify for the audit exemption even if the plan has more than 100 participants. Under the “80-to-120 Participant Rule,” if the number of participants as of the beginning of the plan year is between 80 and 120, and a small plan annual report (Form 5500-SF) was filed for the prior year, the plan administrator can elect to continue to file as a small plan and, therefore, qualify for the exemption from the audit requirement, provided other requirements for the audit exemption are satisfied.

For more information, please contact any member of our Employee Benefits practice group.

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