The Internal Revenue Service, the U.S. Department of Labor, and the Pension Benefit Guaranty Corporation announced on September 14, 2021 proposed changes and enhancements to the Form 5500 Annual Return/Report (i.e., the Federal tax return filing for a tax-qualified retirement plan). It is intended that the changes will be effective for the 2022 plan year, i.e., plan years beginning January 1, 2022 or later. In other words, the first Forms 5500 covered by the new rules generally will be filed in 2023.
(There are a few exceptions applicable to multiple employer plans, or MEPs, and pooled employer plans, or PEPs, that are proposed to be effective for the 2021 Form 5500.)
The proposed changes are likely to be the most comprehensive revisions to Form 5500 in many years. However, there is a notice, review and comment period that must occur before any of the changes will be implemented. Therefore, more information will be provided to you, to the extent important and relevant, in the future.
We believe there is a significant game-changer included in the proposed rules, which we think you should know now. The purpose of this specific change is to encourage, and make it less expensive, for small and medium size businesses and certain non-profits to offer a 401k Plan or a 403b Plan.
For “defined contribution plans”, which include 401k, 403b, Profit Sharing, and Money Purchase Plans, current Form 5500 rules require that a “large” plan must have a CPA audit and opinion, and related documentation must be included with the Form 5500 filing. The CPA audit may be expensive – we have been told that audit fees range from several thousand dollars to more than ten thousand dollars for some of our clients. In a footnote in documentation announcing the proposed changes, it was suggested that CPA audits could cost $5,000 to $50,000, depending on the circumstances.
The “large” plan audit rule applies, generally, if there are 100 or more eligible participants at the beginning of the plan year. For this purpose, an eligible participant includes not only employees and former employees who have an account balance, but also employees who are eligible to make employee contributions or receive employer contributions but have not and, therefore, do not have an account balance. There is an exception (i.e., the 80-to-120 participant transition rule) which provides that a “small” plan may continue to file as a small plan, without a CPA audit, until the number of eligible participants is more than 120 as of the beginning of a plan year.
Under the proposed change, the participant count will be determined based only on the number of participants (or beneficiaries) with account balances as of the beginning of the plan year. In other words, if the employee could contribute, but has not, and the employer has never made a contribution for the eligible employee, the employee is not counted for this purpose.
In the documentation announcing the proposed Form 5500 changes, it was estimated that there are 19,442 defined contribution plans that would be eligible to file as a small plan rather than as a large plan under this rule change. It also was noted that 11,362 of these plans are not covered by the 80-to-120 participant transition rule, therefore, they currently are required to have a CPA audit. These are big numbers; many plans will be impacted.
We believe many of our clients’ plans will no longer need a CPA audit. This is a potentially significant cost savings. What is probably the most significant disincentive for a small or medium size business with large headcount to start a 401k Plan or 403b Plan, will be eliminated.
Please note that the proposed change does not apply to Defined Benefit Plans, including Cash Balance Plans.