What is probably the most significant disincentive for a small or medium size business with large headcount to start or maintain a 401K Plan or 403B Plan, is being eliminated.
The Internal Revenue Service and the U.S. Department of Labor, in late February, announced significant changes and enhancements to the Form 5500 Annual Return/Report. Form 5500 is the Federal tax return filing for a Tax-Qualified Retirement Plan, such as a 401K, 403B, Profit Sharing, Money Purchase, Defined Benefit, or Cash Balance Plan.
The changes are effective for the 2023 Plan Year, i.e., Plan Years beginning January 1, 2023 or later (in other words, for many plans, the year that recently started). In most cases, the first Forms 5500 covered by the new rules generally will be filed in 2024.
There is a significant game-changer included in the new rules, which we think many will want to 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.
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 – the introduction to the regulations suggested eliminating audits for smaller Plans would save an estimated $7,500 or more on audit expenses for these Plans.
A “large” Plan audit applies, generally, if there are 100 or more eligible participants at the beginning of the Plan Year. Under the current (soon to be old) rule, for a 401K Plan or 403B Plan, 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.
For example, under the current rules, a 401K Plan with 150 eligible employees, but only 90 employees and former employees with Plan accounts, is subject to the CPA audit requirement.
The recent change, however, provides that the participant count, under the general rule and the transition rule, 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.
Under the example above, because there are only 90 participants with Plan accounts, no CPA audit will be required.
It has been estimated that there are almost 20,000 Retirement Plans that would be eligible to file as a small Plan rather than as a large Plan under this rule change. We believe many ACSI clients, for the 2023 Plan Year, no longer will need a CPA audit.
Please note that the proposed change does not apply to Defined Benefit Plans, including Cash Balance Plans.
A significant issue and expense, for a small or medium size business with large headcount and a 401K Plan or 403B Plan, is being eliminated. As such, relaxing eligibility requirements for an existing Plan may be something to consider, with less fear of crossing the audit threshold.
ACSI is available to answer questions about Form 5500 reporting, and other Plan-related questions, for our clients.