Am I Small Now?

In the retirement plan world; size matters!

Size, in the sense I am referring to, means the number of participants in a plan and how that number can affect the requirement of needing to be audited by an independent certified public accounting (CPA) firm. A plan reports their number of participants on a required annual Form 5500 which is submitted to the U.S. Department of Labor (DOL). If the plan is “large,” it needs an audit.

If the word audit makes you cringe, you are not alone. However, plan audits are routine and can be a normal part of sponsoring a qualified plan. That said, they are not free. An audit can cost an employer anywhere from $7,000 – $11,000 on average.

From a historical perspective, with the enactment of the Employee Retirement Income Security Act of 1974 (ERISA) came the requirement of filing an annual report with the DOL. Along with this came the need to have an independent CPA conduct an examination of the plan’s financial statements to form an opinion on whether the statements are presented in accordance with generally accepted accounting principles (GAAP). The DOL then gave a waiver of that audit requirement for small plans, identified as qualifying plans having fewer than 100 participants at the beginning of the plan year. The question is, who is a participant?

There have been significant changes and enhancements to Form 5500 brought upon from recent legislation, namely the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) and the SECURE Act 2.0 of 2022. One of the key changes is the modification of participant-counting methodology for defined contribution (DC) plan types.

Up until 2023, an employee was considered a participant towards the 100-person threshold if they were eligible to participate in the plan. Meaning, even if the employee chose not to save using the plan’s retirement vehicle, they were included in the count as a participant.

SECURE Act 2.0 came to the rescue and outlined a new method of counting!

For reporting periods beginning on or after January 1, 2023, the definition of who counts as a plan participant will now only include individuals with an account balance at the beginning of the year! This is a game changer! If you don’t have a balance, you don’t count!

The impact of the regulatory update will result in a large reduction of the overall plans that will need to be audited. It is estimated that over 19,000 plans will no longer need an audit and can file a shortened version of Form 5500 (Form 5500 – SF). This counting method will save thousands of plans thousands of dollars!