2023 Changes to Form 5500 Audit Rules
In February, the Department of Labor (DOL) issued changes to Form 5500 returns for plan years staring 2023 and later. One very exciting change is that the 100-person audit threshold will be based on participants with a balance only, rather than also including active, eligible participants with no balance in the plan.
Prior to 2023, a new plan with 100 or more participants, or an existing plan that increases to 120 participants (including terminated employees with vested account balances), was subject to an annual independent audit. A plan will continue to require an annual audit until the participant count as of the beginning of the year is less than 100 participants. The participant count prior to 2023 was based on all active, eligible employees as of the first day of the plan year, plus terminated participants with balances.
Beginning in 2023, a plan will only need to consider participants (active and terminated) with account balances when calculating the number of participants at the beginning of the plan year for audit purposes. Active eligible participants with no balance who have never contributed to the plan nor received employer contributions will not need to be counted. As a result, some plans will be exempt from an audit for plan years beginning 2023 or later, even if they previously needed to be audited. For example, an existing audit plan with 300 participants but only 99 participants with balances at 12/31/2022, will no longer need an audit for the 2023 plan year. For small plans nearing the audit threshold, the plan will need 120 participants with balances to cross the audit threshold going forward.
This change is intended to lower expenses for small plans, and to encourage start-up companies and growing employers to offer retirement savings plans to their employees.