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Finding Balance with Form 5500

Adam C. Pozek 02/24/23

It’s rare that updates to the Form 5500 warrant little more than a yawn, if anyone other than those who prepare the forms even notice.  That is NOT the case with changes issued by the Department of Labor today.  In nearly 250 pages of new regulations, revised instructions and sample forms, the DOL announced some changes for the 2023 plan year that many will find to be a big deal.

Striking A Balance on Plan Audits

Probably the most significant change is that the 100-participant threshold for determining which plans are considered large and must, therefore, hire an accountant to audit the financial statements each year will now be based on the number of participants with balances as of the first day of each year rather than looking at all of those who are eligible for the plan.  Although that change won’t impact a huge number of plans (DOL estimates approximately 20,000), the impact on those it does affect will be in the 4-to-5 figure range since those plan sponsors will no longer have to spend that much on their annual audits.

This is definitely a welcome change on its own, but it also highlights several other important compliance decisions that plan sponsors make.

  • Mandatory Distributions: It has long been the case that plans that include a mandatory distribution/involuntary cash-out provision are supposed to process those payouts timely (generally at least once per year, if not more frequently).  However, for those plans that are right on the edge of the new 100-participants-with-balances line, getting these small balances paid out as quickly as possible is a higher-stakes proposition.
  • Company Contribution Timing: Generally speaking, companies have until the due date of their tax returns to fund match or profit sharing contributions each year.  However, it is not unusual for some plan sponsors to fund those contributions by year-end.  Since that could result in some eligible participants having a balance in the plan earlier, pre-funding could actually push a plan over the audit threshold a year earlier than it otherwise would.
  • ADP Test Corrections: When a plan fails its ADP test, it generally has until the last day of the next year to make corrections, e.g. December 31, 2023 for 2022 test failures.  If a company does not meet that deadline, correction becomes a bit more onerous and requires a contribution to all of the plan’s non-highly compensated employees.  That would likely result in a number of participants who don’t otherwise contribute now having a balance, which could – in turn – push a plan over the audit threshold.  Talk about adding insult to injury!
  • Discretionary Match Provision: From time-to-time, a plan sponsor could find itself with a pool of money that must be allocated to participants as a contribution.  This typically comes up in the case when forfeiture accounts are not used quickly enough for other purposes.  If the plan includes a discretionary match provision, those dollars can be allocated as a match, which means only those who are deferring (and already have balances) would share in it.  Otherwise, that pool of money might have to be allocated to all eligible participants, including those who wouldn’t have balances otherwise.  So, even if there is no intention to ever make a discretionary matching contribution, some defensive plan design means having that option in your back pocket just in case you need it.

Compliance (Back) in the Spotlight

Speaking of compliance, the 2023 version of the forms will bring it back into the spotlight, reintroducing some questions that were removed more than a decade ago and adding some new ones.  These include questions about the annually required minimum coverage test as well as the ADP test for 401(k) plans.  Interestingly, the preamble to the regulations says, “A plan that performs…ADP testing is more likely to have compliance issues than a plan with a ‘designed-based safe harbor.’”  Although that sentiment doesn’t necessarily align with our experience, it should service as a cautionary note to non-safe-harbor plans to be extra certain to keep their compliance ducks in a row.

Another question will require those plans that use a so-called pre-approved plan document (i.e. a prototype) to include the date and serial number from the IRS approval letter for their plan document.  That might seem like a giant “so what;” however, since those approval letters are tied to specific plan documents, this question will give greater line of sight to situations where a plan sponsor did not timely update its plan document.

MEPs and PEPs and Plans Like That

The new rules include a series of other updates to implement changes from the SECURE Act (we’re talking OG SECURE, not SECURE 2.0 which was just passed at the end of 2022) related to acronym plans:

  • Multiple employer plans (MEPs),
  • Pooled employer plans (PEPs), and
  • Groups of plans (which the DOL now calls defined contribution group reporting arrangements or DCGs).
For those who don’t prepare Forms 5500, these changes generally fall into that “yawner” category we mentioned at the beginning of this post, and largely just formalize some of the reporting requirements that already existed by providing actual forms to capture that information rather than using attachments.  The type of information generally revolves around identifying those plan sponsors that are part of the MEP/PEP/DCG as well as the size of each relative to the overall plan.

These changes apply to the Forms 5500 for plan years that begin on or after January 1, 2023.  Although that means there are no specific action items until this time next year, the updated method for determining which plans must undergo an audit each year definitely present some strategic planning opportunities.  If you have questions about plan design options that could be beneficial, your friends at DWC are just a call or an email away.

Topics: Department of Labor, Multiple Employer Plans (MEP), Form 5500, Forfeitures, IQPA Audit, Safe Harbor 401(k) Plan, Regulations, Mandatory Distribution, Force Out, Acronyms, SECURE Act, Pooled Employer Plan (PEP), ADP/ACP Tests, 5500, Discretionary Match, Plan Document


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.