Fewer Audits? Important Changes to 2023 Form 5500 and Form 5500-SF Filings

The extended Form 5500 filing deadline is approaching, and 401(k) plan sponsors will recall the time-consuming and labor-intensive work required for completing an annual plan audit. Starting on January 1, 2024, the Department of Labor (DOL) and the SECURE Act 2.0 introduced a new development that may eliminate the need for an audit for certain plan sponsors.   

Earlier this year, the DOL announced significant changes for the 2023 Form 5500 and Form 5500-SF filings, altering the participant-counting methodology. This methodology determines if a retirement plan will need an audit for the upcoming year. Further, Section 304 of SECURE 2.0 increases the force-out threshold to $7,000. Taken together, these developments have the potential to offer a new path for many plans to quickly move away from requiring an annual audit. Here, we’ll explain the related changes, effects, and possible savings in time and money for corporate retirement plans.  

Previously, counting participants for audit purposes involved tallying all participants eligible for the plan on the first day of the plan year. Under the updated guidelines, only participants with an account balance on the first day of the plan year will be counted. This change may lead to significant benefits for plan sponsors.  

The shift in participant-counting methodology has meaningful implications. Small plans, in particular, stand to gain from this adjustment as it may mean more plans can avoid the audit requirement altogether. The update could potentially offer a way out of audit status for plans currently subject to audits, creating considerable time and financial savings.  

To grasp how this change will affect your retirement plan, consider the following scenarios: 

Scenario 1: If your plan did not require an audit in the previous year (e.g., 2022), it will now need to have 120 or more participants with an account balance on January 1 (assuming it operates on a calendar year) to trigger an audit requirement for 2023.   

Scenario 2: If your plan did require an audit in the previous year (e.g., 2022), it will no longer need an audit for 2023 if it has fewer than 100 participants with an account balance on January 1.   

This change may particularly benefit plans that primarily offer matching contributions, as they tend to have fewer participants with a balance. For such plans, the adjustment could result in the plan falling below the audit requirement threshold for 2023, effectively removing the need for an audit this year. Plans can remain audit-free until the participant count with an account balance reaches or exceeds 120.  

Starting January 1, 2024, plans can increase the limit for removing terminated participants with funds in their 401(k) accounts. The current limit of $5,000 can be raised to $7,000. Plans that implement this increase may be able to further reduce the number of participants in their plan with balances. The combination of implementing this provision, plus the new counting method, could help many plans step out of audit status.   

Plans that don’t need an audit, called “small plans,” will submit Form 5500-SF. On the other hand, plans subject to audits, known as “large plans,” will continue filing Form 5500. The participant count (now with an account balance) determines the form to be filed in most cases. 

However, the small plan audit waiver may not be applicable for plans with specific investments, such as ownership of entities like golf courses. In these cases, an audit may still be necessary, regardless of the number of participants. These changes in the participant-counting methodology represent a potentially positive change, helping retirement plans avoid audit requirements and associated costs. 

Plan sponsors should carefully assess the number of participants in their plan with a balance at the beginning of the plan year to determine the applicability of these updated audit rules.  

We recommend all affected plans consult their team of experts before proceeding with a final course of action. If your plan is adopting Provision 304, be sure to consult with your team of experts before January 1, 2024, to ensure participant disclosure timelines are planned accordingly.