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Plan Audit No Longer Required


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I have a plan that for the last couple years was required to be audited due to creeping over the 120 eligible participant threshold.  They've never had more than 50-60 with a balance in the plan.  After filing 5500SFs for several years, the last couple years they've had to perform an audit and file the regular 5500 along with an auditor's report.  With the change in regulation counting only participants with a balance and less than 100 participants with a balance, and an audit no longer required, can they just revert back to filing the 5500SF?  Is there anything else that needs to be filed? 

Thanks in advance!

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This plan is very vanilla, no company stock or other assets that would require the 5500, so I think I agree with you, I just find it odd that this question just seems to have not been answered clearly anywhere that I can find.  The 2023 5500SF instructions says the plan must: "Be a small plan (i.e., generally have fewer than 100 participants at the beginning of the plan year)" which is exactly the same language that was used in the 2022 instructions.  You would think that they would define who a "participant" is, given that the definition is presumably changed for 2023.  Am I crazy to think that?

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Part of the confusion comes from the way the instructions approach how to determine which form in the Form 5500 series must be filed.  The instructions start from the premise that all plans must file the Form 5500 unless the plan qualifies for an exception - and qualifying for an exception allows the plan to file the Form 5500-SF .  The instructions then go on to list what are the exceptions.

To illustrate some of the requirements for a plan to be eligible to file the Form 5500-SF, the plan has to:

  • meet the fewer that 100 participant rules,
  • qualify for an independent audit exemption if the plan holds certain types of assets,
  • cannot be a type of plan that must file a Form 5500 regardless of any other exceptions and
  • new in 2023, must qualify for an exemption from having an independent audit exemption if the count of individuals with account balances as of the beginning of the year is under 100.

There are some quirks related to the new provision.  The Form 5500 series retain the question about the total number of participants in the plan as of the beginning of the year (see Line 5 on the Form 5500 and Line 5a on the Form 5500-SF) where this count continues to include participants under the same counting rules that have as in prior years.  For example, an employee who is eligible to make elective deferrals to a 401(k) plan but elects not to defer is in this count.  Also keep in mind that there are many types of plans that must file a Form 5500 that the form and instructions must accommodate (defined benefit, welfare, money purchase, pure profit-sharing...) but the new rule applies only to defined contribution plans.

The new rule was written primarily for defined contribution plans with an elective deferral feature so the plan could qualify for an exemption from having an independent audit.  The new rule basically allows - solely for purposes of determining if an audit is required - for the plan to exclude eligible participants with no account balances as of the beginning of the plan year to be excluded from the count when checking if an independent audit is required.

Is this logical?  There is logic to it if we start with the premise that all plans must file a Form 5500. 

Is there a better way for the form or instructions to be easier to understand?  Likely. 

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On 3/14/2024 at 4:04 PM, 401kSteve said:

You would think that they would define who a "participant" is, given that the definition is presumably changed for 2023.  Am I crazy to think that?

I always thought this would be a great topic for a training session - we use participant all the time in our industry, but depending on the various situations it is defined differently.  With the new 5500 rules, it is not as segregated, but there are still some subtle differences depending on the situation.

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Applying different points of law, there are several differing counts of participants—at least two for Form 5500 reports, and a few more for other ERISA title I or tax law purposes.

Maintaining distinctions and records about those who are participants with an account balance and all participants, including those with no account balance, might matter for many purposes.

Think about how many ERISA title I and tax law notices and disclosures a plan’s administrator must furnish to participants, often including all or many with no account balance.

For ERISA § 104(b)(4) rights to request information and for other provisions that refer generally to a participant (which ERISA § 3(7) defines), that term includes (at least) “‘employees in, or reasonably expected to be in, currently covered employment’” [and] former employees who ‘have . . . a reasonable expectation of returning to covered employment’ or who have ‘a colorable claim’ to vested benefits[.]” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117, 10 Empl. Benefits Cas. (BL) 1873 (Feb. 21, 1989) (citations omitted).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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