Fewer 401(k) Plans Will Require A 5500 Audit Starting in 2023
401(K) plans with over 100 eligible plan participants are considered “large plans” in the eyes of DOL and require an audit to be completed each year with the filing of their 5500. These audits can be costly, often ranging from $8,000 - $30,000 per year.
Starting in 2023, there is very good news for an estimated 20,000 401(k) plans that were previously subject to the 5500 audit requirement. Due to a recent change in the way that the DOL counts the number of plan participants for purposes of assessing a large plan filer status, many plans that were previously subject to a 401(k) audit, will no longer require a 5500 audit for plan year 2023 and beyond.
401(K) 5500 Audit Requirement
A little background first on the audit rule: if a company sponsors a 401K plan and they have 100 or more participants at the beginning of the year, that plan is now considered a “large plan”, and the plan is required to submit an audit report with their annual 5500 filings.
For plans that are just above the 100 plan participant threshold, the DOL provides some relief in the “80 – 120 rule”, which basically states that if the plan was a “small plan” filer in the previous year, the plan can remain a small plan filer until the plan participant count reaches 121.
Old Plan Participant Count Method
Not all employees count toward the 100 or 121 audit threshold. Under the old rules, the company only had to count employees who were:
Eligible to participate in the plan; and
Terminated employees with a balance still in the plan
But under the older rules, ALL plan-eligible employees had to be counted whether or not they had a balance in the plan. For example, if a landscaping company had:
150 employees
95 employees are eligible to participate in the plan
Of the 95 eligible employees, 27 employees have balances in the 401(K) plan
35 terminated employees with a balance still in the plan
Under the 2022 audit rules, this plan would be subject to the 5500 audit requirement because they had 95 eligible plan participants PLUS 35 terminated employees with balances, bringing the plan participant audit count to 130, making them a “large plan” filer. A local accounting firm might charge $10,000 for the plan audit each year.
New Plan Participant Count Method
Starting in 2023, the way that the DOL counts plan participants to determine “large plan” filer status changed. Now, instead of counting all eligible plan participants whether or not they have a balance in the plan, starting in 2023, the DOL will only count:
Eligible employees that HAVE A BALANCE in the plan
Terminated employees with balances still in the plan
Looking at the same landscaping company in the previous example:
150 employees
95 employees are eligible to participate in the plan
Of the 95 eligible employees, 27 employees have balances in the 401(K) plan
35 terminated employees still have balances in the plan
Under the new DOL rules, this 401(K) plan would no longer require a 5500 audit because they only have to count the 27 eligible employees WITH BALANCES in the plan and the 35 terminated employees with balances, bringing the total employee audit count to 62. The plan would be allowed to file as a “small plan” starting in 2023 and would no longer have to incur the $10,000 cost for the 5500 audit each year.
20,000 Fewer 401(k) Plans Requiring An Audit
The DOL expects this change to eliminate the 5500 audit required for approximately 20,000 401(k) plans. The primary purpose of this change is to encourage more companies that do not already offer a 401(k) plan to their employees to adopt one and to lower the annual cost for many companies that would otherwise be subject to a 5500 audit requirement.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
