Form 5500 Changes in Participant Count Methodology

Recent changes by the Department of Labor (DOL) to Form 5500 have redefined the criteria for determining a large plan. The new methodology involves counting the number of participants with account balances on the first day of the plan year. 

According to Form 5500, a plan is generally considered large if it has at least 100 participants with active accounts, triggering the requirement for an audit. This provision applies to defined contribution plans and is effective for plan years beginning on or after January 1, 2023. In contrast to previous reporting rules, which were based on employees eligible to participate, in addition to those with account balances, plans now only need to count participants with account balances.

The purpose behind this new participant count methodology is twofold: to reduce expenses for small businesses that establish and maintain defined contribution plans, and to encourage more small businesses to offer retirement plans to their employees.

As a consequence of this change, many plans that were previously treated as large plans may now qualify for the small plan audit designation, eliminating the need for an audit. The DOL estimates that nearly 20,000 plans previously considered large plans will no longer be subject to the annual audit requirement due to this change.

Take a look at how the counting method change would affect the audit status of a small business 401(k) plan with 125 active (still employed) participants, 15 active participants with an account balance, and 5 terminated participants with a balance. 

How to determine if your plan is impacted

To assess the impact on your plan, begin by reviewing the 2022 Form 5500 and identifying the number of participants with account balances at year-end. This will give you an indication of how close you are to the threshold. Additionally, consult with your third-party administrator or recordkeeper to determine whether your plan still qualifies as a large plan.

Considerations for plans near the threshold

Employee benefit plans below the 100-participant threshold may still elect to engage an audit, although it will not be required. 

If your plan is just shy of the threshold, whether to undergo an audit depends on several factors. There are considerations that should be taken into account in making this determination.

For assistance in navigating through these changes, please reach out to your Herbein advisor.

To learn more about our Employee benefit plan services click here.

Article contributed by Brian Jamnik