Seyfarth Synopsis: New rules change the method of counting participants for Form 5500 purposes, possibly both eliminating audits and allowing use of the abbreviated Form 5500-SF.

On February 23, 2023, the Department of Labor released its changes to the 2023 Form 5500 filing instructions. Among the changes was a modification of the participant counting methodology for small/large plan determination from all eligible participants to only those participants with account balances at the beginning of the year.  {The end of the year in the case of the first plan year.} This counting method will push many plans, especially 401(k) and 403(b) plans, below the 100 participant audit threshold, potentially saving plan sponsors time and money.

In addition, more plans may become eligible to use Form 5500-SF instead of the more cumbersome Form 5500.

Unfortunately, the changes are not effective until the 2023 5500 filing, i.e. for plan years beginning on or after January 1, 2023, which means that the audit requirement and/or the use of Form 5500 may continue for one more year (the 2022 plan year). However, this delay provides employers that sponsor plans that are near the 100 participant account balance threshold the opportunity to make extra efforts to force out small account balances as may be permitted under the plan.  And remember that, pursuant to the SECURE Act 2.0, starting in 2024 plans can adopt rules that permit the mandatory distribution of small accounts up to $7,000 (the present limit is $5,000).  See our Legal Update on the Secure Act 2.0 for more information about those rules.

Please reach out either to the authors of this Blog Post or to your Seyfarth Employee Benefits attorney if you need additional information.