CPA Dismay Over Form 5500 Changes May be Misplaced
Last week, final changes to Form 5500 reporting requirements were announced that are estimated to result in over 10,000 fewer retirement plans having to file independent qualified public accountant (IQPA) reports with their Form 5500 returns. The changes, which take effect for reporting for the 2023 plan year, were met with dismay by CPA firms that provide the IQPA reports, often referred to as audit reports. However, their concerns may be short-lived, as certain provisions of SECURE 2.0 will likely increase plan participation levels over the next few years and result in more plans that are of the size that must file as “large plans” and accompany their Form 5500 with an audit report. Below, we explain the change to the audit requirement, and briefly cover the SECURE 2.0 provisions that may be coming to the rescue.
Who Gets Counted?
The key issue here is the definition of a “large plan” for Form 5500 reporting purposes, including the requirement that a large plan submit an IQPA report with Form 5500. A large plan is one with 100 or more participants on the first day of the plan year, although special rules apply to plans that cross over that threshold (the 80-120 rule). As for who gets counted towards the 100 participants, the rule has been that you count any individual who has satisfied eligibility requirements under the plan, whether or not that individual actually participates (such as by contributing salary deferrals, in a 401(k) plan), or otherwise has an account under the plan. This has often resulted in the anomaly that a plan that covered over 100 participants, but with only a handful of actual plan accounts, and only a few hundred thousand dollars in plan assets, was required to engage an IQPA each year, often for fees in excess of $5,000.
In new final regulations on Form 5500 requirements, the Department of Labor changed the participant counting methodology for defined contribution plans, including 401(k) plans, so that only individuals who actually have plan accounts are counted toward the 100 participants on the first day of the plan year. This change is also reflected in a revised Form 5500 and instructions released by the Departments of Labor and the Treasury, as well as the PBGC. The 80-120 rule is still in effect, but only individuals with plan accounts will be counted rather than those who are eligible.
SECURE 2.0 to the Rescue?
There is no question that in the short term there will be a reduced need for IQPA reports during coming Form 5500 seasons. However CPAs need only to look to certain key provisions in SECURE 2.0 to realize that the stated goal of that legislation – to increase access to retirement plans – will eventually result in a broader base of plan participants in the US and growth in the number of larger plans requiring plan audits.
Specifically, the requirement that plans adopted on or after December 29, 2022 automatically enroll new participants starting in 2025, and auto-escalate their contributions, will be a likely source of plans crossing the 100 participant threshold earlier than would otherwise be the case. As soon as someone is auto-enrolled at 3% of pay or higher, that person has a plan account and will be counted as a participant towards the 100 participant threshold.
Second, the rules for long-term, part-time employees that go into effect under SECURE 1.0 in 2024, and under SECURE 2.0 starting in 2025, means that a number of plans that are currently under the 100 participant threshold due to a 1,000 hour eligibility requirement may not retain that status with a new maximum deferral eligibility threshold of 500 hours of service in two consecutive years (under SECURE 2.0; three consecutive years under SECURE 1.0).
Think for instance of a plan that was adopted in 2023 and will be required to auto-enroll new participants starting in 2025, and that must also start covering long-term, part-time employees in that year. That plan will begin with a significantly larger participant base than if it did not auto-enroll, and maintained a 1,000 hour eligibility requirement.
In sum, CPAs may lose some existing plan audit clients in the short term but likely will gain as many if not more back under the expanded coverage rules put in place under SECURE 2.0.
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.
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