401k audit requirement changes – understanding the details.

The Department of Labor recently revised the requirements for when an audited financial statement needs to be attached to the Form 5500.?Let’s make sure you and your clients understand the details.

First let’s review the “old” audit requirement which has applied since, well, forever, which applies to plan years beginning January 1, 2022 through December 1, 2022.?Nothing changes for 2022 plan year audits:

-?????????Audit requirements are based on number of eligible participants as of the beginning of the plan year

-?????????Plan audits which will be taking place in the spring/summer/fall of 2023 (for 2022 plan years) are based on the “old” requirements of 100 eligible participants as the beginning of the plan year.

• Still need to consider the 80/120 rule, based on number eligible participants at the beginning of the 2022 plan year.

On February 23, 2023, the DOL announced as part of the annual revisions to the Form 5500, https://www.dol.gov/agencies/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/changes-for-the-2023-form-5500-and-form-5500-sf-annual-return-reports changes to how the number of participants is defined for plan years beginning January 1, 2023 and after:

• The number of participants is now based on the number of actual account balances in the plan on the first day of the plan year.
• The Form 5500 will now have a new line item for defined contribution plans to report the number of account balances on the 1st day of the plan year.
• Starting January 1, 2023, plans that have 100 or more account balances in the plan on the first day of the plan year will generally be required to have an audit.
• Accounts balances are for both active participants and terminated employees who have left their money in the plan.
• The DOL estimates that over 19,000 plans which previously met the audit requirement will fall out of the audit requirement in 2023 because the plan has less than 100 account balances but more than 100 eligible participants.

-?????????The 80/120 rule still applies.?Same concept as before, just now applies to number of account balances at the beginning of the plan year.

• Example, assume a December 31, 2022 plan year end:
• The Plan filed a Form 5500-SF for the 2022 year (no audit was required).
• On January 1, 2023, if the plan has between 80 and 120 account balances, the plan can elect to file the same Form 5500 as filed in the prior year, so in this example the plan would file the 5500-SF for 2023, and no audit would be required for 2023.
• However, if the plan has 121 or more account balances on January 1,2023, the plan must file Form 5500 and attach the audited financial statements.

What can you do to help your clients?

Unfortunately, it is too late for plan years beginning January 1, 2023 to try to reduce the number of account balances below 100.?However there is still time for plan years beginning later in 2023.?

If you have a plan that has 100 or more account balances on January 1, 2023 (assuming the plan had an audit in the prior year), and audit will be required for 2023.

• Make sure you are assisting your clients to force out small account balances for terminated employees to get total account balances below 100.
• Help your clients monitor terminated employees going forward to force out small accounts quickly.
• Contact other terminated employees with larger account balances to remind them of their 401k account to see if they want to roll their account into an IRA or to their current employer’s plan.
• If your client’s plan document does not have specific force-out provisions for small account balances, be sure to assist your client to amend the plan document to allow force-outs of small account balances.
• Keep in mind that SECURE 2.0 increases the force-out amount from $5,000 to $7,000, effective January 1, 2024.