Empowering Retirement Security: Form 5500 Reforms
The government’s encouragement for small businesses to offer retirement plans stems from a commitment to economic security and social well-being. Facilitating retirement plans is a proactive step towards securing the financial future of employees, empowering them to save and invest for a stable retirement. Moreover, promoting such plans alleviates strain on social programs, advocating self-sufficiency during retirement and fostering individual financial independence. This multifaceted approach supports both personal financial prosperity and a societal objective of reduced reliance on public assistance, ultimately cultivating a financially resilient and stable community.
To further this goal, the Department of Labor has modified Form 5500 reporting rules related to 401(k) plans, focusing on audit necessity for ‘large plans’, defined as those with 100 or more participants at the plan year’s outset. The key change revolves around participant counting for audit purposes, focusing on those with account balances, effective from January 1, 2023. This alteration aims to alleviate financial and administrative burdens associated with audits, potentially exempting around 20,000 small business 401(k) plans from audits, presenting substantial cost and time savings.
At the conclusion of The Plan Sponsor University (TPSU) Fiduciary Education Program held on the campus of The University of North Florida, Fred Barstein, founder, and CEO of TPSU, interviews Charles Brown, a consulting actuary and adjunct lecturer at TPSU, delves into the evolving landscape of retirement plan audits. Charles, an ERISA expert with a wealth of experience in retirement plans, sheds light on changes in auditing requirements, particularly the shift from counting eligible to participating employees for determining audit necessity. They emphasize the significance of this alteration for both small and large plans, underlining the need for well-informed decisions by plan sponsors.
Read the Full Transcript Here:
Fred Barstein:
Greetings. This is Fred Barstein, CEO and founder of TPSU and 401kTV. I’m here in Jacksonville, Florida, at a TPSU Program at the University of North Florida with one of our adjunct lecturers today, Charles Brown. Welcome Charles.
Charles Brown:
Thanks, Fred.
Fred Barstein:
Okay, if we ask you a few questions?
Charles Brown:
Absolutely.
Fred Barstein:
So Charles, why don’t you tell us a little bit about your background and your association with MAI Capital?
Charles Brown:
Sure. So I’m a consulting actuary, I’m enrolled actuary. My background is in retirement plans. I’ve been in the compliance side of retirement plans for about 20 years. I worked as the chief compliance officer for a national TPA firm. I currently work with a software developer who develops compliance software.
Fred Barstein:
Right.
Charles Brown:
And also, I work with MAI as an ERISA expert.
Fred Barstein:
So Charles, you talked a little bit about the changing requirements for plans that have to get internal audits as opposed to a DOL audit, nobody wants that. So can you tell us what those changes are?
Charles Brown:
Absolutely. So every plan, more or less has to file a form 5500 every year, which is a report to the government on the plans’ operation. The large plans or plans that are considered large plans are plans that have over 100 participants. Plans that don’t have over 100 participants are considered to be small plans, small plans don’t need audits-
Fred Barstein:
Right.
Charles Brown:
… associated with their 550, whereas large plans do.
Fred Barstein:
Got it.
Charles Brown:
And so it’s very important whether you’re a small plan or a large plan for that purpose. In the first year of a plan, if you have over 100 participants, then you’re going to be a large plan filer. Now, if in the first year of the plan you don’t have an over 100 participants, you’re going to be a small plan filer. You get to the next year, let’s say you go over 100 participants-
Fred Barstein:
And that includes eligible as well as participating, right?
Charles Brown:
Exactly. Well, prior to 2023, it did. And that was actually one of the big changes in 2023. So it used to be eligible for the plan, so working for the company and eligible participating in the plan, plus people who are terminated and have a remaining account balance in that plan.
Fred Barstein:
Got it.
Charles Brown:
And so if you’re a small plan in the first year, and let’s say in the second year you get over 100 people, there’s this rule that says that you don’t actually have to switch to being a large plan file or getting an audit until you go over 120 people. You could potentially go for two, three, four how many years and as long as you don’t go over 120 people, then you’re not required to class up, if you will, to where you have to get an audit.
Fred Barstein:
And the classification going forward is not just eligible, but it’s actually participating employees. Correct?
Charles Brown:
Exactly. And that’s the big change for 2023. So effective for 2023 plan years, you’re no longer counting those people who are eligible for the plan, but who aren’t actually contributed to the plan.
Fred Barstein:
Right.
Charles Brown:
So if somebody works for the company, they’re eligible. But they don’t actually have an account balance in the plan, you don’t have to count them for this purpose.
Fred Barstein:
Right, right. So do you think that would be a disincentive for plan sponsors who want to get people in the plan?
Charles Brown:
Hopefully not.
Fred Barstein:
Oh, okay.
Charles Brown:
Hopefully not. I would hope that having to get an audit on your annual return wouldn’t make plan sponsors want to have less participation. I would hope so.
Fred Barstein:
Right, right, right. Yeah, I can see that. Hopefully not as well. Well, last question. This is your first TPSU. What’s your impression? Why do you think plan sponsors should’ve have?
Charles Brown:
Well, I had a great time speaking here. And the plan sponsors who came were very engaged, they came ready to learn, they had very good questions. And the panel of people who you lined up for the program, the industry experts, people from investment companies who have insights into plan investments, into compliance, it felt like a great environment for people to come and learn more about plans. And I think anybody who’s a human resources or who otherwise is tasked with trying to explain plans to employees of a company-
Fred Barstein:
Right.
Charles Brown:
… I think could benefit a lot from those.
Fred Barstein:
Right. And just for the record, there is no sales and marketing happening. Nobody’s pushing product. It’s all pure education.
Charles Brown:
Absolutely.
Fred Barstein:
Yeah. Great. Well, thanks for your time today. And thank you for watching 401kTV, please stay tuned.
