Understanding Changes in 401(k) Audit Requirements

In 2023, the Department of Labor (DOL) revised several rules to simplify retirement plan audits and reduce costs for small employers

By Dan Ryan

Small retirement plan sponsors need to ensure they are taking full advantage of a key U.S. Department of Labor revision in 2023 to the threshold for determining which plans require an independent audit of their financial statements.

What are the current rules?

Previously (before January 1, 2023), the DOL required sponsors of employee benefit plans with 100 or more eligible participants to include an audit report from an independent qualified public accountant with their annual Form 5500 series. This requirement included individuals eligible to participate, even if they had not elected to do so or had no balance in the plan.

Under the revised rules, only participants with account balances are considered when determining whether an audit is required. For many smaller plans, this rule eliminated the need for an audit. The goal of this change was to balance providing retirement savings plans and minimizing costs and administrative burdens on smaller employers.  This revision is expected to reduce the number of plans requiring an audit by approximately 20,000 plans for an estimated cost savings of $150 million.

Under the 2023 DOL requirement:

• The number of participants depends on actual account balances on the first day of the plan year.
• The Form 5500 will includes a new line item for defined contribution plans to report account balances on the first day of the plan year.
• Plans with 100 or more account balances will generally require an audit.

Audit Exception:  80-120 Participant Rule: If the number of participants is between 80 and 120, and a Form 5500 Annual Return/Report was filed for the prior plan year, you may elect to complete the return/report in the same category (‘‘large plan’’ or ‘‘small plan’’) as was filed for the prior return/report. For example, if a Form 5500-SF or a Form 5500 Annual Return/Report was filed for the prior plan year as a small plan, including the Schedule I if applicable, and the participant count for the current year Form 5500 is 120 or less, you may elect to complete the current year Form 5500 and schedules in accordance with the instructions for a small plan.

Taking advantage of the 2023 rule change

For smaller plan sponsors with participant account balances close to the 100 participant count, there are ways to reduce the number of account balances below 100 as follows:

• Forcing out small account balances for terminated employees.
• Monitoring terminated employees to address small accounts quickly.
• Contacting terminated employees with larger account balances to discuss options.
• Amending plan documents to allow force-outs of small account balances.
• Don’t forget to account for SECURE 2.0, which increases the force-out amount from $5,000 to $7,000, effective January 1, 2024.

Dan Ryan is a manager at Boyer & Ritter LLC and a key member of the firm’s employee benefit plan group. He provides audit and accounting services for the construction industry and other closely held businesses. Contact Dan at 717-761-7210 or dryan@cpabr.com.