Proposed Change to DOL Audit Requirement for Defined Contribution Plans

by Mary Varano
Piggy bank with word PENSION and coins on table.

The IRS, Department of Labor and Pension Benefit Guaranty Corporation proposed changes to IRS Form 5500 intended to improve reporting on multiemployer defined benefit pension plan funding. These proposed changes would fundamentally change Form 5500 regulations and be beneficial to all plan sponsors. A defined benefit pension plan is a company pension plan where employee pension payments are calculated according to the employee’s length of service and the salary they earned at the time of their retirement.

The proposal, if finalized, would eliminate the requirement for independent audits of plans that have fewer than 100 participants with account balances as of the beginning of the plan year, beginning on or after January 1, 2022.

Under the proposal, defined contribution pension plans would make the determination of plan size based on the number of participants with account balances as of the beginning of the plan year. Those eligible to participate without account balances would not be included in the determination. Currently, the plan size measure for the audit requirement is based on the total number of participants at the beginning of the plan year, including those eligible – even if they have not elected to participate and do not have an account balance.

What is Form 5500?

The IRS Form 5500 is an annual report that is filed with the U.S. Department of Labor (DOL) containing information about a 401(k) plan’s financial situation, types of investments, etc. to provide the IRS and DOL information about the plan’s operation and compliance with government regulations. Overall, retirement plans like a 401(k) are required to file a form 5500 for every year the plan holds assets.

Depending on the size and structure of your business, one of the three types of Form 5500 will be appropriate:

  • Form 5500: Most public and private sector businesses with 100 or more participants use this general form
  • Form 5500-SF: Short-form version for plans with under 100 participants
  • Form 5500-EZ: The form for single participant plans

 What are the proposed changes to Form 5500?

When the Setting Every Community Up for Retirement Income Security Act (SECRURE Act) passed in 2019, the act included the proposal of additional changes by the IRS, DOL and Pension Benefit Guaranty Corporation (PBGC) to Form 5500, including:

  • Update Form 5500 financial reporting to make the financial information collected on the Form 5500 more useful and usable
  • Enhance the reporting of certain tax qualification and other compliance information by retirement plans
  • Transfer to the DOL Form M-1 (Report for Multiple Employer Welfare Arrangements (MEWAs) and Certain Entities Claiming Exception (ECEs)) (Form M-1) participating employer information for multiple employer welfare arrangements that are required to file the Form M-1
  • Change the rules for determining when a defined contribution pension plan is required to file as a large plan (i.e., have 100 or more participants)
  • Attach an independent auditor’s report and audited financial statements to its Form 5500 annual return/report filing.

These proposed changes will affect Form 5500 filers, not Form 5500-SF or Form 5500-EZ filers.

What should I do now to prepare for the proposed changes to Form 5500?

Although not put into law yet, companies with defined contribution plans can plan ahead to avoid an audit for the 2022 plan year and forward, if the proposed regulations are enacted.  For plans that have a large number of eligible participants, but not a lot of participation, review the number of account balances and isolate those balances that belong to terminated participants.  Call your plan service providers and determine if you can force out those terminated participants with smaller balances or contact the participants to determine if they would like to roll their funds over to an IRA or another qualified plan.

Corrigan Krause Can Help

If you have any questions, please contact us, to connect with the lead of the employee benefit plan audit practice at Corrigan Krause.