The Department of Labor (DOL) released the final changes to Form 5500 relating to the September 2021 notice of proposed form revisions (NPFR) to amend Form 5500. These changes are effective for plan years beginning on or after January 1, 2023, and will be incorporated into the 2023 Form 5500 and consist of seven primary categories.
The Form 5500 is a document that provides details about a retirement plan, such as operations, qualifications, financial condition, and compliance, with government agencies, including the DOL, Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation.
There are several key changes to Form 5500 that you should be aware of. Read more about updated provisions and their potential impact below.
The Rules Determining “Large Plan” or “Small Plan” Have Changed
In the past, the deciding factor between a “large” or “small” plan was the number of eligible participants. Any plan with a minimum of 100 eligible participants on the first day of the plan year was classified as a large plan, regardless of the number of employees who opted to participate.
The updated Form 5500 redefines large plans, measuring instead the number of participants with account balances on the first day of the plan year. A plan will now be required to have at least 100 participants with active accounts, and undergo an annual audit, to be considered a large plan.
(Note that this provision only applies to defined contribution plans and is in effect for plan years that begin on or after January 1, 2023.)
This provision will have a substantial impact on the status of large versus small plans. According to the DOL, an estimated 19,500 large plans will no longer be classified as such and, therefore, no longer be subject to the annual participant count audit.
While many plan sponsors will welcome this change, concerns persist. For example, a failed compliance test or the allocation of forfeitures could push plans over the 100-participant threshold. If a plan fails the Actual Deferral Percentage or the Actual Contribution Percentage test, participants who closed their accounts may need to be reinstated for reimbursement purposes. Plans sponsors can mitigate this issue by reviewing plan documents to determine whether they are able to “push out” participants with account balances under $5,000.
More Changes Are Still to Come
The DOL’s final changes include several other updates. Mock-ups of the new forms and instructions for the following items will be available later this year at Reginfo.gov:
- Consolidated Form 5500 for Defined Contribution Groups
- Streamlined reporting on the 5500 for pooled employer plans and multiple-employer plans
- New breakout categories for administrative expenses (Schedule H)
- Updates to the financial and funding reporting requirements for defined benefit plans
- New Internal Revenue Code (IRC) compliance questions to improve tax oversight
With these updates, DOL aims to improve transparency, consistency, and accessibility of plan investment information by modernizing the data reported in a plan’s individual investments. However, some changes from the NPFR have been delayed, including proposed revisions to the content requirements for the schedules of assets filed by large plans, as service providers have reported needing more time to enact the changes.
Next Steps: Work with Service Providers to Strategize for Success
To successfully navigate these changes, plan sponsors are encouraged to work closely with their service providers to monitor their number of participants, particularly as they approach the 100-participant threshold.
Plan sponsors should also carefully consider whether they wish to remain a small plan, and if so, explore options in the plan document to move participants out, and determine procedure for a potential distribution.