The Department of Labor, Internal Revenue Service, and Pension Benefit Guaranty Corporation recently issued final rules on employee benefit plan annual reporting requirements that are effective for plan years beginning on or after January 1, 2023. These new rules make revisions to Form 5500 (annual report long form) and Form 5500-SF (annual report short form) and their instructions, which, among other changes, change how participants are counted to qualify for the small plan exemption (less than 100 participants at the beginning of the plan year). The new rules reduce the number of participants in individual account plans that must be counted, which is significant as more plans will qualify for the small plan exemption, allowing them to use the short form for reporting and waive the audit requirement, including the required accountant report. This will result in significant savings for qualifying plans. These rules will primarily impact 401(k) and 403(b) plans, which will be the focus of this alert.

Currently, 401(k) and 403(b) plans must include individuals who are eligible to make elective deferrals at the beginning of the plan year in their participant count for reporting purposes, even if those individuals do not have a plan account balance because they have never elected to make deferral contributions and have not received employer contributions. The new rules change the methodology of counting participants so that only the number of participants/beneficiaries with account balances as of the beginning of the plan year (or end of the plan year if it is the first plan year) will be counted to determine eligibility for the small plan exemption. This change also affects the short-year filing rule and the "80-120" participant rule, which permits a plan to file the same form (Form 5500 or Form 5500-SF) it used for the prior year. Note that participants who have made contributions in prior years but elect not to make contributions for the current plan year and who have not received a distribution of their account balances will still be counted as they will have account balances.

The agencies indicate that the participant counting change was made partly to accommodate the change made by the Setting Every Community Up for Retirement Enhancement Act of 2019 ("Secure Act"), which requires that certain long-term, part-time workers must be permitted to make elective deferrals for plan years beginning on or after January 1, 2024. The agencies recognized that this new Secure Act rule could add to the participant number, causing more plans to use the long form and be subject to costly audit requirements. The Department of Labor believes the new participant counting rule will help to alleviate this unintended consequence and minimize costs and burdens on small plans.

Due to the new participant counting rule, plan administrators will need to determine if their reporting requirements for 2023 will change to allow them to use the short form and qualify for the audit exemption. In addition, since the new rules make certain other reporting changes, including other changes mandated by the Secure Act that affect multiple-employer pension plans and defined contribution group reporting arrangements, as well as certain other changes to improve reporting requirements, all employee benefit plan administrators should determine if their reporting requirements will change or be affected for 2023.

Charlotte Ackley also contributed to this article.