New Audit Rules for 2023 5500 Forms

Nov 10, 2023 | 401(k) Plans

New Audit Rules for 2023 5500 Forms

When a 401(K) plan has 100 or more eligible participants on the first day of the plan year, it’s considered a “large plan” for DOL and IRS reporting purposes. A large plan is required to complete a Form 5500 with more schedules and attach an audit report when filing the 5500.  While 100 eligible participants is the general threshold for large-plan status, there is what is commonly referred to as the 80-120 rule. Plans that have between 80 and 120 eligible participants at the beginning of the plan year are permitted to file their Form 5500 in the same way they did the year prior. For example, a plan that had 70 participants on January 1, 2022 and filed as a small plan for 2022, and then grew to 115 participants by January 1, 2023, may elect to file as a small plan again—and avoid an audit—for the 2023 plan year. An audit would not be required in this example until the eligible participant count exceeded 120 as of the first day of a plan year.

Prior to plan years beginning in 2023, the eligible participant count included active employees even if they have never elected to participate and don’t have an account balance. Former employees who have left their 401(k) funds in the plan are also included in the participant count.  Therefore, it was possible for you to meet the audit requirement if you have, for example, 121 eligible participants as of January 1st, but only 50 with an account balance.

For plan years beginning on or after January 1, 2023, only participants with an account balance at the beginning of the year (or the end of the year in the case of the first plan year) are counted for purposes of requiring an audit. Using the example above, if you have 121 eligible participants but only 50 with an account balance, you can now file a short form 5500 (5500-SF) and no audit will be required. This will begin with 2023 tax forms filed in 2024.      

If you are still close to the participant count threshold, consider looking at your terminated participants with account balances and make efforts to force out small account balances as your plan may allow.

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