How Changes to Form 5500 Rules May Affect Audit Requirements

Employers that sponsor EBPs must ensure that they comply with federal laws enforced by the IRS and the U.S. Department of Labor (DOL). The government uses Form 5500 to collect information about EBPs and monitor employers’ legal and regulatory compliance. Revisions from previous filing requirements to the form may alter some employers’ obligations.

When the number of participants in an EBP reaches a certain benchmark, the employer must hire an independent auditor to review the plan and prepare audited financial statements. Some employers who have had to conduct audits in past years may find that the new procedure for counting participants in an EBP relieves them of the audit obligation.

This article will review the filing requirements for Form 5500 and the changes to mandatory EBP audits.

What Is Form 5500?

Form 5500 is a financial reporting form developed by the IRS, the DOL and the Pension Benefit Guaranty Corporation (PDGC) to satisfy requirements established by the Employee Retirement Income Security Act of 1974 (ERISA). The statute requires employers to report financial information about the plans they sponsor to the DOL. This information becomes part of the public record once the DOL receives it.

Who Must File Form 5500?

Any employer that sponsors a retirement plan governed by ERISA must file Form 5500 with the DOL every year. This includes:

• 401(k) plans;
• Defined-benefit pensions;
• Profit-sharing plans; and
• Deferred-compensation plans.

Some plans may be exempt from reporting requirements.

Three types of forms are available, depending on the size of the plan:

• Form 5500: Large plans with at least 100 participants at the start of the plan year
• Form 5500-SF: Small plans with fewer than 100 participants at the start of the year
• Form 5500-EZ: “One participant” plans, which typically means business owners
  
  
  

What Is an Employee Benefit Plan Audit?

An EBP audit consists of an audit of the plan’s financial statement by a third-party auditor, usually a certified public accountant (CPA). The purposes of the audit are to:

• Determine the plan’s overall financial condition and the accuracy of information submitted to the DOL;
• Confirm that the sponsor is meeting its fiduciary duties to the plan participants;
• Monitor compliance with DOL and IRS regulations; and
• Identify areas where the plan administrator could improve, such as efficiency, internal controls or fraud risk.

The audit can be a significant undertaking for a business. The auditor will need cooperation from human resources and accounting personnel, legal counsel, investment trustees and others.

Who Must Have an Employee Benefit Plan Audit?

Under the new Form 5500 rules, an employer must have an EBP audit if the plan they sponsor has 100 or more participants with account balances as of the first day of the plan year. This rule is effective for 2023 filings and marks a significant change from past years.

The previous threshold for an EBP audit was 100 participants who either:

• Had balances in their accounts as of the beginning of the year; or
• Had a deferral option that would allow them to make contributions during the year.

This included participants with zero balances but the potential for balances during the year.

How Will the Rule Changes for Form 5500 Affect Employee Benefit Plan Audits?

Some employers that have had to have EBP audits in the past may find that, even though the size of the plans or the number of participants has not decreased, they are no longer subject to that requirement as the number of participants with account balances are under the audit threshold. The new Form 5500 rule effectively counts fewer participants when assessing which employers must conduct audits.

Suppose, for example, that an employer-sponsored retirement plan has the following participants at the beginning of the plan year:

• 80 participants with balances in their accounts; and
• 40 participants with zero balances and deferral options.

Before 2023, the employer would have to have an EBP audit based on a participant count of 120. The rule changes only count the 80 participants with balances. The employer is no longer subject to the EBP audit requirement.

The process for assessing whether the audit will apply could be simpler as well. Plan administrators may only need to look at financial statements showing who had a balance in their accounts as of the start of the year. They do not have to determine whether plan participants have deferral options that would require their inclusion in the count.

The plan may also be considered small for Form 5500 purposes. The employer can file the simplified Form 5500-SF instead of the full Form 5500.

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