What Employers Need To Know About New Form 5500 Reporting Requirements

The following article was first posted by HR.com’s Employee Benefits & Wellness Excellence Magazine. It is reposted here with permission from the author.

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When it comes to retirement benefits, compliance has long meant very different things for companies of different sizes.

That will always be the case, but with some recent changes to Form 5500, the U.S. Department of Labor is changing how businesses can navigate this landscape.

In a regulatory climate where benefits adjustments and even the smallest staffing changes can spark complex reporting requirements, the Form 5500 updates aim to bring relief—especially to smaller employers often encumbered by reporting obligations that don’t match their actual plan size.

At its core, Form 5500 is a transparency document designed to provide regulators with a clear picture of a plan’s health, including its financial state and participant details.

The main sticking point for many companies, though, has always been the threshold between “large” and “small” plans.

Generally, federal law requires employee benefit plans with 100 or more participants to have an independent audit as part of their obligation to file Form 5500.

By creatively shifting that threshold to allow more small businesses to avoid an audit—and to make the auditing process more predictable for those who have passed the threshold—policymakers are hoping that more employers will be encouraged to offer a retirement benefit.

Redefining ‘Small Plan’ Status

One of the most significant changes to Form 5500, which went into effect January 2023, involves the criteria for that “large” versus “small” classification.

Until now, any eligible participant, even one with a zero balance, counted toward a company’s evaluation of the 100 threshold, which had the effect of pushing companies with low plan participation into a “large” designation.

Under the new rules, only employees with an account balance count toward the threshold.

For many smaller companies, it could mean dropping out of the audit category entirely.

What does this mean in practical terms? For many smaller companies, it could mean dropping out of the audit category entirely.

About 20,000 businesses are expected to be impacted—businesses that, despite offering a retirement plan, may have only a fraction of employees actively participating.

For these companies, this change means fewer hurdles and less cost, freeing up resources that might otherwise have gone toward compliance efforts.

For companies hovering around the 100-employee mark who do not yet offer a retirement benefit—or who are smaller but have a growth mindset and want to entice better employees with a more complete compensation package—this change could create an added incentive to adopt a 401(k) plan.

Grace Period

Employers around the 100-employee threshold also benefit from the “80-120 Rule.” The rule gives plans with between 80 and 120 participants the flexibility to file as either large or small based on their prior year’s status.

This is like having a grace period that lets companies avoid a sudden spike in reporting obligations due to minor fluctuations in participant count.

In practice, this means that an employer who saw their participating employee count go from 98 to 102 in one year won’t need to file Form 5500 with an audit. Only when the company exceeds 120 employees is it subject to the audit requirement.

Only when the company exceeds 120 employees is it subject to an audit.

This rule also, somewhat counterintuitively, benefits employers with large plans by allowing them to stay in the audit category even if their participant number dips below the audit threshold.

The costs associated with performing an audit after an off year are such that year-to-year continuity can be better for the bottom line.

This structure ultimately supports plan sponsors by stabilizing their reporting requirements. It also provides growing businesses with some runway to prepare for the cost and organizational adjustments that this kind of compliance requires.

Help with the LTPT Mandate

The kind of reporting flexibility brought on by these changes to the Form 5500 is especially significant given the soon-to-be enforced mandate requiring long-term, part-time employees to qualify for 401(k) plans.

An LTPT employee is any employee who worked between 500 and 999 hours in each of the last three consecutive years. The first year any LTPT will be required to be eligible for 401(k) plans is 2024.

Without the “balance-based” counting method, more employers could be pushed into the large plan category.

Without the “balance-based” counting method, more employers could be pushed into the large plan category simply by adding eligible employees, even those unlikely to enroll.

The 80-120 Rule, meanwhile, will help businesses weather the compliance uncertainty that comes when a new category of employees are eligible for a benefit.

By focusing on participants with a balance and allowing for some fluctuation in the numbers of those who participate in a plan, businesses can better manage LTPT inclusion without added compliance costs.

Practical Takeaways for Employers

While the new rules have been in place for almost two years now, the reporting period for the first affected year just ended in October.

It’s likely that many businesses aren’t familiar with the changes. It’s not too late to get up to speed, and there are a few things employers can do to ensure they are in compliance and making the most of the new rules.

The first thing any business near the threshold should do is check participant data against the new balance-based counting method.

For companies hovering around the 100-participant mark, this could be the difference between requiring an audit or not. Employers should also check in with their third-party administrators and ask them to verify participant counts to ensure the company is in compliance.

Any businesses looking to select an auditor for the benefit plan audit should begin the process well in advance of the deadline for Form 5500.

Businesses should ensure the audit firm has knowledge of the specialized nature of the industry and the skills necessary to perform benefit plan audits.

The changes to Form 5500 are not sweeping, but they are a move in the right direction.

The American Institute of Certified Public Accountants Employee Benefit Plan Audit Quality Center is a good place to start the search.

Member firms show their commitment to providing quality audit services to ERISA plans by participating. These firms voluntarily adhere to higher standards of audit quality in the policies, procedures and training related to the performance of benefit plan audits.

Businesses should also start planning for LTPT inclusion if they haven’t yet done so. As part-time employees gain 401(k) eligibility, companies should keep an eye on their participation counts and their impact on the audit threshold.

Finally, every company should continue to build employee awareness of its retirement benefits and encourage participation. Greater awareness and engagement can lead to more stable participant counts.

The changes to Form 5500 are not sweeping, but they are a move in the right direction. The hope is that businesses of all sizes can feel supported in offering retirement benefits.

In the long run, employers should be able to better match their compliance with the real structure of their workforce—making it easier for more people to gain access to retirement savings options without additional obstacles.

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About the author: Frank Milone is a co-founding partner at Fiondella, Milone & LaSaracina LLP, an independent accounting and advisory firm with offices in Glastonbury, Enfield, New Haven, Stamford, Avon, and Stafford Springs.