Changes to the 2023 Form 5500

Jun 27, 2023

The Form 5500 serves as a vital source of information for the Department of Labor, Internal Revenue Service, and the Pension Benefit Guaranty Corporation. This form provides details regarding a retirement plan’s operations, qualifications, financial status, and adherence to governmental regulations.

The final revisions to Form 5500 have been released by the Department of Labor (DOL), following the September 2021 notice of proposed form revisions (NPFR). These changes will come into effect for plan years commencing on or after January 1, 2023, and will also be integrated into the 2023 Form 5500. Outlined below are some of the significant modifications made to Form 5500, along with an explanation of the respective adjustments.

Navigating the New Rules: Are You Classified as a Large or Small Plan?

The Department of Labor (DOL) has recently introduced changes to Form 5500, redefining the categorization of large plans based on the number of participants with account balances on the first day of the plan year. Traditionally, the classification of a “large” plan was based on the count of eligible participants in the plan. If a plan had a minimum of 100 eligible participants on the first day of the plan year, it was considered a large plan. However, under the revised guidelines a plan will be considered large if it has at least 100 participants with active accounts, mandating an annual audit. This modification will significantly alter the threshold for determining the status of large and small plans. According to DOL estimates, approximately 19,500 plans will no longer be required to undergo an annual audit due to this revision in the participant-count methodology.

While this change is generally positive news for many plan sponsors, there are potential concerns to consider. For instance, a plan may surpass the 100-participant threshold due to a compliance test failure or the allocation of forfeitures. In such cases, participants who have closed their accounts might need to be reinstated for reimbursement purposes if they fail certain tests such as the Actual Deferral Percentage or the Actual Contribution Percentage. To mitigate this issue, plan sponsors should carefully review their plan documents to determine whether they can exclude participants with account balances under $5,000. (It’s important to note that this change applies solely to defined contribution plans and will be effective for plan years beginning on or after January 1,2023.)

Key Updates in the DOL’s Final Changes to Form 5500

The Department of Labor (DOL) has introduced several notable changes in their final revisions to Form 5500. Mock-ups of the new forms and instructions for the upcoming adjustments will be made available on later this year. Some of the significant changes include:

  • Consolidated Form 5500 for Defined Contribution Groups
  • Streamlined Reporting for Pooled Employer Plans and Multiple-Employer Plans
  • Enhanced Breakout Categories for Administrative Expenses (Schedule H
  • Revised Financial and Funding Reporting Requirements for Defined Benefit Plans
  • Addition of Internal Revenue Code (IRC) Compliance Questions to Improve Tax Oversight

Certain proposed revisions from the notice of proposed form revisions (NPFR) have been delayed. This includes the proposed changes to the content requirements for the schedules of assets filed by large plans. The DOL intends to modernize the data reported on a plan’s individual investments to enhance consistency, transparency, and usability of plan investment information. However, based on feedback received, service providers have expressed the need for more time to implement these changes effectively.

Gaining Perspective: Collaborating with Service Providers for Strategic Planning

Since Collaboration with service providers is common for plan sponsors when managing distributions, particularly if they are nearing the threshold of 100 active plan participants, it is essential for plan sponsors to partner with service providers that closely monitor the participant count. It is also advisable to clarify whether the objective is to maintain a small plan status. Plan sponsors should familiarize themselves with the available options outlined in the plan document to facilitate the movement of participants out of the plan if necessary. Understanding the procedure for potential distributions is equally important and should be established in advance to ensure a streamlined process. By working closely with service providers, plan sponsors can develop a comprehensive strategy aligned with their goals and compliance requirements.