Effective for plan years beginning on or after January 1, 2023, the threshold for determining whether your defined contribution plan needs an audit will be based on participants that have account balances as of the beginning of the plan year, as determined per line 6g of the Plan’s Form 5500 filing. The existing audit determination for defined benefit and health and welfare plans will continue to be based on the definition of an eligible participant as of the beginning of the year, per line 5 of the Form 5500.
The change in audit measurement was primarily caused by a provision of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). It was later revised in SECURE 2.0, through which long-term part-time employees become eligible for automatic participation in 401(k) plans beginning with plan years beginning January 1, 2024, and expands to 403(b) plans beginning January 1, 2025.
Under the previous audit requirement, the addition of this employee group would have resulted in an increase to the eligible plan participant count, triggering audits for many smaller plans. The intention of the SECURE Act was to provide additional access and opportunity for employees to save for retirement but not penalize employers by requiring an additional audit. Thus the change to the account balance methodology.
The Department of Labor (DOL) estimates that this change will reduce the number of plans required to have audits by 18,000, allowing those employers to divert funds toward plan operations. The previous 80-120 rule exemption will remain in place, now based on participant account balances.
Plan administrators should review year-end participant balance detail annually to determine whether there are any duplicate items or participants without balances included. Plans close to the audit threshold should also review their automatic cash out plan provisions to manage year-end participant balances.
During the open comment period, many professionals voiced their concern that this change would result in smaller plans falling under the audit threshold and not getting the level of oversight they may need based on the inexperience of those overseeing the plans. We see this as an opportunity for plan management to engage in a conversation with their auditor to understand the compliance risks and design procedures to address those risks.
Plans that fall below the audit requirement still have options to work with an outside auditor to ensure the plan remains in compliance with the plan document. Communicating with your independent auditor is the first step to develop procedures that will result in additional plan oversight. Formally engaging an independent auditor to perform an annual plan oversight review or implementing certain self-audit procedures with the help of your auditor are two best practice options for plan administrators to stay ahead of any potential compliance issues.
If you have questions or would like assistance implementing these types of procedures to focus on plan compliance, please contact us.