Understanding the conditions triggering a mandatory audit for your 401(k) plan has historically posed a challenge, especially for companies hovering around the 100-employee threshold. Thankfully, in a world that is becoming increasingly complex and challenging, the Department of Labor has simplified things starting in 2023. Instead of counting all eligible plan participants regardless of if they actually contribute to the plan, a company now only has to report eligible employees that have a balance in the plan and terminated employees that still have a balance in the plan. As far as the timing of the balance is concerned, this is based off of the beginning of your plan year. This change is expected to reduce the number of plans that qualify as “large plans”, which serves as the basis for audit requirement.

As an example, consider the following fact pattern. A company has 75 employees eligible for the 401(k) plan at the beginning of the year, and only 20 of them actually participate and have a balance at the beginning of the year. Additionally, there are 40 terminated employees who still maintain a balance in the plan. Under the old methodology, this would mean the plan has 115 (75 + 40) employees for the purposes of filing the Form 5500, and an audit would be required because it exceeds the 100 participants requirement. Under the new methodology, only the 20 employees that participate and the 40 terminated employees with balances would count, so with 60 participants, they would be well under the audit requirement.

It is important to note that there is still the “80-120 Participant Rule” in effect. This allows plans with between 80 and 120 participants at the beginning of the plan year to file the Form 5500 in the same manner as they did in the prior year. So if a plan had 90 participants in the prior year and increased to 104 participants, they could opt to continue to file as a small plan and forgo the required audit for that year.

Aside from attempting to simplify the methodology for people, the DOL hopes this change will encourage more small businesses to establish 401(k) plans so that their employees have an easily-accessible retirement vehicle.

Even with this change, navigating your 401(k) plan and the necessary audit requirements can be challenging. emc is here to provide guidance and help along the way.