Form 5500 filing requirements and instructions updated for 2023 plan years

The Internal Revenue Service (IRS), Department of Labor (DOL), and Pension Benefit Guaranty Corporation (PBGC) (collectively, the Agencies) have released final rules that implement changes to the Form 5500, Annual Return/Report of Employee Benefit Plan. The two rulemaking documents (Notices) reflect changes to Form 5500 filing requirements and the information reported on the form made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and other provisions in SECURE Act 2.0 of 2022. The new rules are effective for plan years beginning on or after Jan. 1, 2023. The final Notices provide a description of the upcoming changes and mock-ups of the affected schedules and corresponding instructions. Similar to prior years, “for information only” copies of the forms and instructions will be available later in 2023.

The changes fall into seven major categories, including: 

• Modifications to the participant count methodology for determining eligibility for simplified reporting alternatives available to small plans.
• A new consolidated reporting option for certain groups of defined contribution plans, now called defined contribution groups (DCGs). 
• Streamlined reporting for multiple employer pension plans (MEPs). 
• New compliance questions added by the IRS to improve tax oversight and compliance. 
• Updates intended to improve defined benefit plan reporting.
• Breakout of administrative expenses paid by the plan.
• Other technical and conforming changes as part of the annual update to the forms and instructions.

The final Notices provide a description of the upcoming changes and mock-ups of the affected schedules and corresponding instructions.

Here’s a closer look at what these changes mean for plan sponsors and what filers need to be mindful of as they prepare to file their 2023 Form 5500. 

Modifications to participant count methodology could affect who files Form 5500 as a “large plan”

Under current reporting rules, employees who are eligible to defer to a defined contribution plan but elect not to do so are counted as active “participants” for purposes of Form 5500 reporting. Plans that have a large number of employees who are eligible and choose not to defer may have an audit requirement if they meet the audit threshold. Generally, plans with less than 100 participants as of the beginning of the plan year are exempt from the audit requirement. Many plans have become subject to the audit requirement based on participant counts that include eligible employees, creating additional costs for plan sponsors. 

Starting with plan years beginning in 2023, the audit requirement will be based on the number of participants with an account balance in the plan. As a result of this change, many plans that were previously treated as large plans may meet the small plan audit waiver, thereby no longer needing a benefit plan audit. Comments raised concerns about control, compliance, and operational errors that may not be caught and corrected if smaller plans are now exempt from the audit requirement. There was also concern that some employers on the verge of crossing the threshold of becoming a large plan might fail to encourage or in some cases even actively discourage participation among employees to participate in order to meet the small plan audit waiver. The DOL responded that it was trying to strike a balance between providing secure retirement savings for employees and minimizing the cost and administrative burden on smaller employers who try to establish plans.

Starting with plan years beginning in 2023, the audit requirement will be based on the number of participants with an account balance in the plan.

New Schedule DCG for defined contribution groups

Prior to the new reporting rules that go into effect for 2023 plan years, unrelated employers that have certain common characteristics were required to file separate Forms 5500. The goal of the new reporting option is to make filing less burdensome for certain unrelated businesses that adopt a plan that has received approval from the IRS (and meet certain other requirements) by providing an option to file only one Form 5500 at the overall plan level. A new Schedule DCG would be required for these types of plans to report certain individual employer identifying information to the DOL and IRS. 

It’s unclear how many plans or employers will benefit from this new, combined reporting option. Likely, the third-party administrator who maintains the plan would make the initial proposal for a plan sponsor to file as part of the DCG, but each individual employer would likely have the ultimate decision to opt in or out of the combined filing. Under the final rules, those employers who opt out would simply be left off the combined return and they would file their own individual Form 5500. 

This new reporting option comes with potential challenges:

• For those covered under the DCG, each individual plan that doesn’t meet the DOL’s small plan audit waiver would still require an audit each year by an independent qualified public accountant (IQPA). The Form 5500 for the DCG at the combined level couldn’t be filed until all the individual plan audits have been finalized. The coordination of these various audits could become unwieldy if each plan has a separate IQPA. 
• Information reported on the various schedules, other than the new Schedule DCG, would be reported on an aggregate basis. Audit procedures require the IQPA to review a substantially complete return before they can issue their audited financial statements. The IQPA may only be auditing one of the plans that is part of the larger DCG filing.  It’s unclear what parts of the DCG filing an IQPA auditing only the participating plans would be required to review.

Given these challenges, it’s likely this new group reporting option will be utilized by small employers who don’t have an audit requirement.

New Schedule MEP streamlines multiemployer plan reporting

Form 5500 filing requirements for plan years beginning in 2023 will include a new Schedule MEP that will consolidate and standardize information that was previously reported as an attachment to the Form 5500. The new schedule will report the same information that was previously required to be reported in an attachment to the Form 5500. 

New IRS compliance questions

The changes include new compliance questions that will be added to various existing schedules to gather additional information focused on methods used for passing nondiscrimination testing and timeliness of plan amendments and/or restatements. The questions are intended to address a need for gathering specific nondiscrimination testing information that was previously obtained under the IRS determination letter process and has since, generally, been eliminated for ongoing plans. The IRS has stated that this data will be used for a variety of purposes, which include: 

• Performing a preexamination analysis.
• Assisting the IRS to prepare initial audit information and document requests.
• Helping identify whether an employer adopted a preapproved plan. 
• Determining whether the plan is up to date for all required law changes. 

At this time, it’s unclear how the questions specific to nondiscrimination testing should be answered if a plan sponsor hasn’t completed their nondiscrimination testing by the due date of the Form 5500. The Agencies’ response to comments stated nondiscrimination testing should be completed by the due date of the Form 5500, meaning failure to answer the questions on the return could raise red flags. 

Updates to defined benefit plan reporting

Certain defined benefit plan reporting will be updated for large defined benefit plans (those with 1,000 or more participants at the beginning of the plan year), enabling the PBGC to better model important characteristics of plan portfolios.

Breakout of administrative expenses paid by the plan 

Continuing its focus on fees paid out of plan assets, the DOL is expanding the administrative expense breakdown on the Schedule H. New categories will include specific line items for: 

• Salaries and allowances
• Contract administrator fees
• Recordkeeping fees
• IQPA audit fees
• Investment advisory and management fees
• Bank or trust company trustee or custodian fees
• Actuarial fees
• Legal fees
• Valuation or appraisal fees
• Other trustee fees or expenses
• Other expenses

While some commenters had concerns about the extra effort necessary to report this new breakdown, the Agencies responded that these amounts are likely already tracked and reported in the aggregate on the 5500 as part of the Schedule C and H, and the new breakdown shouldn’t create a significant additional burden on plan sponsors or Form 5500 preparers. The new lines provide additional transparency and allow the DOL to cross-test amounts reported on the Schedule H and other schedules. 

What’s next for Form 5500 filing requirements?

The 2023 Form 5500 changes can be viewed in their entirety here. The proposed changes, issued in September 2021, included additional changes that are being deferred to a later project, mainly revisions to the content requirements of the Schedule of Assets attachment and certain reporting requirements for multiple employer welfare arrangements. 

If you have any questions about how these new rules might affect your benefit plans, please contact your Plante Moran advisor. You can read more about the general Form 5500 filing requirement and who counts as a participant in our article here.