There are new law changes by the United States Department of Labor (DOL), IRS, Pension Benefit Guaranty Corporation(PBGC) and Secure Act 2.0 as regards to employee benefit plans.
Employee benefit plans generally are required to file annual returns/reports about, among other things, the financial condition and operations of the plan. The requirement to file is accomplished by filing a Form 5500 Annual Return/Report of Employee Benefit Plan or Form 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan, together with required schedules and attachments.
The DOL, IRS, and PBGC use the Form 5500 Annual Return/Reports for enforcement, compliance, and as research tools.
Some of the significant changes to the laws governing employee benefit plans and Form 5500 are described below. This list is not exhaustive, and if you would like to read further on changes involving employee benefit plans, please refer to the complete Secure 2.0 Act of 2022, Title I – Expanding Coverage and Increasing Retirement Savings and to new revised Form 5500 instructions.
Changes in Participant-Count Methodology for Small Plan Simplified Reporting Options
The threshold for requiring an audit to be attached to the Large Plan form 5500 have changed. The DOL, PBGC and IRS, revised the counting methodology for determining the 100-participant threshold for certain small plan simplified reporting alternatives, including the conditional waiver of the IQPA annual audit. The counting methodology for defined contribution retirement plans will be based on the number of participants with account balances, rather than the current method that counts individuals who are eligible to participate even if they have not elected to participate and do not have an account in the plan. This change is intended to reduce expenses for small plans and encourage more small employers to offer workplace retirement savings plans to their employees. For example, under the prior law, if a Plan had 100 eligible plan participants at the beginning of the Plan year, but only 90 participants participated in and had accounts in the Plan, an audit was required. With the new law, if the Plan has 100 Plan eligible plan participants, but only 90 had Plan accounts, then an audit is not required.
This provision is effective for plan years beginning January 1, 2023.
Automatic Enrollment Provisions
One of the main reasons Americans reach retirement age with little or no savings is that too few workers are offered an opportunity to save for retirement through their employers. Many who are offered a retirement plan at work, do not participate. Automatic enrollment provisions in 401(k) Plans significantly increases participation.
The Secure 2.0 Act, section 101, requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (the employees may opt out). The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent.
One exception, is that current 401(k) and 403(b) plans are grandfathered and are not required to participate in automatic enrollment or escalation.
Section 101 is effective for plan years beginning after December 31, 2024.
Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions.
Section 110 is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans. Section 110 allows such employees to receive those matching contributions by reason of repaying their student loans. For purposes of the nondiscrimination test applicable to elective contributions, Section 110 permits a plan to test separately the employees who receive matching contributions on student loan payments.
This provision is effective for contributions made for plan years beginning after December 31, 2023.
Improving Coverage for Part-time Workers
Section 125 of the Secure 2.0 Act requires employers to allow long-term, part-time workers to participate in the employers’ 401(k) plans. The Section 125 provides that employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either 1 year of service, or 2 consecutive years of service of at least 500 hours of service per year. The old rule was 3 consecutive years of service.
This provision is effective for plan years beginning after December 31, 2024.
Section 128, Enhancement of 403(b) plans
Under current law, 403(b) plan investments are limited to annuity contracts and publicly traded mutual funds. This limitation cuts off 403(b) plan participants from access to collective investment trusts. Section 128 would permit 403(b) custodial accounts to participate in group trusts with other tax-preferred savings plans.
This provision is effective after date of enactment of the Act.
Recovery of Retirement Plan Overpayments
Sometimes retirees mistakenly receive more money than they are owed under their retirement plans. These mistakes cause problems when they occur over time, and plan fiduciaries later seek to recover the overpayments from unsuspecting retirees which can create hardship for a retiree living on a fixed income. Section 301 allows retirement plan fiduciaries the latitude to decide not to recoup overpayments that were mistakenly made to retirees.
This provision is effective on the date of enactment of the Act.
Updating Dollar Limit for Mandatory Distributions
Under previous law, employers may transfer former employees’ retirement accounts from a workplace retirement plan into an IRA if their balances are between $1,000 and $5,000. Section 307 increases the limit from $5,000 to $7,000. This can also assist in lowering the number of participants with Plan balances at the beginning of the Plan year.
This provision is effective for distributions made after December 31, 2023.
Expansion of Employee Plans Compliance Resolution System
Section 305 expands the Employee Plans Compliance Resolution System (“EPCRS”) to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make required minimum distributions from the otherwise applicable excise tax.
This provision is effective on the date of enactment of the Act.
If you have questions or need help navigating these changes, don’t hesitate to contact us. Our team at DMJPS CPAs + Advisors is here to provide the guidance and support you need.
Bill Jones, CPA, CPCU
As a member of DMJPS’ professional team, Bill specializes in DMJPS’ Employment Benefit Plan Services including the administration and government reporting for a variety of plans, as well as performing ERISA audits of the plan’s financial statements. In addition, Bill also focuses on nonprofit organizations and 990 preparation. He also has experience with individual and corporate tax.