Changes in Form 5500 May Benefit Small Business Benefit Plans

Following the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and its successor, SECURE 2.0, several changes were made in the requirements for filing IRS Form 5500 or the simpler Form 5500-SF (Short Form Annual Return/Report of Small Employee Benefit Plan). One of the changes is an adjustment in the counting methodology of plan participants, and it may offer some relief to sponsors of smaller benefit plans.

Form 5500 reports information about an employee benefit plan’s size, operations, financial condition and compliance with tax and labor laws. Copies of Form 5500 and Form 5500-SF are shared with the U.S. Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC).

The Form must be filed annually by companies that sponsor certain types of employee benefit plans with 100 or more eligible participants, subject to the “80-120 rule.” The sponsor must also have the plan audited annually and file an independent qualified public accountant (IQPA) report with their Form 5500 returns. Plans with fewer than 100 eligible participants are typically allowed to file Form 5500-SF, a simplified short form version that does not require an independent plan audit.

The “80-120 participant rule” allows certain plans that would otherwise be considered large to continue to file as “small plans” and use the simpler Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. Under the 80-120 participant rule, if a sponsor filed as a small plan last year and the number of plan participants is fewer than 121 at the beginning of the next plan year, it may continue to follow the Form 5500-SF requirements for that year.

The key phrase here is “eligible participants,” as any employee who might enroll in the plan was previously counted, even if they did not actually participate. However, a recent change to the Form 5500 filing rules may provide some relief for smaller businesses whose plans have fewer than 100 participants.

Starting on January 1, 2023, only participants with a plan balance will count toward the plan’s head count. Previously, any eligible individual had to be included in the plan count, whether they participated or not. In some cases, this “any eligible person” rule pushed a smaller plans employee count over the 120-person threshold and required a plan sponsor to file the more complicated Form 5500. The new rule now counts only active participants who have a balance in the plan on the first day of the plan year toward the head count.

This is good news for many smaller businesses who have been on the cusp of exceeding the 120 “eligible participants” level, as they may continue to report using Form 5500-SF.

For additional details and assistance please contact Gray, Gray & Gray at (781) 407-0300.

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