Employee Benefit Plans Alert – Winter 2023

By Louis F. LiBrandi, Partner; Joel Sowell, Tax Manager; and Keely Portillo, Tax Professional

This winter 2023 edition of Employee Benefit Alerts focuses on the following topics:

  • Does Your Retirement Plan Still Need an Audit for the 2023 Plan Year?
  • Tax-Exempt & Government Entities (TE/GE) – Compliance Program and Priorities
  • Required Amendment List for Qualified Plans and 403(b) Plans
  • Form 5558 – Electronic Filing Starting January 1, 2024
  • SECURE 2.0 Act Provisions for New Starter Plans

Does Your Retirement Plan Still Need an Audit for the 2023 Plan Year?

Retirement plan sponsors should be aware of recent developments that could reduce administrative burdens and plan expenses. In particular, a couple of newly passed rules become effective in January 2024 and they may help some large plans simplify their reporting requirements and avoid the annual audit that must be performed by an independent qualified public accountant.

Plans with 100 or more total participants at the beginning of a plan year (i.e., the amount indicated on Line 5 on Form 5500 up through the 2022 plan year) are considered to be large plans and must file Form 5500 (with accompanying schedules) and arrange for an audit of the plan’s financial statements.

In February 2023, the U.S. Department of Labor (DOL) revised the rules for determining whether a plan is classified as a small plan or large plan for reporting purposes. Previously, the total number of participants included anyone who is a participant in the plan (including active employees, retirees and COBRA participants), as well as employees who were eligible to participate in the plan. Starting with plan years beginning on or after January 1, 2023, the DOL’s new methodology requires plan sponsors of defined contribution plans [e.g., 401(k) and 403(b) plans] to consider only those participants who have an account balance in a plan. It is expected that this change will result in many plans going below 100 total participants, with the DOL estimating that approximately 19,000 plans will be affected.

The SECURE 2.0 Act of 2022 expanded coverage and increased retirement savings and also included a rule that could decrease participant counts. Section 304 of the SECURE 2.0 Act increased the dollar amount whereby plan sponsors can automatically cash out a former employee’s vested account from $5,000 to $7,000. Adoption of this limit is optional and requires a plan amendment, but it does provide plan sponsors with a way to reduce the number of inactive participants with low balances from a plan. Section 304 will be effective for distributions made after December 31, 2023.

The new rules could result in a plan falling below 100 total participants and eliminating (at least temporarily) the need for an audit of the plan’s financial statements and the requirement to file Form 5500. In the absence of these requirements, it is likely that a plan must instead file the simplified Form 5500-SF, and the plan is still subject to nondiscrimination and the many other compliance requirements.

Tax-Exempt & Government Entities (TE/GE) – Compliance Program and Priorities

The TE/GE fiscal year 2024 Program Letter was recently issued and lists several areas emphasized by the IRS to promote lax law compliance by tax-exempt and government entities. The goal of the IRS Program is to identify, prioritize and allocate its resources to align with the objectives of the IRS Strategic Operating Plan.

The following are the areas the IRS has identified to meet its compliance program, its priorities and the plans it anticipates examining in fiscal year 2024:

  1. Better taxpayer experience: The agency will focus on identifying and better serving small and underserved taxpayers (e.g., taxpayers with limited English proficiency).
  2. Faster issue resolution: This includes streamlining notices and improving two-way electronic communication between the IRS and taxpayers regarding notices.
  3. Smarter enforcement: The agency will focus on expanded enforcement of complex tax filings and high-dollar noncompliance using advanced modeling techniques.
  4. Advanced technology and analytics: A priority is the completion of a digital referral form (Form 13909) that provides an avenue for the public to submit complaints against tax-exempt organizations.
  5. Empowered employees: The IRS is working to develop a highly skilled workforce through recruiting and training that is diverse and technologically oriented.

These programs will be utilized as the IRS has identified the following types of plans to examine:

  • Worker classification issues including the incorrect exclusion from employer retirement plans,
  • Small exempt organizations. To review plan loan administration, prohibited transactions and distributions and tax-related matters,
  • One (1) participant 401(k) plans. Determine if there are violations with the plan documentation and operational failures, and
  • Required minimum distributions from large defined benefit plans. Ensure the timing and amount is correct.

Required Amendment List for Qualified and 403(b) Plans

The IRS publishes an annual list (referred to as the Required Amendments List) of tax law changes for qualified retirement and 403(b) plans. The list was released in 2021 and requires adoption of the amendment by the end of the second calendar year after the list is published. The 2021 list published in Notice 2021-64 provides a deadline of December 31, 2023. The amendments only affect individually designed plans.

Good news – there is only one amendment requiring adoption and it affects multiemployer plans that received financial assistance in 2021 under the American Rescue Plan Act of 2021.

Pre-approved plans: Formerly referred to as prototype plans, these types of plans are not subject to the required amendment discussion. Typically, these types of plans require a restatement every 6 (six) years and sometimes an interim amendment is required. The plan document preparer usually provides an employer with the required amendment, or the amendment is unilaterally adopted and applied to all similar plans of the pre-approved plan document preparer.

Major Law Changes: SECURE Acts 1.0 and 2.0, the CARES Act and the Bipartisan American Miners Act of 2019 all contained changes that will require amendments be adopted by the end of the 2025 plan year.

Discretionary Amendments: These are optional plan design changes and must be adopted by the employer by the end of the plan year in which they became effective. The last day to adopt any 2023 calendar plan year discretionary amendments would be December 31, 2023.

Form 5558 – Electronic Filing Starting January 1, 2024

Plan sponsors file Form 5558 with the IRS to request an extension of time to file certain employee benefit plan returns. Starting January 1, 2024, Form 5558 will only be used to request filing extensions for the following Forms:

  • Form 5500 Series (Form 5500, Form 5500-SF and Form 5500-EZ)
  • Form 8955-SSA (Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits)

As of January 1, 2024, the Form will no longer be used to request an extension of time to file for Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans).

Additionally, Plan sponsors will have the option to electronically file Form 5558 through the Department of Labor (DOL) EFAST2 System. No signatures are required to file the extension. This option should increase efficiency and reduce the chance of mail being lost.

SECURE 2.0 – Provisions for New Starter Plans

The SECURE 2.0 Act was passed in December 2022 with several provisions designed to strengthen the U.S. retirement system. In particular, the provisions of Section 121 of the Act are designed both to encourage employers to offer access to retirement plans and to encourage individuals to improve their long-term financial security by participating in a retirement savings plan.

Section 121 allows employers that don’t currently operate a retirement plan to establish a “starter” 401(k) plan or a safe harbor deferral-only 403(b) plan. These new plans simplify requirements and remove some of the obstacles that can preclude smaller employers from offering retirement benefits to their employees. Employer contributions will not be allowed under Section 121 plans – a provision that may appeal to smaller employers with limited resources. Also, Section 121 plans can reduce potential administrative burdens by automatically satisfying nondiscrimination requirements and top-heavy testing.

To encourage employee participation, all plans established under Section 121 will feature automatic enrollment for all employees at a deferral rate of 3 to 15 percent of compensation. Employee deferrals will be limited to $6,000 for the 2024 plan year, with an annual adjustment for inflation. $1,000 catch-up contributions will be available for those employees who are at least 50 years old.

Starter 401(k) plans and safe harbor deferral-only 403(b) plans under SECURE Act 2.0 Section 121 can be established as described above for plan years beginning after December 31, 2023.

Contact Us

The Employee Benefit Services Group at PKF O’Connor Davies is available to assist plan sponsors in meeting the various compliance requirements applicable to their plans. We also provide a full spectrum of compliance services for qualified retirement plans, nonqualified deferred compensation plans and welfare plans. For more information, please contact your client services partner or any of the following: 

Timothy J. Desmond, CPA
Director of Employee Benefit Services | 551.249.1728

Louis F. LiBrandi, EA, CEBS, ChFC, TGPC
Employee Benefit Services Group | 646.449.6327

Joel Sowell, CPA
Employee Benefit Services Group | 212.286.2600