U.S DOL Offers Some Good News for Smaller Businesses with 401(K) Plans

Daniel L. Morgan 

It’s not often that business owners get good news from the government, but small and even some medium-sized businesses with 401(k) plans got a helping hand from the U.S. Department of Labor (“DOL”) earlier this year when the DOL eased the rules for identifying which 401(k) plans are required to have audited financial statements.


The Employee Retirement Income Security Act of 1974 (“ERISA”), everyone’s favorite federal law, has a dual reporting structure for 401(k) plans depending on the number of participants in the plan. Plans with 100 or more participants at the beginning of the year—so-called large plans—are required to prepare audited financial statements and file them with the plan’s Form 5500, Annual Return/Report of Employee Benefit Plan. Plans with fewer than 100 participants escape the audit requirement and, in most instances, can file a Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan.

What’s Changed

Historically, the DOL’s regulations and the instructions to the Form 5500 established the criteria for determining the number of participants for purposes of whether a 401(k) is below the 100-participant threshold by counting not only individuals who had account balances but also individuals who were eligible to make contributions, whether or not they actually had made contributions. Under the new rule, for plan years beginning on or after January 1, 2023, an employer need only count people who have account balances. The DOL estimates that this change will reduce the number of plans that must prepare audited financial statements by 19,400. Employers that satisfy the new reporting threshold will not only save the cost of an annual audit, but also will be able to file the Form 5500-SF.

SECURE 2.0 Provides an Assist

Prior to Congress’ passage of Secure 2.0 in December, employers were permitted to cash out the 401(k) plan account of a former employee if the account did not exceed $5,000; accounts between $1,000 and $5,000 that are cashed out are required to be transferred to an individual retirement account (“IRA”) selected by the employer. After December 31, 2023, Secure 2.0 increases the cash-out limit from $5,000 to $7,000. This change, by increasing the group of former employees who can be cashed out, should help reduce the employer’s fiduciary obligation to keep track of former employees with small 401(k) balances. And, in keeping with the DOL’s change in the participant counting rule, employers whose 401(k) plans are near the 100-participant large plan limit will want to be sure to avail themselves of the cash-out dollar increase to aid in keeping the plan under the limit.

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