Old Rule:

Before January 1, 2023, the participant count included both active employees eligible to participate and terminated vested employees with balances still in the plan. Using this calculation method, plans needed to include all employees currently employed and eligible for the plan regardless of whether they were participating in the plan.  Under the old rule, an audit was required for a plan with 100 or more of both active employees eligible to participate and terminated vested employees with account balances.  Even if a plan had less than 100 participant accounts with balances, an audit could still be required due to the eligible and not participating employees.

New Rule:

Effective January 1, 2023, plan sponsors will only need to consider participants (active and terminated) with account balances when calculating the number of participants at the beginning of the plan year. This means that those active employees eligible to participate who have never contributed to the plan and/or received employer contributions will not be counted. As a result, some plans might be able to file as a small plan. 

What’s Next?

Plan sponsors should be aware of these changes and review their plan counts closely with their third-party administrators under this new methodology for the 2023 plan year. Plans with less than 100 plan account balances as of January 1, 2023 (for calendar year end plans) will not need an audit even if they previously did under the old rules.

What does this mean for plans that are hovering around the 100 account balance mark during 2023? If your plan has 100 or more participant account balances on January 1, 2023 (calendar year end plans), an audit is still required for 2023 but there are some steps that can be taken to reduce plan participants for January 1, 2024 (next plan audit measurement date for calendar year end plans).  Plan sponsors should be reviewing terminated employees with participant account balances of $5,000 or less. The plan sponsor should review with their third-party administrator the existing plan provision that allows the plan to force out terminated participants with balances of $5,000 or less.  This plan provision could be utilized to reduce the participants with balances which could potentially remove the audit requirement in the future.