There has been a lot of buzz surrounding retirement savings and employee benefit plans recently, even more so after new legislation and sweeping changes to Form 5500 were announced earlier this year. With a swath of new rules set to go into effect for the 2023 plan filing year, many plan sponsors are beginning to wonder how this will affect them heading into the new year.
Here is a brief roundup of the new legislation and what plan sponsors can expect to see in 2024.
SECURE ACT 2.0
To better help Americans plan and save for retirement, Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE ACT) in 2019. Introducing dozens of new provisions, SECURE 2.0 intends to build upon that mission and further improve retirement outcomes and financial security for individuals across the country.
Notably, SECURE 2.0 contains a wide range of initiatives to strengthen the country’s retirement system for retirees and address the steady decline in younger worker’s retirement savings. For retirees, this includes increasing the age to begin taking required minimum distributions (RMDs) and raising catch-up contribution limits. For younger Americans, it contains provisions to ease the transferring of retirement savings accounts to new employers, avenues for increasing emergency savings within retirement accounts, and helping individuals pay off student debt without sacrificing their retirement savings.
While the complete list of provisions and their details exceed the scope of this article, here are a few of the most pertinent updates the SECURE ACT 2.0 will bring forth in 2024 and beyond:
· RMD age has been increased to 73 for 2023 and will further increase to 75 in 2033
· The penalty associated with failure to take an RMD will decrease to 25% of the RMD amount (down from 50%). The penalty may be further reduced to 10% if a corrected tax return is filed in a timely manner
· Individuals contributing to employer-sponsored ROTH accounts will no longer be required to make RMDs as of 2024
· Starting in 2025, businesses adopting new 401(k) and 403(b) plans must automatically enroll eligible employees with a default contribution rate of at least 3%
· Beginning 2025, catch-up contributions for 401(k), 403(b), governmental plans, and IRA accounts will increase to $10,000 annually for those aged 60 to 63 (up from $7,500 in 2023)
Changes in Form 5500 Requirements
It’s been almost a year since the Department of Labor (DOL), IRS, and Pension Benefit Guaranty Corporation (PBGC) jointly announced key revisions to Form 5500. Now that the final revisions have been released, it’s time to start preparing for the new rules going into effect for the 2023 plan year.
While the new rules target several notable categories, below is a brief overview of the most critical changes affecting Form 5500 going into the 2024 filing year.
Participant Count Methodology
Plan size has historically played a leading role in determining what plans are subject to an employee benefit plan audit. Large plans (those with more than 100 participants) are generally required to undergo and attach a copy of an audit report performed by an independent certified public accountant (IQPA) along with their Form 5500. Current participant counting rules dictate that “large” plans are those with 100 or more employees eligible to participate in the plan as of the beginning of the plan year, regardless of whether those employees elect to participate, have an account, or even make contributions.
While the 100-participant threshold remains intact, the method for counting “participants” will adjust for the 2023 plan year. For plan years beginning on or after January 1, 2023, the participant count will be based on the number of participants with account balances at the beginning of the year rather than eligibility alone. For many, this is a welcomed adjustment that will substantially reduce the financial burden for small plans and ultimately increase the number of employers willing to offer retirement savings plans.
Breakout of Administrative Expenses on Schedule H
To boost fee and expense transparency, Schedule H on Form 5500 has been updated to include more specific breakout categories under “Administrative Expenses” in the Income and Expenses section of the balance sheet. Plan sponsors will now notice more specific classifications, including audit fees, bank or trust company fees, actuarial fees, legal fees, valuation fees, salaries, trustee fees and expenses.
In addition, it’s worth noting that the data reported in these sections will now be publicly available for both the DOL and outside parties.
IRS Compliance Questions
With the goal of enhancing tax oversight and compliance, three new compliance questions have been added to Schedule R and Schedule DCG, including:
1. Nondiscrimination testing: Did the plan sponsor aggregate plans in testing, and has the plan satisfied the nondiscrimination and coverage tests of IRS Code sections 401(a)(4) and 410(b)?
2. ADP testing: Did the plan sponsor use the design-based safe harbor rules or the “prior year” or “current year” ADP tests?
3. Pre-approved plan letters: Did the plan sponsor adopt a pre-approved plan that received a favorable IRS Opinion Letter, and if so, the date and serial number of the IRS Opinion Letter?
Going forward
With a slew of changes coming down the pike for 2024, it’s helpful for plan sponsors to understand how these new rules will affect their plan audits and compliance going forward. While some changes may be simple to implement, others may require a bit more preparation and planning. If you have any questions or want to learn more about how these changes will impact your business, our employee benefit plan team is here to help. Please contact us anytime.
Ben Lord is a Director at ARB specializing in audit and consulting services for employee benefit plans. Ben manages employee benefit plan audits in an efficient, cost-effective way by customizing services to meet a plan’s specific needs. He also specializes in consulting and financial accounting services for construction, real estate development, manufacturing, and professional services firms.
