A few months into 2023, employers and plan sponsors have been met with changes concerning audit requirements, electronic tax filing requirements, and regulations on using forfeitures. What does this mean for organizations in the near future?
Form 5500: Modification of Audit Requirements
The U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) revealed changes to the 2023 Form 5500, an annual statement reporting an organization’s employer-sponsored benefit plan to federal agencies. Effective January 1, 2023, the modification of the requirement may eliminate over 19,000 plan audits for the 2023 plan year. Depending on the plan’s size, organizations may also be required to include an audit report.
These modifications are the third and final changes that enforce a September 2021 regulatory proposal, which included modifications connected to provisions in the SECURE Act that affected annual reporting requirements.
The current audit requirement applies when the plan has 100 or more participants on the first day of the plan year. Under the revised rules, a participant is defined as an individual with an account balance in the plan. The rule now no longer counts employees eligible for the plan but no activity or contributions to their retirement account in the 100-participant threshold.
Prior to this change, plan audits were required in instances where there were less than 100 account balances, due to a population of eligible participants that elected not to contribute to the plan. The DOL evaluated the cost of compliance for these smaller plans and modified the rules to save on costs and encourage more employers to sponsor plans. The change will be a relief to many smaller plan sponsors in 2024.
The regulations have also modified Form 5500 to include new reporting requirements for Pooled Employer Plans (PEP), Multiple Employer Plans (MEP), and several additional Internal Revenue Code compliance questions to aid the IRS in monitoring plan compliance. These are the first substantive changes to Form 5500 in many years. The complete regulation changes can be viewed here.
Electronic-Filing: Requirements Modification
In addition to Form 5500 changes, the IRS issued final regulations for the electronic filing of specific tax and information return types. The regulations affect all organizations required to file with the IRS, including filers of employment tax returns and information returns, as well as Form 1099 series, Form W-2, and Affordable Care Act (ACA) Forms 1094 and 1095. The new IRS regulations state:
- The decrease of the 250-return threshold in prior regulations to require that any organization that files 10 or more returns or statements in a calendar year be filed electronically.
- Requires e-filing of certain returns and other documents not previously required to be e-filed.
- Filers must aggregate nearly all information return types covered by the regulations to determine whether a filer meets the 10-return threshold and is required to e-file their information returns.
- The elimination of the e-filing exception for organizations’ income tax returns reporting total assets under $10 million at the end of its taxable year.
- Requiring partnerships with more than 100 partners to e-file information returns.
- Partnerships must file at least 10 returns of any type during the calendar year to e-file its partnership return.
Since the enactment of the ACA filing requirement, many small organizations have continued to file Form 1095-C in paper format due to the cost of the software needed to complete the filing. The ACA filing requirement applies to organizations with 50 or more full-time equivalent employees, requiring electronic filing for most all ACA forms in 2024 under the new 10 or more filing threshold.
The modification may dramatically increase the electronic filing mandate for small businesses. Organizations should review completed 2023 paper files and evaluate whether it needs to e-file for 2024. If e-filing is required, it should implement new services to ensure it has an approach to filing electronically in 2024. The IRS can assess significant penalties for failure to file electronically.
Retirement Plan Forfeitures: Regulations
Lastly, the IRS proposed regulations for using forfeitures in retirement plans. The guidance provides that forfeitures in defined contribution plans must be used at the end of the plan year following the year the forfeiture occurs.
Defined contribution plans, such as 401(k) plans, that include a vesting schedule typically transfer unvested monies into a forfeiture holding account once distributions have occurred. Plan administrators will then periodically utilize the forfeitures to offset employer contributions and/or reduce administrative expenses. If forfeitures are not used timely, the amounts are required to be reallocated to qualified plan participants. It is unclear how long funds may remain in the forfeiture account before being reallocated to plan participants. The IRS had provided informal guidance that one year may be reasonable; however, no authority was available.
The new guidance will be a welcome change to plan sponsors, helping reduce administrative costs and burdens associated with using forfeitures in 401(k) plans. Although the regulations are offered to apply for plan years beginning on or after January 1, 2024, taxpayers may rely on them in the interim. Plan sponsors may depend on the rules effective immediately due to a transition rule included in the regulations. The change may require plan document amendments if current documents have more restrictive terms for using forfeitures.
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