Form 5500 trilogy concludes with latest set of changes 

March 13, 2023
Final changes to the instructions for Form 5500, Annual Return/Report of Employee Benefit Plan, for 2023 plan-year filings and supporting Department of Labor (DOL) regulations implement the remaining updates for the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (Div. O of Pub. L. No. 116–94). These changes include a standardized reporting schedule for multiple-employer plans (MEPs) and a new group filing alternative for single-employer defined contribution (DC) plans. More DC plans will be small plans exempt from annual audits under a new participant-counting rule that disregards nonparticipating employees. Other changes unrelated to the SECURE Act that more broadly affect retirement plans include detailed Schedule H expense reporting and IRS compliance questions. DOL also made several adjustments reflecting the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328).

Some earlier 5500 proposals finalized

In September 2021, DOL, IRS and the Pension Benefit Guaranty Corp. (PBGC) released a lengthy package of proposed revisions to Form 5500 and supporting regulations. The proposal included several changes implementing provisions of the SECURE Act. While DOL subsequently finalized portions of the proposal for 2021 and 2022 plan-year filings, a significant number of proposed changes remained outstanding.

The 2023 final changes address most — but not all — of the outstanding items, including the following:

  • A final Schedule MEP
  • Optional DC group (DCG) filing arrangements
  • Changes to the method of determining whether a DC plan needs an audit report from an independent qualified public accountant (IQPA)
  • Enhanced expense reporting on Schedule H, Financial Information
  • Compliance questions relating to retirement plan nondiscrimination testing and favorable opinion letters for preapproved plans

The agencies expect to reconsider remaining portions of the 2021 proposal as part of a forthcoming Form 5500 modernization project.

SECURE Act changes

The SECURE Act introduced a new type of MEP called a pooled employer plan (PEP) for unrelated employers that don’t qualify for preexisting MEP structures. DC MEPs — including PEPs — have had to report aggregate account balances for each participating employer beginning with the 2021 plan year. PEPs must also report information about the pooled plan provider. In addition to those changes, the SECURE Act directed DOL and IRS to implement a simplified group annual reporting option for single-employer individual account and DC plans sharing certain characteristics.

MEP reporting

The final revisions implement a new Schedule MEP for all types of retirement MEPs — including PEPs, association retirement plans and professional employer organization (PEO) plans. Schedule MEP reflects the content requirements that DOL finalized for 2021 and 2022 plan-year filings, with adjustments to reflect SECURE 2.0’s introduction of 403(b) MEPs. MEPs will continue to report required information on an attachment for the 2022 plan year.

New DC group filing arrangement

The SECURE Act directed DOL and IRS to permit certain groups of DC plans to file a consolidated annual report. The final rule implements this directive by creating an optional DCG filing arrangement starting in 2023 (delayed from 2022). The agencies believe this provision of the SECURE Act is “primarily aimed” at single-employer DC plans sponsored by unrelated small employers that have adopted a preapproved plan with the same provider, even though the act doesn’t restrict group filing eligibility to those plans.

Conditions for DCG eligibility. The SECURE Act made new group filings available to DC plans that have the same trustee, named fiduciary, plan administrator, plan year and investment options. The final rule includes some additional conditions, but responds to public comments by eliminating the more controversial elements of the proposal.

  • Same trust not required. Each plan must have a common trustee, either named in the trust or plan instrument or appointed by a named fiduciary of the participating plan. In a departure from the proposal, plans participating in a DCG needn’t (but could) have the same trust. The agencies didn’t extend the DCG filing alternative to plans without trustees, such as those funded through insurance products or custodial accounts. As a result, a DCG filing is not an option for 403(b) plans, which are typically offered in the nonprofit and educational sectors. However, the agencies have asked for comments on how to implement similar consolidated filing arrangements for 403(b) plans. (Oddly, the agencies didn’t ask for comments on similar consolidated reporting for qualified plans funded entirely through insurance products.)

  • Same named fiduciary and plan administrator. Consistent with the proposal, the employer or sponsor of a plan participating in a DCG filing can serve as a named fiduciary for its own plan, but other named fiduciaries must be common to all participating plans. Plans participating in a DCG filing must also have the same designated plan administrator — the plan sponsor can’t be the default plan administrator for this purpose.

  • Same investments or investment options. All plans participating in a DCG filing arrangement must offer the same investments or investment options. Although the proposal included additional restrictions on permissible investments, the final rule provides greater flexibility:

    • The final rule eliminates the proposed requirement for plans to be fully invested in assets that have a readily determinable fair market value and are held or issued by regulated financial institutions, such as banks, insurance companies and registered investment companies. However, DOL expects that as a practical matter, the DCG same-investment and audit requirements will effectively limit participating plans to these types of investments.

    • Plans holding employer securities generally can’t participate in a DCG filing. However, DOL clarified that this restriction doesn’t apply to publicly traded employer securities held indirectly through a diversified pooled investment fund, such as a collective investment trust, and offered as an investment option by all of the plans.

    • The agencies added flexibility for DCG plans to offer a single dedicated brokerage window that only permits investments in assets with a readily determinable fair market value held or issued by regulated financial institutions. The brokerage window must be available through a single designated provider that is a registered broker-dealer.

  • Audit requirements. With the elimination of the same trust requirement, DCGs won’t have to obtain a trust-level audit, contrary to the original proposal. Large plans — generally those with 100 or more participants — that participate in a DCG filing will still need to obtain an annual audit, including an IQPA report, as required for other large plans. Small plans currently exempt from the IQPA audit requirement will remain exempt. DOL explains that these audit requirements are consistent with SECURE 2.0’s direction that DCG filing arrangements can only require audits for participating plans that would have to obtain an audit if filing an individual Form 5500.

  • Excluded plans. MEPs and multiemployer plans can’t participate in a DCG filing arrangement.
Filing requirements. A DCG will file Form 5500 with applicable schedules and attachments reporting aggregate information for the group, along with a separate Schedule DCG for each participating plan and each large plan’s IQPA report (as applicable). Schedule DCG will provide information ordinarily reported on Form 5500 for an individual plan, such as identifying details, financial information, applicable plan characteristic codes, compliance questions and information relating to the accountant opinion (if applicable). Information for schedules other than Schedule DCG will be reported in the aggregate — for example, the $5,000 threshold for reporting a service provider on Schedule C is based on the provider’s total compensation from all plans participating in the DCG filing. DCGs can’t file Form 5500-SF, even if they have fewer than 100 participants in total.
  • Filing due date. DCG filings will have the same due dates that apply to individual Form 5500 filings. The final revisions allow a DCG to request an extension of the filing deadline by filing a single Form 5558 that lists all participating plans. (The proposal would have required a separate Form 5558 filing for each participating plan.)

  • Summary annual report (SAR) updates. DOL provided model SAR language for plans participating in a DCG. The model language informs participants that the plan participates in a consolidated Form 5500 filing arrangement, the SAR provides aggregate information on all participating plans, the consolidated filing includes a Schedule DCG with plan-specific information and participants have a right to request the Schedule DCG relating to their plan.

Fewer DC plans subject to annual audit

The final revisions change how to determine whether a DC plan is subject to the annual IQPA audit requirement for plans with 100 or more participants. Starting with the 2023 plan year, DC plans will determine large-plan status using the number of participants with account balances at the beginning of the plan year. Employees who are eligible but not participating don’t count toward the audit threshold. The existing rules — which remain in effect for 2021 and 2022 plan-year filings — count all eligible employees, even if they haven’t contributed and don’t have a balance in the plan. Though the SECURE Act doesn’t require this change, DOL believes the act’s expanded eligibility requirements for long-term part-time workers — which take effect in 2024 — would otherwise subject many small plans to the audit requirement. In response to comments critical of this change, DOL cautions that employers seeking to avoid the audit requirement by discouraging eligible employees from participating could face agency enforcement actions and participant lawsuits.

Schedule H expense reporting

Updates to Schedule H, Financial Information, increase the number of categories of administrative expenses from four to 11. The more detailed listing will break out salaries and allowances, along with fees for contract administration, recordkeeping, investment advisory and management, trust and custodial, audit, valuation/appraisal, actuarial, and legal services. This change applies to all funded retirement and welfare benefit plans that file Schedule H. Sponsors can use any reasonable method for expense classification.

Other changes affecting retirement plan filings

The agencies have also made a few other miscellaneous changes for retirement plan filings.

IRS compliance questions

Several changes will help IRS target audits toward plans likely to have compliance issues:
  • Nondiscrimination testing. Retirement plans — except for MEPs and PEPs — will have to answer two new nondiscrimination testing questions:

    • Whether the plan satisfied the coverage and nondiscrimination requirements of Internal Revenue Code (IRC) Sections 410(b) and 401(a)(4) using the permissive aggregation rules
    • Whether a 401(k) plan uses a design-based safe harbor, prior-year actual deferral percentage (ADP) testing or current-year ADP testing to satisfy the nondiscrimination rules of Sections 401(k) and 401(m) for employee deferrals and employer matching contributions

  • Preapproved plans. To help IRS identify plans that haven’t been timely updated for changes in law, an employer that adopted a preapproved plan — including a preapproved 403(b) plan — must indicate whether the plan received a favorable IRS opinion letter, and if so, give the letter’s date and serial number. (Employers that have made more than minor modifications to a preapproved plan are no longer preapproved plan adopters and won’t complete this question.)

Defined benefit changes

Schedule R. All defined benefit (DB) plans (except direct filing entities) with at least 1,000 participants at the beginning of the plan year will have to report year-end assets allocated among seven specified classes. The current form requires reporting on five asset classes as of the beginning of the year. The updated instructions also clarify how to report certain atypical assets like cash equivalents and infrastructure investments. PBGC also simplified reporting on the average duration of the fund’s investment-grade debt and interest-rate hedging assets. While not in the 2021 proposal, these changes were released in a routine PBGC proposed information collection in August 2022.

Schedule SB. The revised instructions clarify reporting for the new 50-year benefit projection required for PBGC-insured plans with 1,000 or more participants. The 2022 Form 5500 instructions suggest the projection must reflect the form of payment used in the actuarial valuation that determines the minimum funding requirement for the plan year. However, plans assumed to pay lump sums in accordance with IRC Section 417(e) must use a valuation technique called “annuity substitution,” which values the annuity underlying the lump sum, rather than the lump sum itself. The instructions for the 2023 Form 5500 clarify that the benefit projections may reflect the underlying annuity. (Although the 2022 instructions haven’t been updated, the instructions suggest — and PBGC has said informally — that plans may use the underlying annuity for 2022 as well.) PBGC also made minor revisions to the reporting of the target normal cost to ensure the correct result for plans with mandatory employee contributions.

About the author(s)
Matthew Calloway
Margaret Berger

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