EBP Audit Alert: New Method for Counting Participants and Secure Act 2.0 Changes

Do you offer a defined contribution plan (401(k) or 403(b)) for employees at your nonprofit? If so, a significant change reduces the chances you’ll need an employee benefit plan audit (EBP audit).

What’s the news?

Under the previous guidance, your plan was generally required to undergo an audit if you had at least 100 plan participants as of the beginning of the plan year. (See exception to this under the “80/120” rule below.) This included all eligible plan participants regardless of whether they had an account balance in the plan.

The U.S. Department of Labor (DOL), however, has established a new method of counting those participants. Starting with plan years beginning on or after Jan. 1, 2023 (Form 5500 filed in 2024), only those participants with an account balance at the beginning of the plan year count toward the 100-participant threshold.

Let’s demonstrate with an example. Imagine a small nonprofit organization offers a 401k plan. The plan has 125 active (still employed) participants, 15 active participants with an account balance, and five terminated participants with a balance.

• Under the old guidance, an EBP audit would be required because it exceeded the 100-participant threshold. There would be 130 total participants consisting of the 125 active (still employed) and the five terminated.
• Under the new guidance, no EBP audit is required because only 20 participants (the 15 active and five terminated) have an account balance.

You’ll still include both active and terminated participants in your count. But those who are eligible but have never contributed to the plan and/or received employer contributions will not be counted.

A plan with over 100 participants might still qualify for the EBP audit waiver under the 80/120 rule. If the number of participants as of the beginning of the plan year is between 80 and 120 and a small plan annual report was filed for the previous year, the plan can elect to continue to file as a small plan. In this case, no EBP audit is required.

While your plan might not require an EBP audit, you can still voluntarily elect to have one performed. Rapidly growing plans that may only be exempt from the EBP audit requirement for one year may decide to have one done even if it is not required to maintain continuity and/or for peace of mind.

Why did the DOL change the counting method?

The DOL’s main intention behind the new participant counting method is to reduce expenses for small businesses and organizations. While establishing and maintaining a defined contribution plan helps attract quality talent, there are expenses involved. Taking an EBP audit off the table for many of these entities might encourage them to offer these plans.

Another factor considered was the upcoming requirement of making long-term, part-time (LTPT) employees eligible for 401(k) defined contribution plans. Established by the SECURE Act of 2019, this requirement allowed employees completing at least three consecutive years of service after Jan. 1, 2021, and working a minimum of 500 hours per year to participate in such plans. (In 2022, Secure 2.0  expanded the LTPT provisions to 403(b) plans and reduced the timeframe to two years for plan years beginning after Dec. 31, 2024.)

Although the LTPT requirement might increase the number of eligible participants, those participants might be less likely to contribute. Under the old counting method, you might have needed an EBP audit even though these enrolled participants weren’t contributing. The DOL believes the new counting method will relieve or eliminate this unintended result.

What do I do next?

First, check your numbers from the beginning of the plan year (Jan. 1, 2023, for calendar year plans). If your plan had 100 or more participant account balances on that date (see “80/120” rule above), an EBP audit is still required for this year. If not, you’re in the clear even if you would have needed one under the old counting method.

Next, take steps to reduce plan participants with balances before the beginning of the next plan year (Jan. 1, 2024, for most). Some plans have a provision that allows you to pay out terminated participants with balances under $5,000. (Starting in 2024, the plans have the option to increase the threshold to $7,000.) Review your plan to see if any participants fall under this category, and ask your third-party administrator (TPA) whether your plan has any such provision. If so, you could reduce participants with balances — potentially removing your EBP audit requirement for 2024.

Remember, your plan’s participant count at the beginning of the plan year is the only figure that matters. Even if you drop participants with balances on Jan. 2 to come in at under 100, an audit will be required if that number was 100 or higher the day before. If you’re close to the new threshold, contact your TPA immediately to see if you can reduce that number.

While this change is good news for many sponsors, there can be complications. A failed compliance test or the allocation of forfeitures could push a plan over the 100-participant-with-balances threshold. For example, if a plan fails the Actual Deferral Percentage or the Actual Contribution Percentage test, participants who closed out their accounts may need to be reinstated for reimbursement purposes.

What else is new regarding employee benefit plans?

In December of 2022, the Secure Act 2.0 was signed into law. It contains a plethora of new provisions that will impact EBPs in the future. A few of the more noteworthy ones include:

• Participants are automatically enrolled once they are eligible for new 401(k) and 403(b) plans for years beginning after Dec. 31, 2024. The initial deferral percentage must be between 3% and 10%, though a participant may elect to opt out. All 401(k) and 403(b) plans in effect on the date of enactment are grandfathered. Small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than three years), church plans and governmental plans are exempt from this provision.
• Beginning in 2024, employers can make matching contributions for employees’ qualified student loan repayments. For example, if a student repays $3,000 in student loans during a plan year, an employer may make a matching contribution of $3,000.
• Required minimum distributions (RMD) age increased to 73 in 2023 and will increase again in 2033. Starting in 2024, Roth accounts will be exempt from the RMD rules while the participant is alive.
• Starting in 2025, super catch-up contributions are available for individuals aged 60 to 63. This increases the catch-up contribution to the greater of $10,000 or 150% of the regular catch-up amount for 2024. In addition, all such contributions beginning in 2024 must be Roth for those with compensation of $145,000 or more. This provision is effective for years beginning after Dec. 31, 2023.
• An optional provision for distributions made after Dec. 31, 2023, exempts participants from the 10% tax on early withdrawals for early distributions. These distributions must be made for emergency purposes (i.e., unforeseen or immediate family needs). The maximum amount is $1,000 and can be repaid to the plan over three years.

What if I do need an EBP audit?

The important thing to remember is that having an EBP audit is about more than fulfilling a compliance requirement. You’re also demonstrating to your valued employees that you’re a responsible steward of their retirement funds. Offering a retirement plan is already an important commitment you make to them. Providing assurance that their investment vehicle for retirement is sound adds even more to that promise.

Get in touch with a seasoned nonprofit CPA that has experience with EBP audits. In addition to performing the audit itself, they can help you prepare ahead of time to make the process as smooth as possible.

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