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
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 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
Schedule H expense reporting
Other changes affecting retirement plan filings
IRS compliance questions
- 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.
Form 5500 modernization is next up
With these final changes completed, the agencies expect to propose a broader Form 5500 improvement project. DOL’s most recent regulatory agenda indicates that this project will make investment and other information on the Form 5500 more data-mineable and may revise group health plan reporting requirements. The agencies also may reconsider the following aspects of the 2021 proposal that weren’t finalized:
- Standardized and enhanced asset schedules for retirement and welfare benefit plans filing Schedule H, Financial Information
- Qualified loan-offset reporting on Schedule H
- Trust information reporting
- Changes to reporting on multiple-employer welfare agreements (MEWAs) that file Form M-1
- Final Form 5500 reporting rule (Federal Register, Feb. 24, 2023)
- Final Form 5500 revisions (Federal Register, Feb. 24, 2023)
- Fact sheet (DOL, Feb. 23, 2023)
- Press release (DOL, Feb. 23, 2023)
Mercer Law & Policy resources
- Latest Form 5500 updates address DB reporting but defer other changes (June 1, 2022)
- Form 5500 updates address MEPs and more (Jan. 10, 2022)
- Form 5500 proposal reflects SECURE Act changes and more (Sept. 29, 2021)