2023 Plan Year Filing Reminders for Employee Benefit Plans
As a plan sponsor, staying informed about the latest regulations and industry trends is crucial to the success of your employee benefit plan as we navigate through employee benefit plan filing season. Adhering to regulatory requirements and ensuring compliance to avoid potential penalties are priorities for plan sponsors with employee benefit plan audits. Here are key insights and reminders to help you navigate the complexities of employee benefit plan compliance for the 2023 filing year.
Investments
As investments in 401k plans typically include mutual funds and are more recently moving towards being comprised of common investment funds, the accurate reporting of investments is crucial. However, several common reporting oversights can occur, specifically with cash and stable funds. Addressing these oversights requires understanding valuation methods and determining which investments should be valued at net asset value. Following are the common reporting oversights to be aware of:
Cash
- Non-interest-bearing cash should NOT be treated and disclosed as an investment in the financial statements or on Form 5500 Schedule 4i, Schedule of Assets Held (at End of Year).
- Interest-bearing cash and money market funds ARE considered investments.
Stable-Value Funds
- Stable value funds should be presented at fair value on the statement of net assets. There is NO adjustment to the contract value. They are generally valued at Net Asset Value (NAV) practical expedient or Level 2 depending on the circumstances of the Fund. The Form 5500 should present these investments at fair value.
Investments that should be valued at NAV
- Common/Collective Trusts (CCT) (unless there are other circumstances for level 2)
- Pooled Separate Accounts (PSA)
- Limited Partnerships
- Hedge Funds
- Fund of Funds
- Real Estate Investment Funds
It is important to ensure that these investments are covered under the certification (note that many alternative funds are not covered under the certification). In addition, any unfunded commitments and/or redemption restrictions need to be disclosed or indicate there are none for Investment categorized at NAV.
SECURE 2.0 Updates
SECURE 2.0 provides for several new optional distribution types, which are exempt from the 10% early withdrawal penalty. These include emergency expense distribution, disaster-related distribution, domestic abuse-related distribution, terminal illness-related distribution, and long-term care premium-related distribution.
Emergency expense distribution
- Plan sponsors may permit one in-service distribution a year of up to $1,000 for “unforeseeable or immediate financial needs related to necessary personal or family emergency expenses”.
- Participants may self-certify to meet the “needs” qualification. This is an OPTIONAL feature for Defined Contribution plans beginning in 2024.
- Participants may be limited from taking additional emergency distributions in subsequent years unless the distribution is repaid.
- Participants are permitted to repay back to the Plan within 3 years.
Disaster-related distribution
- There are special rules for the use of retirement funds in connection with federally declared disasters. Participants can request up to $22,000.
- Participant’s principal residence must be in the designated disaster zone; must experience an economic loss.
- Participants may spread income recognition over a 3-year period for Federal income tax purposes.
- Available for disasters occurring back to 2021.
Domestic abuse-related distribution
- Allows for penalty-free withdrawals from retirement plans for individuals in the case of domestic abuse.
- Plans may permit repayable, in-service access to up to the lesser of $10,000 or 50% of the participant’s account balance from a defined contribution plan for a participant who is a victim of domestic abuse.
- Participants are permitted to repay the distribution within 3 years.
- Available for distributions made after December 31, 2023
Terminal illness-related distribution
- Allows for penalty-free withdrawals from retirement plans for individuals diagnosed with terminal illness.
- Available for distributions made after January 1, 2023
- Additional guidance provided in Notice 2024-2, technical corrections draft bill.
Long-term care premium-related distribution
- Permits defined contribution plans to allow penalty free distributions of up to $2,500 used to pay premiums for qualifying long-term care insurance coverage.
- Distributions are exempt from 10% additional tax.
- Effective starting December 29, 2025.
- Extensive rules on what qualifies as eligible long-term care insurance.
- The participant must file a premium statement with the Plan, and the insurer must file with the Treasury. The Treasury must maintain a website of certified long-term care insurance providers.
Other Notable SECURE 2.0 Provisions for 2025
- Automatic enrollment – Beginning in 2025, Employers who start a new 401k or 403b plan will be required to auto-enroll employees at a minimum of 3% but not more than 10%. Some exceptions apply.
- Higher catch-up contributions will apply to participants aged 60 to 63
Defined Benefit Plans
Trends and Updates
- Current trends show terminations of defined benefit plans are on the rise due to rising interest rates, stock market volatility and other economic risks.
- Many plan sponsors are utilizing derisking strategies to stabilize costs and future benefits. Derisking strategies include, but are not limited to, freezing the defined benefit plan, changing the provisions of the plan document, settlements for retirees, and annuity buyouts.
- Newest mortality data available is from 2020, which was severely affected by the COVID-19 pandemic. The Retirement Plans Experience Committee (RPEC) of the Society of Actuaries (SOA) does not believe it would be appropriate to incorporate this data into the graduation and projection models used to forecast future mortality. Therefore, the RPEC has elected to not release a new mortality improvement scale for 2023. As a result, it is imperative for auditors to document the appropriateness of the mortality table used in the valuation of a plan’s benefit obligation.
Mergers and Terminations
Mergers
When a plan merges into another existing plan, it is important to identify the effective date of the merger. The merger date is the legal transfer date, which may differ from the physical transfer date and will drive the reporting for both financial reporting and Form 5500 reporting. Some planning considerations for plan sponsors include:
- Understanding the roles of service providers (payroll, trustees, custodians, recordkeepers, etc.) and having complimentary user entity controls in place where appropriate with respect to the service organization’s controls.
- Ensuring due diligence to the participants has been performed. Proper communication to participants explaining the merger, their options as a participant, and identifying any blackout periods that may occur.
- Additional audit procedures are required when a plan merger occurs.
Termination
A plan is considered terminated when those charged with governance over the plan make the decision to terminate the plan and the termination is deemed imminent. Some planning considerations include:
- The official termination date is a key driver for financial reporting and Form 5500 reporting. The termination date for defined contribution plans can occur at any time. For defined benefit plans, a termination involves communication with the Pension Benefits Guaranty Corporation and the Internal Revenue Service (IRS). The funded status of the plan will be a consideration for approval for termination.
- The general process for terminating a plan includes, but is not limited to, an amendment to the plan document, notifications to the participants, potentially applying for a determination letter with the IRS, and a plan for the distribution of the plan assets.
- When termination of a plan is deemed to be imminent, the liquidation basis of accounting must be used in the financial reporting. Generally, freezing a plan or dissolution of a plan due to a plan merger does not trigger the liquidation basis of accounting in the financial reporting.
- When a defined benefit plan is in the process of terminating, defined benefit plans should reflect assumptions in the actuarial report that are a result of the entity’s decision to terminate the plan.
Form 5500
Form 5500 continues to be a hot topic in the industry, with significant reporting changes released by the IRS, DOL, and PBGC for plan year 2023. For existing plans, the audit requirement is determined by the number of participants with account balances at the beginning of the year as of January 1, 2023. For new plans started during 2023, the audit requirement is determined by the number of participants with account balances at the end of the year. An important key takeaway from the recent AICPA Employee Benefit Plan conference is that the US Department of Labor’s guidance recommends filing an incomplete return on time rather than a complete return late. A “deficient filer” is preferable to a “delinquent filer.”
Other Matters
- 403(b) Plans – There are now programs for individually designed programs for 403(b) Plans that opened June 1, 2023. Plan Sponsors may submit for a determination letter based on the last number in the Plan EIN between 2023 (1,2,3), 2024 (4,5,6,7) and 2025 (8,9,0).
- Forfeitures – Read the Plan document carefully to understand how forfeitures should be used. While many plan documents indicate that forfeitures can be used to pay plan expenses and/or for employer contributions, some plan documents dictate certain restrictions on the use of forfeitures that need to be followed.
Authors: Donna Nevolo, CPA, Partner and Market Leader, Employee Benefit Plans | [email protected]; Nadia Matthie, CPA, Partner | [email protected]; Sheri Wronko, CPA, Partner | [email protected]; and Ana Romeo, CPA | [email protected]