Retirement Services

401(k)ology – Form 5500 Updates: Participant Count Win and Large Plan Filer Warning

The Form 5500 series was recently updated with a key change to the participant counting methodology for determining if the plan is a small plan filer or large plan filer.

Not as widely publicized but affecting all filers, the Department of Labor released adjusted penalty rates effective January 15, 2024, which include an increase of $84 per day (up from $2,586 to $2,670) for failure to timely file a complete Form 5500.

Are you prepared for the changes to the filing requirements?

The Form 5500 has evolved and changed in multiple ways over the course of decades, but no change has been quite as welcome as the new participant counting methodology (effective for the 2023 plan year filed in 2024). For many plan sponsors, the new method will reduce the participant count well below the large plan filer threshold of 100 (now based solely on those with account balances), allowing the plan to be filed as a small plan filer and avoiding the expense of an Independent Qualified Public Accountant report (IQPA).

  • Newfront Note: The IQPA is a constant pain point for employers—and particularly smaller employers—when preparing to file the 401(k) plan Form 5500. This change is a major win for a significant group of small to mid-sized employers that will no longer be subject to the IQPA requirement.

However, in the “warning” category, the Department of Labor (DOL) has released its annual increase to the administrative penalty for failing to file a complete and accurate Form 5500. The per day civil penalty assessed to the Plan Administrator after January 15, 2024 is up to a staggering $2,670! Yes, that is the civil penalty and hopefully that never impacts your plan.

The DOL’s Enforcement Program Procedures materials provide that it will impose a $150/day penalty for a missing or deficient IQPA, capped at $50,000. While these published DOL enforcement guides provide valuable insight as to how the agency will address these issues in practice, rumor has it that the DOL will be less forgiving this filing season once the Notice of Rejection letter is issued. And, if you think the penalty is assessed from the extended filing due date – think again.

In this blog, we will celebrate the win with a highlight of the participant counting methodology and will provide another warning about large plan filers that do not have the IQPA completed by the extended filing due date.

Participant Counting Methodology

Prior to the 2023 Form 5500 filing years, the determination of small or large plan filing status was based on the number of eligible participants as of the first day of the plan year. For 401(k) plans, “participants” included employees who were eligible even if they did not have an account balance in the plan, plus all terminated participants who had a balance in the plan.

Consider a plan that had 200 eligible “participants” as of January 1, 2022, but only 80 of whom had an account balance in the 401(k). That plan was required to file as a large plan filer, which meant they had to submit an IQPA report with the Form 5500.

Effective for plan years beginning on or after January 1, 2023, that same plan with 200 eligible “participants” may file as a small plan filer because only 80 participants have an account balance in the plan.

Nothing has changed in the small plan/large plan threshold, only the method for counting participants has changed. Plans that have less than 100 “participants” are still considered small plan filers and plans with more than 100 “participants” are still considered large plan filers. The difference is that now employers determine the number of “participants” on the first day of the plan year based only on those with an account balance (i.e., excluding those who have never deferred or received an employer nonelective contribution).

The new account balance counting methodology is much easier to determine and straight forward for existing plans, but there are three important exceptions to note.

  • Exception #1 to Form 5500 Large Filer Status Methodology: First Return/Report – A newly established plan will not have any participants with an account balance on the first day of the plan year (effective date). For the first plan year only, the count is based on the number of participants with an account balance as of the last day of the first plan year (i.e., December 31st for calendar year plans). Unfortunately, that means that a plan sponsor of a newly established plan will not know if an IQPA is required until after the close of the initial plan year.

If your company established a plan in 2023, make sure that the participant count on the last day of the plan year is reviewed as soon as possible! If the plan had over 100 participants with account balances, engage with an IQPA as soon as possible.

  • Exception #2 to Form 5500 Large Filer Status Methodology: Short Plan Year – This exception applies only if the first return/report for a newly established plan is for a short plan year of seven months or less. In this case, if the plan had more than 100 participants with a balance in the plan on the last day of the initial/short plan year, the plan sponsor may elect to defer the IQPA until the subsequent 5500 filing.

    For example, a new plan that began July 1st would have an initial plan year that runs for only 6 months (July 1st to December 31st)—permitting the plan sponsor to elect to defer the IQPA until the subsequent 5500 filing. The IQPA submitted with the second year Form 5500 filing will cover both the initial short plan year and the second full plan year. The plan sponsor must still submit the initial/short plan year Form 5500 filing as a large plan filer with all of the large plan filer schedules included, but it will not submit the IQPA until the subsequent Form 5500 filing submission for the full plan year.

  • Exception #3 to Form 5500 Large Filer Status Methodology: 80-120 Participant Rule – This exception allows employers to retain small filer status at up to 120 participants (as opposed to 100), but it only applies if the employer filed a Form 5500 for the plan for the prior plan year! For example, the 2023 Form 5500 may be filed as a small plan filer if the plan was considered a small plan filer for the 2022 Form 5500 filing year AND the participant count is 120 or less for the 2023 Form 5500. Note that if the number of participants on the first day of the plan year with a balance is 121 or more, then the plan will be required to file as a large plan filer.

    The reverse is slightly more challenging, when a large plan filer drops below 100, they MAY file as a large or small plan filer. Once the count falls below 80, the plan MUST file as a small plan filer. That begs the question – why would any plan sponsor voluntarily file as a large plan filer when they could avoid the IQPA and file as a small plan? That depends on whether it is anticipated that the plan will be a large plan filer again in the subsequent year (the CPAs hired to perform the IQPA will have to review the gap year(s) anyway, so check with the plan’s auditing firm to see what they recommend if the plan will bounce between large and small plan filing requirements).

WARNING: Higher DOL Penalties and Less Forgiveness Expected

In the blog, 401(k)ology: Large Plan Filing Dilemma, we reviewed common reasons why a large plan filer’s IQPA may be delayed, and presented the less-than-ideal options for filing when the IQPA is not completed by the extended filing deadline. To recap, Option 1 is to submit an incomplete filing on the extended due date (generally October 15th for a calendar year plan), and Option 2 is to file late under the Delinquent Filer Voluntary Compliance Program (DFVCP). To further illustrate the dilemma and the new warnings, let’s recap with examples:

Option 1 – Incomplete Filing Example (“Deficient”)

Let’s assume Company A (large plan filer) submits the Form 5500 on October 15th (calendar year plan) without the IQPA attached. It was intended to have the IQPA completed on time, but the IQPA is not ready by the extended filing deadline. Company A believes that the IQPA will be completed no later than mid-November, but unfortunately it is delayed.

On November 14th (30th day after filing deadline) the DOL issues a Notice of Rejection Letter, rejecting the Form 5500 filing because the required IQPA is not attached. Company A is given 45 days to respond.

Company A files an amended return on December 20th with the completed IQPA attached and believes that everything is fine – whew. And then… Company A receives the Notice of Intent to Assess a Penalty. The penalty in the notice is $21,300. The DOL calculated the penalty at $150 per day from August 1st (i.e., from the day after the July 31st deadline, not the October 15th extended deadline) to December 20th (date complete 5500 is filed). Note that in many cases, the initial penalty assessed is $50,000!

Company A may now file a statement of reasonable cause with the DOL explaining why Company A did not comply with the filing requirements. Word of caution here – the “reasonable cause” may not be reasonable in the eyes of the DOL. Examples according to the DOL’s manual are bankruptcy, plan termination, natural disaster, there was no deficiency (meaning the IQPA was actually attached when filed on October 15th) or the filing was not actually required.

Once the penalty letter is issued, the negotiations process opens and Company A should engage legal counsel to assist with the response, which must be submitted under a Penalty of Perjury Statement.

  • Newfront Note: We recently saw an initial $35,000+ penalty reduced by a factor of 10 to $3,500+ in the negotiations process with the DOL. That’s still in excess of the $2,000/year maximum DFVCP filing fee, but it is significantly less than the initial assessment.

There have been rumblings in the retirement plan industry of informal DOL comments suggesting that the ability to “negotiate” the penalty is going to be much more difficult going forward. Apparently, the DOL intends to crack down on the “file without the audit” approach unless the amended return is filed with the complete IQPA attached before the Rejection Letter is issued (for those keeping track – that is before the 30th day after the extended filing deadline). If the employer is not 100% certain that the IQPA is going to be completed by the end of October or first week of November (for calendar year filers), be aware that this approach may start costing significantly more than Option 2 and there will be little room to negotiate down the initial assessment.

  • Reminder: The penalties for an incomplete filing are calculated from the original filing deadline, NOT including any extensions. They are calculated from the day after the initial due date of the Form 5500 (the day after July 31 for calendar year plans), not the extended deadline (October 15 for calendar year plans).

Option 2 – Wait to File with the IQPA Under DFVCP (“Delinquent”)

Company B had every intention of having the IQPA ready by the filing deadline, but there were delays and operational corrections that had to be made before the IQPA could be finalized. On October 15th, Company B has a decision to make about the filing and decides to file late with the complete IQPA attached.

Filing under the Delinquent Filer Voluntary Compliance Program (DFVCP), is a simple two-step process.

  1. Step 1 – Submit the Form 5500 with the complete IQPA attached. On the first page of the Form 5500, mark the box for “the DFVC Program”.

  2. Step 2 – Pay the penalty ($100 per day, capped at $2,000 per year) using the DFVCP Online Penalty Calculator. If the Form 5500 was due on July 31, 2023, the 200th day is February 16, 2024. The penalty will be less than $2,000 the quicker that it is filed!

It should be noted that the “delinquent” letters generated by the IRS are typically not mailed out until January of the following year (for calendar year filers) and are generally issued much later than the DOL rejection letters. The IRS letters also include an invitation to use the DFVCP, and the response is just that – thanks for the reminder letter, Mr. IRS, we are using the late filer program!

  • Newfront Note: To confirm, we are fans of the DFVCP approach. While neither approach is ideal, the reduced bailout cost available under the “delinquent” DFVCP approach provides employers with significant potential advantages to the higher potential penalty exposure “deficient” approach when the IQPA cannot be completed by the extended Form 5500 filing deadline.


Would you rather be “deficient” or “delinquent”? Ultimately, that is the plan sponsor’s decision and will depend on the facts and circumstances relative to the anticipated timing for completion of the IQPA. Employers should consult with their attorneys, advisors, service providers, and auditors before making the decision about what to file and when.

The good news is that this filing season is a huge win for plan sponsors who have been required to file as large plan filers with fewer than 100 account balances in the plan. The new Form 5500 participant counting methodology change is long overdue and should be celebrated across the retirement plan industry.

As always, Newfront’s Retirement Services team is available to assist you with questions regarding plan operation, plan compliance or other retirement plan questions that may arise.

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Joni L. Jennings
The Author
Joni L. Jennings, CPC, CPFA™

Chief Compliance Officer, Newfront Retirement Services, Inc.

Joni Jennings, CPC, CPFA is Newfront Retirement Services, Inc. Chief Compliance Officer. Her 30 years of ERISA compliance experience expands value to sponsors of qualified retirement plans by offering compliance support to our team of advisors and valued clients. She specializes in IRS/DOL plan corrections for 401(k) plans, plan documents and plan design.

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