Form 5500 and You

Compliance.BLOGBy February, many employer retirement plan sponsors begin preparing for the annual obligation to file a Form 5500 with the U.S. Department of Labor (DOL). Form 5500s are due seven months from the end of a plan year, which is July for calendar-year plans. Employers who file their corporate tax returns using an extension may also choose to extend their Form 5500 reporting deadline.

Form 5500 is required of non-governmental retirement plans, including 403(b), 401(k), profit sharing, savings/thrift, money purchase plan, cash balance, pension plans and even for simple plans. While the filings are not difficult, the penalties imposed for failing to file or filing late are substantial. Late or non-filers may be fined up to $1,100 per day by the DOL and an additional $25 per day, to a maximum of $15,000 per year, by the IRS. While penalties may be reduced for certain facts, timely filing of these forms is critical.

Recently, the DOL released a copy of the new 2015 Form 5500 and Instructions. The new form clearly indicates the DOL is broadening the scope of its review. The form has been expanded to include a series of ERISA compliance questions and representations. The IRS instructs employers that answering these compliance questions is optional for the 2015 plan year but will be mandatory for future Form 5500 filings. For helpful FAQs, click here

If your plan is in great shape, you will have no problem responding to the questions and should do so on your 2015 filings. For many employer plans, however, these questions are an early warning on areas the IRS and DOL are likely to target on upcoming compliance audits. The wise action? Conduct a compliance review of your plan now so you, too, will be able to answer these questions confidently on your 2016 filing.

Below are some examples to give you an idea of the type of inquiries added to the form. Several involve non-discrimination testing and design rules.

  • Has the plan been timely amended for all required tax-law changes? Enter the date on which the last plan amendment/restatement for the required tax law changes was adopted.

This is one area where MSEC receives many questions and requests for assistance. Some employers believe it is up to their Third Party Administrator (TPA) or investment manager to update the plan document with statutory amendments. This is incorrect. The law puts the responsibility squarely on the employer who sponsors the plan. What is the current status of your plan?

  • Were in-service distributions made during the plan year?

If plan money was distributed to an active employee for a hardship withdrawal, the employer who sponsors the plan must ensure all eligibility rules and plan provisions were precisely followed, including notarized spousal sign off and provision of proper tax statements to the participant.

  • How does the 401(k) plan satisfy the non-discrimination requirements for employee deferrals and employer matching contributions under applicable IRC rules?

You will need to know whether your plan uses a safe-harbor contribution formula, of which there are many. If not, you must run and pass the Actual Deferral Percentage (ADP) Test annually, as well as the Actual Contribution Percentage (ACP) Test if there are matching contributions.

If your TPA or provider runs these tests for you, carefully review the test results. Unfortunately, we have assisted several members who produced what was given to them by reputable TPAs, only to discover they failed the test, or it was conducted on inaccurate or incomplete information. This can be expensive to fix, so get it correct on the front end.

  • Does the sponsor use the current year or the prior year testing method for the 401(k) ADP/ACP tests?

Do not venture a guess here. Check what your document provides and ensure that your provider/TPA follows your document provision on proper compensation for test purposes.

  • Questions around the IRC 410(b) non-discrimination coverage tests are bound to be new to many employers. Which method did your plan use to pass?

There are a couple of alternatives, using either a Ratio Percentage Test or an Average Benefits Test (ABT). For very complex plans with multiple employer contribution levels, an actuary can provide valuable assistance with the ABT (informally referred to as the “slice it and dice it” test).

  • Does the plan satisfy the coverage (410(b)) and non-discrimination tests (IRC 401(a)(4)) by combining the plan with any other plans under the permissive aggregation rules?

“Pardon me?” you ask.

This involves the often complex IRC Sec. 414, “Controlled Group” rules. When your entity has common ownership with other entities, such as parent/subsidiaries, brother/sister corporations, or even affiliated service companies, your plan(s) must pass tests on a controlled-group basis. This means all employees of commonly owned businesses must be counted in your test. Those who are not eligible count as zeros.

  • Provide the date of the most recent IRS opinion or advisory letter provided specifically for the plan you have adopted.

The majority of our members use a plan document that was pre-approved by the IRS (called a “master and prototype” or “volume submitter” plan). First, confirm you have a copy of the correct and most recent letter, then report the serial numbers on the letter, as well as the date of the letter. Contact your plan document provider to obtain the correct and most recent letter for your records.