The annual Form 5500 due date is again fast approaching for most employee benefit plans. The Form 5500 is a required annual filing that must be made with the IRS and the U.S. Department of Labor (“DOL”). It reports details relative to finances and operations of health plans and retirement plans. The filing due date is seven months after the end of the plan year (i.e., July 31 for a plan that has a calendar year plan year). An extension may be obtained to file up to 2½ months later.
Penalties for not filing (or filing late) could be more than $2,000 per day. The information reported on the Form 5500 is used by the IRS and DOL to identify plans for closer examination and investigation, which is not only a burdensome and time-consuming process, but could lead to the discovery of plan problems that may require costly corrections and/or result in the imposition of other monetary penalties and taxes. Accordingly, careful preparation and review of the Form 5500 is strongly advised. The following are a few common issues to keep in mind and tips that are aimed at lessening the chances of examination and/or the imposition of penalties.
• The statements and assertions on the Form 5500 are made by the employer who signs the filling under penalty of perjury, not the service provider who may have populated the draft (often thousands of drafts).
• Maintain appropriate proof of having filed the Form 5500 (and the extension Form 5558). It is an easy enough box to check that will shortcut any discussions with the IRS and/or DOL over whether you timely filed.
• Ensure that the plan name, employer name, tax ID number, etc. are consistent on the Form 5500, Form 5558, and the plan documents. Often, there is an inconsistent use of service provider names as well.
• Attach an appropriately completed independent audit report, if necessary (i.e., not all plans must attach an audit, but if you are in that group, it must be included). The DOL is especially concerned about poor audit reports – make sure you understand it and that it does not unnecessarily raise red flags.
• Do not attach random documents to the Form 5500 that are not required and/or do not make sense (and/or are not appropriately labeled). As an example, I recently had a large service provider recommend that an employer attach its annual “404a-5” participant fee disclosures, as well as the “408(b)(2)” fee disclosures that were made to the employer. Those disclosures are important, and must be made to participants and the employer, but they should not be filed with the Form 5500.
• Do not overlook the 5500 filing requirement. Often, employers are unaware of the requirement (more typically, in the context of welfare plans including flexible spending accounts). As indicated, the penalties for not filing could be enormous. If you have missed a filing, such matter is easily corrected under the DOL’s delinquent filer program; however, participation in that program must be initiated before DOL notices the issue.
• Exercise caution in reporting “late deposits.” Late deposits must be reported on the Form 5500; accuracy is key, as is identifying and appropriately correcting the issue as soon as possible. This is an issue that is high on the DOL’s list of concerns and priorities.
• Understand the Schedule C entries. The information here might not only garner unneccessary IRS or DOL attention, but also could provide information (i.e., a bit of a road map) to prospective plaintiffs who may file a class action against an employer relative to plan fees. Notably, the U.S. Supreme Court recently determined to undertake a review of a case involving class actions against plan fiduciaries.
• Review of the Form 5500 presents an excellent opportunity for a self-plan assessment/audit relative to plan document issues and operations. For example, most 401(k) plans must be “restated” on a new generation document that has been approved by the IRS in the next year. Is your restatement in motion? Are your historical plan documents and amendments in order? Additionally, there has been a recent onslaught of new laws, rules, and guidance from the government relative to benefit plans. Are you keeping up? Some examples include the SECURE Act, the CARES Act, the Consolidated Appropriations Act, cybersecurity guidance, lost plan participant guidance, and more.
In summary, do not increase your odds of winning the “audit lottery.” Ascertain the status of your Form 5500’s preparation and carefully review the draft with your advisors. Do not blindly rely on the individual who may have entered the data onto the form. Understand it is your filing under penalty of perjury, and that it should be complete and accurate.
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