Insight IRS Form 5500 Reminders for Employer Plan Sponsors

Form 5500 is a required annual report that is filed with both the IRS and the U.S. Department of Labor (“DOL”). It contains details relative to finances and operations of health plans and retirement plans.

The July 31, 2024 un-extended Form 5500 due date for calendar year employee benefit plans is fast approaching. Careful review of the Form 5500 with your professional advisors prior to signing under penalty of perjury and filing is advised.

The following are some reminders and observations relative to those reviews:

• Penalties for not filing (or filing late) could be more than $2,500 per day.

• The information reported on the Form 5500 is used by the IRS and DOL to identify plans for closer examination and investigation. This is not only a burdensome and time-consuming process if your plan is chosen, but could lead to the discovery of plan problems that may, in turn, require costly corrections and/or result in the imposition of other monetary penalties and taxes. In that regard, and as a separate reminder, it is better for plan sponsors to find and address plan problems on their own before the DOL or IRS discovers those problems.

• Maintain appropriate proof of having filed the Form 5500 (and the extension Form 5558). It is an easy enough action item that will shortcut any assertions by the IRS and/or DOL over whether you timely filed.
• Ensure that the plan name, employer name, tax ID number, etc. are accurate and consistent as among the Form 5500, Form 5558, and the plan documents.

• Confirm the participant count reporting. Wide swings could be an indication of inaccuracies, and are easily noticed.

• Attach an appropriately completed independent audit report, if necessary. Not all plans must attach an audit report; however, if you are in that group, it must be included. The DOL is especially concerned about poor audit report quality; accordingly, the report should be understood and not unnecessarily raise red flags. Filing without a report because it is not ready could lead to steep penalties.

• 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 voluntary compliance 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. It is important to ensure there were in fact late deposits; the rule is frequently misunderstood and misapplied. Also, often employers and their service provider confuse this issue with “missed deferrals,” which is a separate problem that should be addressed, but not reported as a late deposit on the Form 5500.

• Don’t check boxes on the Form 5500 that are not applicable to your plan or operations.

• Understand the “Schedule C” entries. The information here might not only garner unnecessary 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. The incidence of such class action filings continues to increase, as do the theories of recovery.

• Review the Schedule C service codes. I encountered a few instances recently where a large recordkeeper coded itself as only processing loans. That assertion is not accurate and could raise a red flag when it is correspondingly reported that the plan is paying that service provider hundreds of thousands of dollars a year.

• Be sure to have a fidelity bond in place when required and to report appropriately.

• If a plan is merged or terminated be sure to not lose sight of the requirement to file a “final” Form 5500. This issue seems to arise frequently in the context of M&A transactions.

• Review of the Form 5500 presents an excellent opportunity for a self-plan assessment/audit relative to plan document issues and operations in general. For example, are your historical plan documents and amendments in order?  In that respect, 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 SECURE 2.0, 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,” and coming under investigation or examination by the IRS or DOL. Ascertain the status of your Form 5500’s preparation and carefully review the draft with your professional advisors. Do not blindly rely on the service provider who may have entered the data onto the form. Understand it is your filing under the penalty of perjury, and that it should be complete and accurate.

This blog is provided by Hawley Troxell Ennis & Hawley LLP for educational and information purposes only. It is intended to notify our clients and friends of certain events or issues. It is not intended to be, nor should it be, used as a substitute for legal advice regarding specific factual circumstances.

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