Is your plan’s IRS Form 5500 complete, accurate, and ready for filing? It is that time of year again. The annual IRS Form 5500 is due to be filed by most retirement and health plans by July 31. Plan sponsor employers should have drafts of the filing in their hands for review, or should contact their providers and confirm that they soon will receive a draft for their review and revision. An ounce of prevention is certainly worth a pound of cure when it comes to the Form 5500.
IRS Form 5500 is an annual tax form that most retirement and medical plans must file each year. The exceptions to the filing requirement are beyond the scope of this article; suffice it to say that if the filing is not properly made, penalties of $2,000+ per day late may be imposed by the government. As such, the stakes are undoubtedly high. It is also important to be sure that the reporting is complete and accurate. While assisting clients in reviewing their filing, we typically come across numerous errors that are easily avoidable.
There is a common misconception that the Form 5500 belongs to the plan service providers who may have prepared the draft such as third party administrators, recordkeepers, brokers, CPAs, or investment houses. This is incorrect. The Form 5500 is signed under penalty of perjury and filed by the plan sponsor; that is, the company or organization that established and maintains the plan for its employees. Every representation therein is made by the employer, not the entity that might have provided the employer with a draft. In many cases, the entity that prepares the draft does so for hundreds or perhaps thousands of clients and has little or no motivation to ensure that the form is complete or accurate. Accordingly, the draft is often incomplete and inaccurate. It is up to the plan sponsor to scrutinize the entries and make sure the information is correct and will not unnecessary raise red flags.
The filing is reviewed by both the IRS and the Department of Labor (“DOL”). The IRS and DOL state continuously that their reviews of the form are aimed in part to identify plans for investigation or audit. It is in a plan sponsor employer’s best interest to avoid inquiries or investigations because those events will be time consuming and burdensome. More importantly, they might lead to the discovery of problems requiring expensive corrections and/or the imposition of monetary sanctions. For example, the discovery by the IRS of a retirement plan “qualification failure” could lead to the imposition of significant “Audit CAP” penalties in addition to the costs associated with correcting the particular failure that is discovered during an examination.
Bottom Line: It is critical that Form 5500 (and the associated audit report) is timely filed and contains accurate information. This means that a draft should be reviewed by the employer and its own advisors. Almost without exception, those reviews will result in revisions that will avoid “wrong” answers that could trigger an investigation, and in some cases, those reviews will result in the discovery of problems that it is better to become aware of and address in a proper manner sooner rather than later. A “head in the sand” approach to fulfilling fiduciary duties is not a good strategy for plan administration.
A few issues to look out for include:
• Reporting the incorrect plan name, employer name, and/or plan number. Yes, surprising, but true!
• Reporting of late deposits and/or qualification failures in an appropriate manner.
• Misreporting on “Schedule C.” Schedule C relates to the payment of plan fees and expenses to various providers such as investment professionals. This section often contains erroneous information because the preparer does not take the time to understand the particular situation.
• Entering incorrect codes describing the plan characteristics.
• Reporting that there is no “ERISA fidelity bond” in place (which there must be), or reporting a very high limit of coverage (which is indicative of misunderstanding about the coverage that is actually in place).
• Use of a preprinted entry on the form that uses the word “other” to describe the entry when other more descriptive entries are available and applicable. DOL and IRS comment that use of the “other” descriptor triggers their curiosity.
• Misreporting the use or nonuse of leased employees.
• Misreporting relating to controlled group, affiliated service group, multiple employer, or multiemployer status.
• Misreporting relative to plan transfers, mergers, and terminations.
• Filing late; or not filing. The DOL maintains a program to correct this problem and avoid potentially massive monetary penalties known as the Delinquent Filer Voluntary Compliance Program (“DFVCP”). Most notably, one is not eligible for DFVCP if the DOL notices the missed filing first.
• Failure to properly obtain, and document, an extension of the filing due date. The expense and burden associated with confirming a valid extension (for example, by obtaining a return mail receipt) does not outweigh the potential headache associated with DOL or IRS asserting a late filing.
• Filing the wrong version of the form.
• Not filing for a medical plan. This seems to be overlooked more often that not filing for a retirement plan; particularly, flexible spending accounts.
• Not filing a “top hat” statement. These are for deferred compensation plans, and work to exempt the plan from the Form 5500 requirement.
Action Item: Don’t increase your odds of winning the audit lottery. Ascertain the status of your Form 5500’s preparation and carefully review the draft (and associated audit report) with your advisors. Do not blindly rely on the individual who may have entered the information onto the form. Understand it is your filing under penalty of perjury and that it should be complete and accurate. It is your responsibility, as are all other legal plan issues, despite potential implications to the contrary.