Most retirement plans operate on a calendar year, which makes July a big deal: Form 5500 must be carefully completed, reviewed and submitted by month-end. Changes effective this year are significant. Though preparation of Form 5500 is generally done through service providers, sign off must be taken seriously: penalty of perjury applies.
The Purpose of Form 5500
The Department of Labor offers this summation of the purpose of Form 5500:
“The Form 5500 Annual Return/Reports are a critical enforcement, compliance, and research tool for the DOL, the IRS, and PBGC. These filings are the Agencies’ main source of information and data regarding the operations, funding, and investments of the approximately 864,000 pension and welfare benefit plans that file.” Although Form 5500 has always been important, successive revisions, including changes that become effective this year, have sharpened its use as a tool for oversight and enforcement by the multiple federal agencies with eyes on it.
Specifically, Form 5500 is shepherded by three “Agencies”: the Department of Labor (DOL); the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC). Working together, these agencies have added to the complexity of Form 5500, turning it into a “major enforcement and oversight tool.” For example, this year changes on Schedule H require increased detail about expense categories:
Schedule H has been updated to add new breakout categories to the administrative expenses reported on the Income and Expenses section of Schedule H. Several new expenses lines have been added, including new lines for actuarial expenses, audit fees, legal fees, trustee/custodial fees, valuation/appraisal fees, and others. These lines will require plans to break out expense categories with more granularity, and enable DOL to more closely oversee plan expenses paid for various services.
Tips for Avoiding Errors on Form 5500
Though preparation of Form 5500 is generally done through service providers, sign off must be taken seriously: “Form 5500 is filed under penalty of perjury which means that anyone signing should, at a minimum, review the form at a high level to be sure that nothing in the form is obviously inaccurate.” Failures and shortcomings related to filing Form 5500 come with steep penalties from both the DOL and IRS. In addition to adhering to filing deadlines, take note of these common Form 5500 errors:
Zero Plan Participation
Businesses often respond that particular plans do not have participants, usually because they are new programs. Yet, according to Form 5500 instructions, every eligible employee with plan balances is termed a plan participant.
Excess Deferral
Plan sponsors sometimes incorrectly allow contributions to exceed a participant’s annual contribution limit. Also, 403(b) or 457 contributions may be wrongly categorized as 401(k) deferrals.
Plan Termination
Many companies do not fill out Form 5500 because they have dissolved a particular plan. However, you must document plans canceled within the year until all assets are dispersed. Also, some companies mistake frozen plans for terminated plans and mark plans as terminated even when the assets are yet to be dispersed from the plan.
Fraud Declaration
Form 5500 asks about plan losses from fraud or dishonesty. Employers often answer incorrectly, so to be safe, leave the area blank if you’ve not experienced fraud.
ERISA Fidelity Bond and Form 5500?
Another common compliance trigger related to the filing of Form 5500 is failure to have an up to date and adequate ERISA fidelity bond, obtained from a surety listed by the US Department of Treasury. The purpose of an ERISA Fidelity bond is to protect the assets of the retirement plan from theft. Plan sponsors across the country ensure compliance by obtaining their ERISA fidelity bonds from leading national provider, Colonial Surety Company. Uniquely, Colonial includes retroactive ERISA fidelity bond coverage for years when the plan was not adequately covered, and makes it possible for plan sponsors to protect themselves by opting into an affordable fiduciary and cyber liability coverage package.
Armed with Colonial’s ERISA bond plus liability coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. Protect yourself, the plan, and your business, for a few dollars a day, now:
ERISA Fidelity Bond Plus Fiduciary Liability Insurance
Providing customers with knowledgeable and friendly service since 1930, Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country.