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Employee Benefit Plans Form 5500 - Are You In Compliance?
ccastrategies.com, July 12, 2006
Are you sure you are filing all of the Forms 5500 that you should be
filing? Are you filing for an employee benefit plan that may now
qualify to be exempt from the filing requirements? Are you aware that
for calendar plan years the extension for filing is July 31?
Many companies are unaware of the Form 5500 filing requirements for
their employee benefit plans. A recent poll of 74,000 employers
regarding compliance with Form 5500 filing requirements, showed that
about 47% of them did not file the Form 5500 as required by federal
authorities in 2003.1 Larger businesses fared better, with
22% of firms with more than 4,000 workers noncompliant, compared to 57%
for businesses with 100 to 300 workers.2
What is a Form 5500?
The Form 5500 Annual Return/Report is used to report information
concerning employee benefit plans and fringe benefit plans. Almost all
retirement plans are required to file a Form 5500, primarily dependent
upon the number of participants in the plan and whether or not it is
funded by a trust; all cafeteria plans are required to file a Form 5500
regardless of their size. Welfare benefit plans usually are only
required to file a Form 5500 if they have more than 100 participants
(If an employer uses a trust, the exception is not available). The U.S.
Department of Labor (DOL) and the Internal Revenue Service (IRS)
utilize these filings to oversee pension and benefit plans.
Who has to file and why?
Unless exempted by ERISA itself or by DOL regulations, the law requires
that every employer that sponsors any sort of employee benefit plan
must be familiar with the Annual Return/Report (Form 5500) filing
requirements. Most employee benefit plans must file a Form 5500. These
plans include defined benefit pension plans, 401(k) plans,
profit-sharing plans, 403(b) tax-sheltered annuities, money purchase
pension plans, stock bonus plans, and certain welfare benefit plans.
Insured and "unfunded" welfare benefit plans with fewer than 100
participants (as of the beginning of the plan year) do not generally
have to file a Form 5500. [This is often referred to as the small
employer plan filing exception.] Every employer that sponsors one of
the following fringe benefit plans must file Form 5500: cafeteria
plans, qualified group legal services plans, and educational assistance
programs. (Although group-term life insurance plans, accident/ health
plans, and dependent care assistance programs are subject to this same
requirement, the IRS has temporarily excused them from the IRS fringe
benefit filing requirements. They may, however be subject to the DOL
filing requirements unless otherwise exempted.)
Benefits provided under an "unfunded" plan are paid directly from the
general assets of the sponsoring employer or employee organization.
Depending on how it is structured and benefits are paid, a health
Flexible Spending Arrangement (FSA) may or may not qualify for the
small employer plan filing exception. Alternatively, a health FSA may
not need to file if it is sponsored by an entity that is not subject to
ERISA.
Exceptions to filing
There are several types of employee benefit plans exempt from the
requirement to file a Form 5500. The following plans are not required
to report:
- Unfunded Excess Benefit Plans;
- Tax-Sheltered Annuity Arrangements and Custodial Accounts;
- SIMPLE IRAs;
- Simplified Employee Pension Plans (SEPs);
- Church Plans Not Electing ERISA Coverage;
- Governmental Pension Plans;
- Certain Benefit Plans Maintained Outside the United States;
- Top-Hat Plans;
- IRAs not considered pension Benefit Plans under ERISA;
- Certain Unfunded Dues-Financed Benefit Plans Maintained by Unions;
- Federal or state workers’ compensation coverage;
- Plans maintained for unemployment compensation or disability insurance laws;
- Certain plans of Partnerships and Wholly Owned Trades or Businesses; and
- Certain Apprenticeship or Training Plans.
The IRS also no longer requires a Form 5500 filing
for Section 125 – Cafeteria Plans. However, if a sponsor has a
Medical Reimbursement Feature associated with its plan and more than
100 employees participate in the reimbursement feature, the DOL will
require that it file the Form 5500.
When is a Form 5500 filing due?
Unless the plan is exempt from the filing requirements, an Annual
Return/Report must be filed for every plan year from the plan’s
inception until the plan is terminated and a final Return/Report is
filed. All required forms, schedules, and attachments must be filed by
the last day of the 7th calendar month after the end of the plan year
(unless a 2 1/2-month extension of time to file has been requested
before the end of the initial filing period). For example, filings
related to plans that are on a calendar year basis are due by the end
of the following July (with an extension, this due date would be
extended to October 15).
The total filing period for each Annual Return/Report may not exceed 12
months in length. For a short plan year (i.e., less than 12 months),
the due date is the last day of the seventh month after the end of the
month in which the short plan year ends.
Common Form 5500 compliance failures
- Small welfare plan reporting exception.
The most common failure occurs when a plan that formerly qualified as a
small plan (i.e., with under 100 participants) and did not have a
filing requirement fails to file a Form 5500 when the participant count
exceeds 100. Many times plan administrators are not aware that they are
responsible for additional filings or, if they are aware, they are not
completely and accurately tracking the number of participants and
therefore do not realize that the number of plan participants increased
to more than 100. Please note, that a plan crosses the 100 participant
threshold does not necessarily result in a change in its filing status;
please see the bullet below for more information on the 80/120 rule.
- The 80/120 participant rule. ERISA
allows a special reporting exemption for certain small plans (those
with more than 80 but fewer than 120 participants at the beginning of
the plan year). For example, if a pension plan filed as a
“small plan” last year and the number of plan participants
is fewer than 121 at the beginning of this plan year, it may continue
to file Schedule I as a “small plan” under the
“80-120 Participant Rule.” This rule allows plans with
between 80 and 120 participants at the beginning of the plan year to
file the Form 5500 in the same category (“large plan” or
“small plan”) as the prior year filing. This exemption is
only available for the first year you are under 120. This also allows
the plan to avoid the financial statement audit requirements. For
various reasons (e.g., acquisition, merger, company/employee growth),
some plan sponsors cross the 100 participant threshold and either
forget to take advantage of the special rule or forget to file entirely
when the plan no longer qualifies for the exemption (i.e., when a Form
5500 is now required).
- Failure to file Form 5500 and provide disclosures because employer doesn’t realize it has a plan.
This often arises in the area of employer severance plan arrangements
where the employer does not appreciate the fact that the arrangement
may qualify as an ERISA-covered welfare plan. It also regularly appears
in arrangements where the employer allows (i.e., the employer does not
take an active role in promoting these “benefits”) an
insurance provider to sell certain “employee-pay-all”
benefits to employees. If set up and operated properly, the employer
has no reporting obligation for such an “employee-pay-all”
plan. This is the result of a regulatory exception that states the
employer is not actually sponsoring the plan. For example, certain life
insurance products and 403(b) deferred compensation arrangements are
routinely sold this way; the employer merely provides a forum for the
insurance company to solicit employees and may provide a “check
off box” for employees to pay premiums by payroll deduction.
Where problems arise is when an employer takes on a more active role in
promoting such plans, such as prominently printing the employer’s
name on the Summary Plan Description or taking credit for the employee
plan. In the past, such actions have resulted in similar arrangements
being deemed as employer-sponsored welfare plans.
Penalties
Failing to file the Form 5500 can be very costly to a plan
administrator and sponsor. In addition to the possible criminal
penalties for willful Form 5500 failures, the plan administrator is
also subject to penalties of up to $1,100 for every day a Form 5500 is
missing or deemed incomplete. The Department of Labor offers a special
program to file with reduced penalties if the plan sponsor has not been
contacted by the Department of Labor about the failure.
If a sponsor discovers an error on its Form 5500, it should amend the
Return as soon as possible. It is also important that its Summary
Annual Report (SAR) be amended and redistributed to plan participants.
Summary Annual Report (SAR)
Each year, the plan administrator of a plan that is not exempt from
filing a Form 5500 must provide a summary annual report (SAR) to the
participants within nine months after the end of the plan year. A plan
that is totally unfunded, under which the benefits are paid solely from
the general assets of the employer, where there are no employee
contributions, is exempt from the SAR requirement even if the plan
administrator must file a Form 5500 because there are at least 100
participants.
The SAR summarizes the information provided on the Form 5500 and tells the participants how to obtain a copy of the Form 5500.
The date by which a SAR must be delivered to participants and
beneficiaries is tied to the due date of the Form 500 filing which it
relates to. The regulations require distribution of the SAR within nine
months after the close of the plan year. If the due date of the Form
5500 has been extended, then the SAR is required to be furnished within
two months after the close of the period for which the extension is
granted. For example, if Form 5500 has been extended until October 15,
the SAR for the plan must be distributed to participants by December 15.
A plan administrator who fails to provide a SAR to a participant or
beneficiary within 30 days of a written request may be liable to the
participant or beneficiary for a civil penalty of up to $100 a day from
the date of the failure. This penalty is payable to the participant or
beneficiary filing a civil action.
Conclusion
The information provided above is a brief discussion of the general rules that apply to the Form 5500.
Endnotes
1&2 "Almost half of firms noncompliant with Form 5500."
Employee Benefit News.12 July 2006.
<www.benefitnews.com/detail.cfm?id=9281>.
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