That Time Again: The Must-knows for the 5500 Filing Season

While one of the key advantages of qualified plans is deferral of taxation, the law requires that these plans file an annual informational tax return on a set of forms generally referred to as Form 5500. The degree of reporting and type of information provided to the Department of Labor (DOL), the Internal Revenue Service (IRS), and Pension Benefit Guarantee Corporation (PBGC) varies depending on plan’s complexity, investment arrangement, and size of participant population.

Who Must File Form 5500? All retirement plans subject to ERISA must file Form 5500, regardless of the amount of plan assets. A separate form is filed for each plan. IRA-based plans- such as SEPs and SIMPLEs- are excluded, as are owner-only plans with assets under $250,000. The asset level at which owner-only plans must file a 5500 was increased from $100,000 to $250,000 under the Pension Protection Act of 2006.  The value of all plans, including any outstanding loans, is aggregated when determining whether the filing threshold has been reached. A final 5500 must be filed at plan termination for all plans, even those that never reached the filing threshold.

For purposes of Form 5500 filing requirement, owner-only plans are plans that cover only a business owner, business owner and his or her spouse, partners in a partnership, and partners in a partnership and their spouses. A plan is not an owner-only plan when it benefits anyone besides the owner (or owner and spouse) or partners (or partners and their spouses), e.g. other family members, highly compensated employees who are non-owners, etc.

Simplified Reporting for Small Plans A new, shorter version of Form 5500, known as Form 5500‐SF, was introduced in 2009. Plans must meet certain criteria to file this short form. Specifically, such a plan:

1. Must have fewer than 100 participants.
2. Must be a single‐employer plan.
3. Must contain investments that are easy to value such as mutual funds, publicly‐traded stocks, and cash.
4. May not invest in employer securities.
5. Must not be subject to outside independent audit requirements.

Plans failing to meet all of the above criteria must file their return on the unabridged version of Form 5500 with any applicable schedules.

When is the 5500 Due? In general, the return must be filed no later than the last day of the 7th month following plan year-end, e.g. July 31 for calendar‐year plans. Plan sponsors may request a 2 ½ month extension by filing Form 5558, delaying the due date to October 15. No additional extensions are granted.

Mandatory Electronic Filing Requirement The IRS, DOL, and Pension Benefit Guarantee Corporation (PBGC) are the three government agencies that oversee retirement plans and are charged with enforcing compliance with the filing mandate.  In the past, service providers provided clients with signature‐ready 5500, which clients then reviewed, signed and mailed to the regulators. As of 2009, plan sponsors are required to file 5500 forms electronically.  An exception exists for Form 5500-EZ – plan return for owner-only plans – which is still filed on paper. For convenience and ease, many eligible owner-only plans elect to file their return on Form 5500-SF; to encourage use of this form and electronic filing, the IRS reduced the amount of data owner-only plans report when choosing this option.

What Does Electronic Filing Mandate Mean for Plan Sponsors? Under the electronic filing mandate, plan sponsors must first register on the DOL website, www.efast.dol.gov, receive a unique personal identification number (PIN), and then submit their annual 5500 over the DOL website, using their unique PIN.

Immediately after registering on the DOL website, plan sponsor should receive an email from the DOL containing their PIN. Those responsible for filing multiple 5500 forms, for example, a business with both a Defined Benefit plan and Defined Contribution plan, can use a single PIN for multiple filings.

What if Plan Sponsor Fails to File a Return? Failure to comply with the filing requirements exposes plan sponsors to significant penalties ranging from a DOL-imposed penalty of up to $1,000 per day, without a maximum, to imprisonment for up to one year for willful violations. The Internal Revenue Code imposes a separate penalty of $25 per day for noncompliance with the IRS filing requirements, with a maximum of $15,000 per return. If a plan is subject to the filing requirements of both the DOL and the IRS, both penalties may be imposed.

What if a Plan Sponsor is Out of Compliance? Contact a competent plan service provider, a third party administrator (TPA), a consultant, or an ERISA attorney for help as soon as possible. Failure to file Form 5500 is a common mistake, especially with small businesses. Unfortunately, the issue does not go away on its own and the penalties compound over time. Regulators easily uncover this issue when plans process distributions or begin their termination processes. Because the severity of fines increases over time, the best interest of the client is served by addressing the issue as soon as it is discovered.

To encourage compliance, the DOL established a Delinquent Filer Voluntary Compliance Program (DFVCP), which allows small plan late filers to pay a reduced penalty of $10 per day capped at $750 per year not to exceed $1,500 per plan for multiple year submissions. Large plans also pay $10 per day but their maximum is set at $2,000 per year per plan with a $4,000 cap in case of multiple year submissions. In 2015, after a successful pilot, the IRS created a similar program for owner-only plans. The reduced compliance fee for these plas is $500 per late return with the $1,500 maximum for multiple year submissions.

It’s important to note that access to these reduced fee compliance programs becomes unavailable if the plan receives an inquiry about a missing filing. With the DOL and IRS increasing small plan audit activity over the last few years, the cost for complying with the 5500 filing requirement is small in light of the potential penalties.

For discussion purposes only and in no way represents legal or tax advice. For advice regarding your specific circumstances, the services of an appropriate legal or tax advisor should be sought.