FORM 5500 CHANGES ON THE HORIZON | PLAN TERMINATION PROCEDURES AT THE FOREFRONT

The April Monthly Minute examines upcoming Form 5500 changes (which particularly impact small plans) and a recent case highlighting the importance of compliance with plan termination procedures.

Form 5500 Changes on the Horizon

The Department of Labor recently released changes to Form 5500 effective for plan years on and after January 1, 2023. Key revisions include:

• Consolidated Form 5500 reporting option for certain groups of defined contribution retirement plans (defined contribution group (DCG)) and a new Schedule DCG (Individual Plan Information).
• Streamlined reporting by multiple-employer plans (MEPs), including pooled employer plans (PEPs).
• New participant-counting methodology for determining eligibility for simplified reporting alternatives available to small plans. The new methodology for defined contribution retirement plans will be based on the number of participants with account balances, rather than the current method that counts individuals who are eligible to participate even if they have not elected to participate and do not have an account in the plan.
• Addition of breakout categories to the “Administrative Expenses” category of the Income and Expenses section of the Schedule H (Financial Information) balance sheet to improve fee and expense transparency.
• Newly added questions to address tax oversight and compliance, technical and conforming changes as part of the annual rollover of forms and instructions, and changes to Schedule R and Schedule SB to enhance PBGC-covered defined benefit plans’ financial and funding reporting.

KMK Comment: The Form 5500 changes take many forms, but the new participant-counting rule is cause for excitement among smaller plans as it is intended to reduce expenses and encourage more small employer plans. Generally, plans with at least 100 participants must comply with the Form 5500 audit requirements. However, the new participant-counting methodology will mean many more smaller plans can avoid the audit. While these changes do not apply until reporting due in 2024, plans can take administrative steps now, such as ensuring compliance with plan provisions as to cash-out or rollover of small account balances, to avail themselves of this new rule in the future.

Plan Termination Procedures at the Forefront

In Messer v. Bristol Compressors Int’l, LLC, decided earlier this month, the Fourth Circuit reminded plan sponsors to carefully follow written procedures when making plan amendments and terminations. At issue in the case was whether a board resolution was sufficient to terminate a severance plan, or whether further action was needed. The appeals court ultimately reversed the district court’s decision which found that a board resolution had effectively eliminated the severance plan. In so holding, the district court relied on an earlier Supreme Court case that found a provision stating that “[t]he Company reserves the right at any time and from time to time to modify or amend, in whole or in part, any or all of the provisions of the Plan” identified both who could amend the plan and a procedure for amending the plan. In re-examining this particular clause, the Fourth Circuit explained that the provision was the only provision that could be interpreted to set forth the procedure by which the plan at issue could be amended. In contrast, the Company’s handbook in the case at bar stated, in two successive sentences, both who had the power to alter or eliminate handbook provisions—the Company—and the procedure by which those amendments needed to occur: “in writing by the Human Resources department.” On this basis, the Fourth Circuit concluded that a Board resolution alone was insufficient to terminate the plan, and the Board was required to have HR take action to eliminate the plan in writing.

KMK Comment: A simple oversight of failing to satisfy plan amendment and termination procedures can lead to complex problems. The Fourth Circuit’s decision is a reminder to pay close attention to all written plan terms and procedures, particularly with regard to amendment and termination.