We are just past the “official” start of summer, which means it is time for sponsors of retirement plans and many health and welfare plans to think about preparing and submitting Form 5500. In this post on the All Things HR Blog, I examine the most common mistakes I encounter when assisting plan sponsors in Form 5500 compliance.

What Is a Form 5500?

The Form 5500 is an annual return created by a collaboration of the Department of Labor (“DOL”), Internal Revenue Service (“IRS”), and Pension Benefit Guaranty Corporation (“PBGC”) to help the government, participants, and beneficiaries have access to adequate information about benefit plans subject to ERISA. This includes most retirement and many health and welfare plans.

Form 5500 contains, among other things, information about the type of plan and plan features, plan investment and funding, the number of participants, service providers, and compensation for service providers, and whether the plan had any nonexempt prohibited transactions.

When Is Form 5500 Due?

Form 5500 is due the last day of the 7^th month after the plan year’s end, although an additional two and a half month extension may be obtained by filing Form 5558 prior to the normal due date. Many plans are run based on the calendar year, so for those plans, Form 5500 is due on July 31—hence we are now in the midst of “Form 5500 season.”

Here are the top errors that I see with Form 5500 compliance: 

1. Failing to File a Health and Welfare Plan Form 5500 When Necessary

Health and welfare plans are established to provide medical, dental, vision, accident, or similar benefits to employees, former employees, and their dependents. The good news is that health and welfare plans that have fewer than 100 participants on the first day of the plan year and are unfunded, fully-insured, or a combination of unfunded and fully-insured (like most health and welfare plans), are not subject to Form 5500 requirements.

The bad news is that when many plans cross the 100-participant threshold, they fail to start complying with the Form 5500 obligations. In fact, in my experience, this is the most common failure with respect to Form 5500 filing for health and welfare plans. Employers may have fewer than 100 participants for many years, and then through growth or acquisitions, may find itself above 100 participants. Employers that are near this mark should carefully note the first time that they cross the 100-participant threshold as of the first day of a plan year.

The penalties for failing to file a Form 5500 can be steep. A plan sponsor that fails to file a Form 5500 is subject to a penalty of $2,400 per day imposed by the DOL with no maximum amount (adjusted for inflation), and up to $250 per day from the IRS, with a maximum of $150,000 for the IRS penalty.

There is an opportunity for employers that have failed to file Form 5500s to escape these steep penalties under the DOL’s Delinquent Filer Voluntary Compliance Program (“DFVCP”). The DFVCP permits plan sponsors to file delinquent Form 5500s and pay reduced penalties so long as the filing is made before the DOL identifies the failure to file. The IRS will also generally waive late filing penalties for Form 5500 filers who satisfy the DFVCP program.  We have assisted many employers through corrections of years’ worth of filings under this program.

In determining “participants” for this purpose, plan sponsors should consider active participants (employees), participants retired or separated from service receiving benefits, and other participants.

2. Failing to Accurately Report Participant Counts

Another aspect that trips up employers is that counting “participants” for Form 5500 purposes is trickier than it sounds.

For health and welfare plans, participants include enrolled (active) employees, enrolled COBRA/ex-employees, and enrolled retirees (if eligible). It does not include spouses and dependents. This is frequently a point of confusion for employees, as spouses and dependents will typically be included on the Schedule A disclosures provided by insurers for insured benefits. Therefore, the best source for participant counts is an enrollment census.

For retirement plans, an employee is deemed to be a participant if the employee is eligible to elect to reduce salary to participate in a 401(k) or 403(b) plan, or is eligible for a contribution under a profit-sharing plan. For defined benefit plans, an employee is considered to be a participant if they are eligible to receive a benefit accrual during the year. Vesting is not relevant to counting participants. 

3. Failing to Answer Fidelity Bond Coverage Question

For retirement plans, ERISA imposes a requirement that every fiduciary and every person who handles plan assets be bonded to protect the plan from risk of loss due to fraud or dishonesty. This bond must cover at least 10% of the plan’s assets, up to a maximum of $500,000 per loss.

Plan sponsors are required to report on Form 5500 whether the plan is covered by a fidelity bond. Some plan sponsors skip this question and fail to indicate that the plan is actually covered by an appropriate fidelity bond. This is sometimes the cause of a plan audit from the DOL.

Sometimes plan sponsors fail to actually maintain an appropriate bond. While there is no specific penalty for failing to maintain an appropriate bond, it creates potential exposure for plan fiduciaries to be held personally liable for losses that could have been covered by a fidelity bond. 

4. Marking a Form 5500 as “Final” When the Plan Still Has Assets

For terminating retirement plans, a Form 5500 is required for every year while the plan still has assets. Many plan sponsors file a “final” Form 5500 indicating that the plan still has assets at the end of the reporting period. For the final return to be filed properly, all assets must have been distributed from the plan.

For example, if a sponsor marked its 2021 Form 5500 as the final return for the plan year ending December 31, 2021, but the assets were not distributed until sometime in 2022 (even if prior to the 2021 filing deadline), the 2021 return is not the final return. A 2022 Form 5500 that is marked as the final return must be filed for the portion of the 2022 plan year in which the plan had assets.

5. Failing to Comply with the Retirement Plan Audit Rules

In general, retirement plans with more than 100 participants or with hard to value plan assets are required to be audited by an Independent Qualified Public Accountant. Periodically, an employer will submit a Form 5500 and simply fail to attach the audit. Typically, the DOL will reject such filings or advise the plan sponsor within a period of weeks that the audit report is missing. If the sponsor did not actually obtain the audit, the DOL will not put its inquiry on hold for the audit to be obtained, and may impose penalties for failure to provide the audit report. Therefore, it is important for plan sponsors to be aware of when the audit requirements may apply to it.

Conclusion

Form 5500 is just one piece in the complex web of administrative challenges facing plan sponsors. It is helpful to engage with your accountant, third-party administrator, and employee benefits legal counsel to make sure that all of the bases for the retirement and health and welfare Form 5500 returns are covered. The employee benefits group at Dickinson Wright is familiar with the technical requirements and practical aspects of Form 5500 filings, and regularly assists clients in reviewing, filing, and correcting these returns.

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