Tag Archive for: Form 5500

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Group of Plans Audit Requirement

A recent call with a financial advisor from Minnesota dealt with a question on Group of Plans (GoPs). The advisor asked: “Did the DOL or IRS ever conclude whether a GoPs is subject to the annual Form 5500 audit requirement?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

This is a timely question as the SECURE Act of 2022, enacted as part of the Consolidated Appropriations Act, 2023, addresses this question specifically.  Section 345 of the law clarifies that plans filing as a GoPs will submit an auditor’s opinion if a plan, individually, has 100 participants or more. In other words, any audit required shall relate only to each individual plan that would otherwise be subject to an independent audit. The new rule took effect on December 29, 2022.

For more details on GoPs, please see a related case: Group of Plans or Defined Contribution Group Plans.

Conclusion

The SECURE Act created a consolidated Form 5500 filing option for GoPs beginning with the 2022 plan year. SECURE Act 2.0 of 2022 clarified the application of the independent auditor’s report as applying to individual plans within the GoPs.

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Too Late for a SAR?

“My client has not distributed the summary annual report (SAR) for his 401(k) plan for 2021.  Is he past the deadline to provide the SAR to participants?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in Florida relates to the timing of a plan’s summary annual report.

Highlights of Discussion

The date a plan sponsor must deliver a SAR to plan participants and beneficiaries is tied to the end of the plan year—unless the individual has an extension to file the plan’s Form 5500. (The SAR is a summary of Form 5500 information.) If your client had an extension to file the plan’s Form 5500 for the 2021 plan year, he may still have time to timely distribute a SAR.

The regulations require distribution of the SAR within nine months after the close of the plan year (or two months after the Form 5500 filing). The Form 5500 for a plan is generally due seven months after the end of the plan year (i.e., July 31st for a calendar year plan). So, generally, a calendar year plan has a SAR distribution deadline of September 30th following the end of the plan year.

However, if the plan sponsor has an extension to file Form 5500 for the year, the sponsor also has additional time to provide the SAR (i.e., two months after the close of the filing extension [DOL Reg. § 2520.104b-10(c)]. For example, if a calendar year plan has an extension to file Form 5500 until October 15th of the following year, the plan sponsor must distribute the SAR for the plan by December 15th.

Example:

Toy Time Inc., as a calendar year 401(k) plan that had an extension to file its Form 5500 for the 2021 plan year until October 15, 2022. That means, the SAR for Toy Time’s 401(k) plan is due to participants and beneficiaries by December 15, 2022.

Conclusion

A SAR is a summary of Form 5500 information that must be given to plan participants and beneficiaries annually and upon request. The regulations require distribution of the SAR within nine months after the close of the plan year or, if there is a filing extension for Form 5500, within two months after the close of the filing extension.

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Filing Form 5500 Without an Audit Report

“My client is afraid the audit report for his 401(k) plan will not be complete by the October 15th extended filing deadline. Can he file Form 5500 without the audit report by the deadline, and provide the audit report later?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from West Virginia involved filing a Form 5500, Annual Return/Report of Employee Benefit Plan.

Highlights of Discussion

The Department of Labor’s (DOL’s) EFAST2 electronic system will accept a Form 5500 filing without the independent qualified public accountant (IQPA) audit report attached, however the DOL will treat the submission as an “incomplete filing and [it] may be subject to further review, correspondence, rejection, and assessment of civil penalties” (see Q&A 25 of FAQs on EFAST2 Electronic Filing System).

The guidance goes on to state that filers must correctly complete Schedule H, Part III, line 3 regarding the plan’s IQPA report. That means your client will only be able to fill in the information on 3(c) Name and EIN of the IQPA. Lines 3(a), (b) and (d) would not apply in this case and must be left blank. If your client files Form 5500 without the required IQPA report, he or she should correct that error as soon as possible.

Excerpt from Schedule H, Form 5500

 

Without the required IQPA report, the filing is incomplete and the DOL may (and likely will) reject the filing pursuant to ERISA Sec. 104(a)(5). If your client receives an official rejection letter or notice from the DOL, he or she has 45 days to resubmit the filing correctly [see ERISA Sec. 104(a)(5)] . Failure to submit a corrected filing allows the DOL to issue a notice of intent to assess a penalty. Note, there is a 30-day grace period to ask for waiver of the penalty due to reasonable cause [DOL Regulation 2560.502c-2(b) & (e)].

The DOL can assess a penalty of up to $2,400 a day for each day a plan administrator fails or refuses to file a complete report (ERISA Sec. 502(c)(2) and DOL Reg. 2560.502c-2). The IRS may separately assess penalties per the SECURE Act, effective for returns due after December 31, 2019, the IRS late fees are $250 per day up to $150,000. Both agencies could waive or abate those penalties if the plan sponsor can establish “reasonable cause” for the late filing.

The DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP) encourages voluntary compliance with Form 5500 filing requirements and gives delinquent plan administrators a way to avoid higher civil penalty assessments by satisfying the program’s requirements and voluntarily paying a reduced penalty. Eligibility for the DFVCP is limited to plan administrators who have not been notified in writing by the DOL of a failure to file.

Conclusion

The DOL will accept a Form 5500 filing without the IQPA audit report attached, however the agency will treat the submission as an incomplete filing, subject to penalties if not timely corrected and resubmitted.

 

 

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The Audit Formerly Known As “Limited Scope”

“My plan clients are asking questions about changes to what used to be called the “limited scope audit” for Forms 5500 that take effect for the 2021 plan year filings. Can you summarize the changes?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to the report performed by an independent qualified public accountant (the auditor) that accompanies certain Form 5500 filings.

Highlights of the Discussion
The limited scope audit related to Form 5500 filings is now more involved and has a new name: the ERISA Sec.103(a)(3)(C) audit. From a plan sponsor’s perspective, the changes do not affect anything in ERISA. Therefore, a sponsor’s ability to elect such an audit continues. The new rules change what is expected of the plan auditor, starting with the 2021 filing year in most cases.

Under the old rules, a limited scope audit permitted plan sponsors to elect to have the plan auditor exclude certain investment information from his or her review that pertained to investments held and certified by qualified institutions. In 2019, the American Institute of Certified Public Accountants’ (AICPA) Auditing Standards Board issued two new auditing standards related to the financial statements of employee benefit plans and transparency in annual reports:

1. Statement on Auditing Standards(SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA; and
2. Statement on Auditing Standards (SAS) No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports.

SAS 136 creates a new section in the AICPA Professional Standards, and deals with the auditor’s responsibility to form an opinion and report on the audit of financial statements of ERISA employee benefit plans. SAS 136 takes effect for audits of ERISA plan financial statements for periods ending on or after December 15, 2020. SAS 137 enhances transparency in reporting related to the auditor’s responsibilities for nonfinancial statement information included in annual reports.

SAS 136 will affect limited-scope audits beginning with the 2021 filing by

1. Referring to such audits as ERISA Sec.103(a)(3)(C) audits;
2. Clarifying what is expected of the auditor, including specific procedures when performing the audit; and
3. Establishing a new form of report that provides greater transparency about the scope and nature of the audit, and describes the procedures performed on the certified investment information.

For a summary of the SAS 136 changes to Form 5500 reporting, please refer to AICPA’s At A Glance: New Auditing Standard for Employee Benefit Plans.

Conclusion
Limited scope audits associated with IRS Form 5500s have a new name and scope because of changes that are effective starting with the 2021 filing year in most cases. A plan sponsor’s ability to elect such an audit continues. The new rules change what is expected of the plan auditor. Make sure the plan has an experienced auditor who is keenly aware of the new expectations.

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Deadline for Summary Annual Reports

I have a client who failed to deliver the 2020 Summary Annual Report (SAR) on time for the business’s 401(k) plan. What are the consequences?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question related to required plan reports.

Highlights of Discussion

  • Let’s start with the due date of the SAR. The date a plan sponsor must deliver a SAR to plan participants and beneficiaries is tied to the due date for filing the Form 5500 series report for the plan. The SAR is a summary of Form 5500 information. The appropriate Form 5500 is generally due seven months after the end of the plan year (i.e., July 31st for a calendar year plan). The regulations require distribution of the SAR within nine months after the close of the plan year. So, a calendar year plan has a SAR distribution deadline of September 30th following the end of the plan year.
  • If the plan sponsor has an extension to file Form 5500 for the year, the sponsor also has additional time to provide the SAR (i.e., two months after the close of filing extension [DOL Reg. § 2520.104b-10(c)]. For example, if a calendar year plan has an extension to file Form 5500 until October 15th of the following year, the plan sponsor must distribute the SAR for the plan by December 15th.
  • If a plan fails to provide the annual SAR, there is no stated penalty per se. However, plan sponsors have a fiduciary duty to ensure compliance with all plan reporting and notice rules. The error could result in DOL fines or criminal action upon discovery. The best course of action is to distribute a current SAR as quickly as possible and document how this failure will be avoided in the future.
  • There is a potential penalty if a plan participant or beneficiary requests a SAR and the sponsor fails to provide one in a timely manner. Failure to provide a SAR within 30 days of receiving a request from a plan participant or beneficiary could result in a penalty of $110 per day per participant [ERISA § 502(c)(1)].

Conclusion

When applicable, plan sponsors have a fiduciary duty to distribute SARs each year to participants and beneficiaries. They also have a responsibility to timely provide them upon request.

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What Makes a Plan an Electing Church Plan?

“I discovered a church that has been filing a Form 5500 for its retirement plan even though it is not required to do so (it intends to be a non-electing plan). Will the IRS categorize the plan as an ‘electing church plan’ because of the Form 5500 filings?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question for plans maintained by churches.

Highlights of the Discussion

Fortunately, the IRS has taken the position that a church plan cannot be inadvertently categorized as an “electing church plan” [i.e., one that elects to have certain rules under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) apply as if the plan were not a church plan]. The plan administrator must make a formal election under Treasury Regulation 1.410(d)-1(c) in order to be treated as an electing church plan. The election is irrevocable.

There are two methods of election and both involve the plan administrator executing a written statement that indicates 1) the election is made under IRC Sec. 410(d) and 2) the first plan year for which it is effective. A plan administrator could either attach the written statement to the

  • Form 5500 it files for the first plan year for which the election is to be effective

OR

  • Determination letter application for a qualified IRC Sec. 401(a) plan.

If an election is made with a written request for a determination letter, the election may be conditioned upon issuance of a favorable determination letter and will become irrevocable upon issuance of such letter.

If the church plan is a qualified defined benefit plan, the plan administrator must also notify the Pension Benefit Guaranty Corporation (PBGC) of its election for PBGC insurance to apply [ERISA § 4021(b)(3)].

Conclusion

A bona fide church plan cannot accidently become an electing church plan, subject to ERISA and the IRC as any other qualified retirement plan would be. The plan administrator must execute a written statement that is either attached to a Form 5500 filing or determination letter application.

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ERISA Fidelity Bond Failure—So what?

“I’m aware of a business retirement plan that has not maintained an ERISA fidelity bond for the plan for the last several years.  What penalties is the plan facing?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Texas is representative of a common question related to the Department of Labor’s (DOL’s) requirement for retirement plans to have ERISA fidelity bonds.

Highlights of Discussion

Through examinations of Forms 5500, the IRS has determined that one of the top two most common compliance issues among plans is not having adequate ERISA fidelity bond coverage. The DOL, pursuant to ERISA Sec. 412 and related regulations, generally requires every fiduciary of an employee benefit plan and every person who handles funds or other property of a plan be bonded to protect the plans from risk of loss due to fraud or dishonesty on the part of the bonded individuals. Please see the Department of Labor’s Field Assistance Bulletin 2008-04 for more details on ERISA Fidelity Bonds. The DOL also has a handy hand-out entitled Protect Your Employee Benefit Plan with An ERISA Fidelity Bond that provides an overview of the bonding requirements and how to obtain a bond.

Although the DOL imposes an ERISA fidelity bonding requirement on employee benefit plans,[1] the agency has not identified a specific penalty for failing to have an appropriate bond when one is required. In practice, plan officials who have failed to secure bonds have received a range of consequences from auditors’ admonitions to obtain the necessary bonds to court mandates for their removal as plan fiduciaries and plan termination.

There are substantial risks associated with not meeting ERISA’s bonding requirements:

  • Failing to report a sufficient bond on the Form 5500 can trigger a plan audit.
  • It is against ERISA law for plan officials to be without an ERISA bond.
  • Plan fiduciaries can be held personally liable for losses that could have been covered by a fidelity bond.

 

Consider the following court case.

In Chao v. Thomas E. Snyder and Snyder Farm Supply Inc. 401(k) Plan, Civil Action No. 1:00CV 889, a federal district court judge in Grand Rapids, MI, ordered the defendant (the owner of a company) to purchase and maintain a fidelity bond for the company’s 401(k) plan until the plan was terminated. The defendant also was ordered to direct the plan’s custodian to distribute or roll over the accounts of plan participants. Under the consent judgment and order obtained by the DOL, Snyder, who was a fiduciary of the 401(k) plan, further agreed to pay all expenses related to the distributions, rollovers, or plan termination, except for annual maintenance fees charged against each plan participant’s account.

Conclusion

Although no particular DOL penalty is prescribed for failing to have an ERISA fidelity bond when one is required, nonetheless, noncompliant plan officials must be aware they expose themselves, unnecessarily, to DOL audits, personal liability and potential lawsuits.

[1] Exceptions: The bonding requirements do not apply to employee benefit plans that are 1) completely unfunded or that are not subject to Title I of ERISA, or 2) maintained by certain banks, insurance companies and registered broker dealers.

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Terminating a defined contribution plan

“My client is thinking of terminating the 401(k) plan for her business. She has numerous employees. What are the steps to plan termination?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common inquiry related plan terminations.

Highlights of Discussion

Before terminating a plan, it is best to check with the plan’s record keeper or third-party administrator to determine the set procedure for executing a plan termination. Be sure to document the reasons for and all actions taken to terminate the plan.

Generally, under treasury regulations and other official guidance, the steps to terminate a defined contribution plan that covers common-law employees include the following.

  1. Execute a board resolution to authorize the plan termination and set the date of termination.
  2. Amend the plan to establish a plan termination date and make the language of the plan current for all outstanding law changes or qualification requirements effective as of the plan’s termination date.
  3. Make all required contributions accrued as of the plan termination date.
  4. Fully vest the benefits of all affected participants[1] and beneficiaries as of the set termination date.
  5. Notify all plan participants and beneficiaries about the plan termination.
  6. Authorize the plan to distribute all benefits in accordance with plan terms as soon as administratively feasible after the termination date.
  7. Provide a rollover notice to participants and beneficiaries who may elect to receive eligible rollover distributions.
  8. Distribute all plan assets as soon as administratively feasible (generally within 12 months) after the plan termination date.
  9. File a final Form 5500 series return, whichever is appropriate.
  10. Although not required, the plan sponsor may file for an IRS determination letter upon plan termination, using Form 5310 PDF, Application for Determination for Terminating Plan, to ask the IRS to make a ruling about the plan’s qualified status as of the date of termination. If a filing is done, the plan sponsor must notify interested parties about the determination application.

Conclusion

Terminating a defined contribution plan involves multiple steps. The plan sponsor and committee must carefully execute and document each step to ensure plan fiduciaries fulfill their obligations to affected participants and beneficiaries. For additional guidance, please see Chapter 12. Employee Plans Guidelines, Section 1. Plan Terminations.

 

 

[1] Applies to any employees or former employees with an account balance as of the termination date

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Form 5500 and the Automatic Filing Extension

“My client failed to file his Form 5500 for his company’s 401(k) plan by the deadline of July 31, 2020. Is there any way to get a filing extension?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to filing IRS Form 5500.

Highlights of the Discussion

Your client would have had to have filed a Form 5558, Application for Extension of Time To File Certain Employee Plan Returns by the company’s regular due date (i.e., July 31, 2020, in this case) to request a one-time extension (for 2 ½ months) to file its Form 5500 for the year. However, if your client has filed for an extension to submit his company’s business tax return for 2019, he still may be in luck with respect to filing his plan’s Form 5500 for the year.

The IRS will grant an automatic extension of time to file the Form 5500 Annual Return/Report of Employee Benefit Plan for a year—until the business’s due date for filing its federal income tax return—if  all of the following conditions are met:

  1. The plan year and the employer’s tax year are the same;
  2. The employer has been granted an extension of time to file its federal income tax return to a date later than the normal due date for filing the Form 5500; and
  3. A copy of the application for extension of time to file the federal income tax return is maintained with the filer’s records.

 An extension granted by using this automatic extension procedure cannot be extended further by filing a Form 5558, nor can it be extended beyond a total of 9½ months beyond the close of the plan year. (See the Instructions to Form 5500, page 4.)

Unfortunately, if your client did not file Form 5558 for the one-time extension, and does not qualify for the automatic extension to file by the tax return deadline, he could face late filing penalties. Those penalties could be reduced by participating in the Delinquent Filer Voluntary Correction Program.

Conclusion

Business owners who have been granted an extension to file their business tax returns automatically receive an extension of the deadline to file Forms 5500 Return/Report for their retirement plans, if they satisfy certain conditions.

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DOL Filing for Top Hat Plans

“Are top hat plans required to file a Form 5500 report with the Department of Labor (DOL)?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Washington is representative of a common inquiry related to top hat plans.

Highlights of the Discussion

Top hat plans (i.e., unfunded plans maintained for a select group of management or highly compensated employees) are exempt from most of the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), including the need to file a Form 5500 series report. Instead, top hat plans are subject to an alternative method of compliance with the reporting and disclosure provisions of ERISA.

Sponsors of top hat plans are required to submit a “statement” to the DOL pursuant to DOL Reg. 2520.104–23 within 120 days of the plan’s effective date. As of August 16, 2019, it is mandatory for sponsors of such plans to file top hat plan statements electronically via the Top Hat Plan Statements Online Filing System. In March 2020, the DOL introduced its a top-hat plan statement search engine.

The information requested on the statement is quite simple:

  • Employer identification information (EIN, name, address);
  • Plan administrator information;
  • Number of top-hat plans maintained;
  • Number of participants in each plan; and
  • A declaration that the sponsor maintains the plan(s) primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

If a sponsor fails to file the top hat statement with the DOL, the plan could be subject to ERISA’s full reporting and disclosure requirements, and assessed penalties by the DOL and IRS. Corrections can be made through the Delinquent Filer Voluntary Compliance Program.

Conclusion

While a sponsor of a top hat plan does not have to file an annual Form 5500 series report for the plan, it must submit a statement to the DOL within 120 days of the plan’s effective date. Failure to do so could result in more burdensome reporting requirements and penalties.

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