Tag Archive for: Form 5500

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Delaying a Plan Audit

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“My client started a 401(k) plan for her business last year on July 1. The plan operates on a calendar year basis. The recordkeeper just told my client that because her plan covered more than 100 participants last year, she has to include an auditor’s report with the plan’s Form 5500 filing. She has an extension to file, but time is running out. Is there any relief available for her?”  

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 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 New York focused on Form 5500 and plan audits.

Highlights of the Discussion

A little-known rule could buy your client some extra time to complete a plan audit. She should check with her tax advisor or accountant, but, generally, when a plan has a short plan year of seven months or less for either the prior plan year or the plan year being reported, an election can be made to defer filing the Independent Qualified Public Accountant (IQPA) report with the Form 5500 (see Form 5500, Schedule H Instructions).

In your client’s case, because the prior year (2022) was a short plan year with fewer than seven months, your client can delay filing an IQPA until the 2023 Form 5500 filing is due (i.e., in 2024). According to the 2022 Schedule H Form 5500 instructions, she should check the box on Line 3d(2) indicating the plan has elected to defer attaching the IQPA’s opinion until the following year’s filing. The 2023 Form 5500 should be completed following the requirements for a large plan, including the attachment of the Schedule H and the IQPA report which covers the short plan year in 2022 and the 2023 plan year.

Conclusion

A qualified retirement plan with a short plan year of fewer than seven months can catch a break regarding when it needs to include an IQPA report for the plan with its Form 5500 filing. Always be sure to check the complete Form 5500 filing instructions for a particular year, and confer with a tax professional for specific guidance.

 

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Faulty Form 5500 Filings and “Reasonable Cause”

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“My client who sponsors a 401(k) plan received a notice from the Department of Labor (DOL) that the DOL rejected the plan’s Form 5500 filing because it lacked certain required information. My client is now facing a $75,000 penalty.  Is there any way to correct this error and reduce the penalty?”

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 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 Illinois is representative of a common inquiry regarding faulty Form 5500 filings.

Highlights of Discussion

Unfortunately, since the plan sponsor has already received a formal notice from the DOL, the DOL’s Delinquent Filer Voluntary Correction Program (DFVCP) is not available to the sponsor to correct the failure with a minimal penalty. But—there still may be an option to correct the error and pay a lesser penalty using the “reasonable cause” argument.

The DOL is authorized to waive all or part of the civil penalty for a faulty Form 5500 filing if the plan sponsor demonstrates reasonable cause for its failure. The IRS has a similar waiver provision. Reasonable cause is based on all the facts and circumstances in the situation. The plan sponsor must establish it exercised all ordinary business care and prudence to meet the annual filing obligations but, nevertheless, was unable to comply with the duty within the prescribed time.

According to the IRS’s Delinquent Filing Penalty Relief Frequently Asked Questions, reasonable cause may include the following:

  • Fire, casualty, natural disaster, or other disturbances,
  • Inability to obtain records,
  • Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family,
  • Other reasons that establish the plan sponsor used all ordinary business care and prudence to meet its filing obligations but, despite its best efforts, failed to meet the file standards.

RLC regularly works with a plan service provider who has had success using the reasonable cause argument when applicable. One example involved a plan sponsor that received a DOL notice rejecting its Form 5500 filing because the plan sponsor had not included the necessary audit report. According to the notice, the DOL was going to assess a $50,000 penalty. The plan service provider helped the plan sponsor draft a letter of reasonable cause, assisted with getting the audit done and refiled the Form 5500 within the prescribed 45-day correction window. As a result, the DOL lowered its penalty to $5,000.

Conclusion

Even in situations where the DFVCP can no longer be used because the plan sponsor has already received a DOL notice regarding a faulty Form 5500 filing, there still may be ways to lessen the penalty assessment by utilizing the reasonable cause argument.

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The New Way to Count Participants for Form 5500 Audits

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“I attended a conference where there seemed to be a great deal of confusion regarding the Department of Labor’s (DOL’s) newly released Form 5500 filing rules. One change relates to how plans count participants for the independent audit requirement. Can you clarify, please?”

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 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 Colorado is representative of a common inquiry regarding Form 5500 filing rules for defined contribution plans.

Highlights of Discussion

Perhaps the most important detail about the new Form 5500 filing rules is that they pertain to the 2023 plan year filing, which will be done in 2024. Plan sponsors must follow the current rules for the 2022 plan year filing.

The DOL requires sponsors of employee benefit plans subject to the annual Form 5500 series of returns and schedules to include an audit report from an independent qualified public accountant (IQPA). There is an exception to this requirement for “small plans” (i.e., those with fewer than 100 participants at the beginning of the plan year) (DOL Reg. 2520.104-46).  The current rules count individuals who are eligible to participate even if they have not elected to participate and do not have an account in the plan.

For plan years beginning on or after January 1, 2023, participant count for the audit waiver will be based on the number of participants with account balances at the beginning of the plan year. This change is intended to reduce the number of plans that need to have an audit, lower expenses for small plans and encourage more small employers to offer workplace retirement savings plans to their employees.

For both 2022 and 2023, a plan may qualify for the audit waiver even if there are more than 100 participants. Under the “80 to 120 Participant Rule,” if the number of participants covered under the plan as of the beginning of the plan year is between 80 and 120, and a small plan annual report was filed for the prior year, the plan administrator may elect to continue to file as a small plan and, therefore, qualify for the audit waiver.

For more information, please see the final regulations for Annual Reporting and Disclosure.

Conclusion

The Form 5500 filing regulations, among other things, change the method of counting participants for purposes of determining when a defined contribution plan must file as a small plan, which also factors into whether the plan may be exempt from the IQPA audit requirement. Specifically, for 2023 and later plan years, plans are directed to count only the number of participants/beneficiaries with account balances as of the beginning of the plan year, as compared to the current rule that counts all the employees eligible to participate in the plan.

 

 

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Group of Plans Audit Requirement

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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?

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“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

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“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”

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“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

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“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?

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“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?

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“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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