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Form 5500 and the “80-120 Rule”

“My client was told by the record-keeper for her plan that it would be filing the plan’s IRS Form 5500 annual report under the “80-120 Rule.” Can you explain what that rule is?

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.

Highlights of the Discussion

Generally, plans with more than 100 participants are required to file the long version of Form 5500, Annual Return/Report of Employee Benefit Plan, as a “large plan.” However, there is an exception referred to as the “80-120 participant rule” that allows certain plans that would otherwise be considered large to continue to file as “small plans” following the streamlined Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, requirements (see 2018 Form 5500 Instructions).

The DOL defines small plans for Form 5500 purposes as plans with fewer than 100 participants at the beginning of the plan year. Small plans file Form 5500-SF and Schedule I Financial Information—Small Plans, (instead of Form 5500 and Schedule H Financial Information), plus certain other applicable schedules. However, small plans, typically, are exempt from the independent audit requirement that applies to large plans.

Under the 80-120 participant rule, if your client filed as a small plan last year and the number of plan participants is fewer than 121 at the beginning of this plan year, your client may continue to follow the Form 5500-SF requirements for this year.

EXAMPLE: For the 2017 plan year, Smally’s Inc., had 93 participants, so the plan administrator filed a Form 5500-SF and applicable schedules as a small plan.  The number of plan participants at the beginning of the 2018 plan year rose to 112.  Under the 80-120 participant rule, Smally’s Inc., may elect to complete the 2018 Form 5500-SF, instead of the long-form Form 5500 and schedules, in accordance with the instructions for a small plans.

Conclusion

The 80-120 participant rule may allow some plans that would otherwise be required to follow the arduous large plan filing requirements for Form 5500 to, instead, continue to file under the streamlined Form 5500-SF process.

 

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Relief for delinquent Form 5500-EZ filers

“I have several clients who run owner-only businesses that have 401(k) plans that cover themselves and their spouses. I believe at least some of them should have been filing Form 5500-EZ, Annual Return of a One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan, but have not. Is there a way for them to correct this error without 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 a financial advisor from Colorado is representative of a common inquiry related to plan reporting requirements.

Highlights of the Discussion

An owner-only business with a qualified retirement plan that covers the owner, partners and spouses, such as a “solo (k)” or “individual (k),” must begin filing an annual Form 5500-EZ when the total value of the plan assets exceeds $250,000 at the end of the plan year. Regardless of plan asset value, an owner-only business must file a Form 5500-EZ to report the final plan year of the plan (See the Instructions for Form 5500-EZ.)

Initially, the IRS did not provide any penalty relief for delinquent Form 5500-EZ filers. That changed with the IRS’s release of Revenue Procedure 2015-32, which made permanent a 2014 pilot program that allowed owner-only businesses to correct late Form 5500-EZ filings. Without the program, a plan sponsor faces late filing penalties of $25 per day, up to $15,000 for each late Form 5500-EZ, plus interest, and $1,000 for each late actuarial report (for a defined benefit plan, if needed).

The IRS’s Form 5500-EZ Later Filer program is separate from the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP), which is available to late filers of Forms 5500, Annual Return/Report of Employee Benefit Plan. Form 5500-EZ filers do not qualify for the VFCP.

In order for late filers of Form 5500-EZ to qualify for penalty relief, the business owner must meet the following criteria. He or she

  1. Has not been informed of a late filing penalty (i.e., the business owner has not received a CP 283 Notice from the IRS);
  2. Submits all delinquent returns for a single plan together;
  3. Prepares a paper Form 5500-EZ for each delinquent year, including any required schedules and attachments, if any. Use the Form 5500-EZ return that applied for the delinquent plan year. However, if the return is delinquent for a year prior to 1990, use the Form 5500-EZ for the current year (see prior year Forms 5500-EZ);
  4. Writes in red letters at the top of each paper return: “Delinquent Return Filed under Rev. Proc. 2015-32, Eligible for Penalty Relief;”
  5. Attaches a completed one-page transmittal schedule (Form 14704) to the front of each late return;
  6. Pays the required fee. The fee is $500 per delinquent return, up to $1,500 per plan. Make checks payable to “United States Treasury;” and
  7. Mails the returns to the following address (Note: Electronically filed delinquent returns are not eligible for penalty relief).

First class mail

Internal Revenue Service

1973 North Rulon White Blvd.

Ogden, UT 84404-0020

Private delivery services

Internal Revenue Submission Processing Center

1973 North Rulon White Blvd.

Ogden, UT 84404

Conclusion

Some owner-only businesses with qualified retirement plans must file an annual Form 5500-EZ. If they fail to do so when required, IRS penalties could result. Since 2015 there has been a permanent penalty relief program for Form 5500-EZ late filers to follow in Revenue Procedure 2015-32.

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IRA
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Payroll Deduction IRA vs. Employer-Sponsored IRA

Is there a difference between payroll deduction IRAs and employer-sponsored IRAs?”

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, 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 New Jersey is representative of a common inquiry related to workplace IRAs.

Highlights of the Discussion

Payroll deduction IRAs and employer-sponsored IRAs are similar, but they have important differences. A key difference is level of involvement by the employer.

The IRS views payroll deduction IRAs as arrangements that merely allow employees to make contributions to IRAs by having amounts deducted from their paychecks by their employers which are then directed to IRAs for deposit. There are no employer contributions. All the standard IRA rules apply. Further, if a payroll deduction IRA program follows the IRS’s safe harbor rules for structure, it is not considered an employer pension plan and, therefore, exempt from the rules of the Employee Retirement Income Security Act of 1974 (ERISA) (see DOL Reg. 2510.3-2(d) and Interpretive Bulletin 99-1).

Generally, a payroll deduction IRA is not considered an ERISA plan if

  1. it is voluntary;
  2. there are no employer contributions;
  3. the employer does not endorse a particular IRA provider (although limiting the number of IRA providers is permitted within limits); and
  4. the employer receives only reasonable compensation for administrative services.

In contrast, IRC Sec. 408(c) and IRC Sec. 219(f)(5) allow employers and employee associations to establish employer-sponsored IRA arrangements and make employer contributions to employees’ IRAs or a common trust fund that separately accounts for the employees’ contributions. Employers who want an IRS ruling on their employer-sponsored IRA plans may file IRS Form 5306, Application for Approval of Prototype or Employer-Sponsored Individual Retirement Arrangement. These are savings arrangements other than simplified employee pension (SEP) plans under IRC Sec. 408(k) or savings incentive match plans for employees (SIMPLE) IRA plans under IRC Sec. 408(p). Consequently, all the standard IRA rules apply.

Any amount contributed by an employer to an IRA that is employer sponsored under IRC Sec. 408(c) shall be treated as payment of compensation to the employee (other than for a self-employed individual), deductible by the employer and subject to Social Security and unemployment taxes. Employees may be able to deduct such contributions under the standard rules that apply for the deductibility of traditional IRA contributions [Treasury Regulation 1.219-1(c)(4)]. In this scenario, the employer-sponsored IRA arrangement is considered an ERISA plan for certain purposes, for example, they are subject to limited Form 5500 Reporting (See “IRA Plans” IRS Form 5500 instructions).

Conclusion

While payroll deduction IRAs and employer-sponsored IRAs have similarities, the DOL views them differently, depending on the level of involvement by the employer.

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Form 5500 Limited-Scope Audit

“What is a Form 5500 limited-scope audit, and how does a plan qualify for one?”

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 Massachusetts is representative of a common inquiry related filing Form 5500, Annual Return/Report of Employee Benefit Plan.

Highlights of Discussion

Generally, ERISA requires administrators (the plan sponsors in most cases) of employee benefit plans  with 100 or more participants to have full scope audits of their plans, conducted by an independent qualified public accountant (IQPA), as part of their obligation to file an annual Form 5500 series of reports with the Department of Labor (DOL) and IRS. The IQPA is tasked with conducting an examination of all financial statements of the plan, and of other books and records of the plan as may be necessary, to enable him or her to form an opinion as to whether the financial statements and schedules conform to generally accepted accounting principles and standards.

Under ERISA Section 103(a)(3)(C) and DOL Reg. 2520.103–8, plan sponsors may instruct the IQPA not to perform any auditing procedures with respect to investment information prepared and certified by “qualified institutions.”  A qualified institution could be a bank, trust company or similar institution, or an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as trustee or custodian for the investments. This option is referred to as a “limited scope audit,” and is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive that full scope audits.

Brokerage firms and investment companies generally would not meet the eligibility requirements for a limited scope audit. However, if those types of firms have established separate trust companies, such trust companies, potentially, could meet the requirements to be a qualified institution for this purpose. A 2002 DOL information letter provides more insight into what constitutes a qualified institution. It is the responsibility of the plan sponsor to determine whether the conditions for limiting the scope of an IQPA’s examination have been satisfied, and only the plan sponsor can request the IQPA to limit the scope of the audit. The American Society of Certified Public Accounts has put together a “Limited Scope Audits Resource Center” to help plan sponsors satisfy their fiduciary responsibility in this area.

The DOL attributes the overall increase in noncompliant plan audits with the corresponding increase in the number of limited-scope audits performed.[1] According to a DOL report, “Assessing the Quality of Employee Benefit Plan Audits,” of the plans studied, 81 percent had limited scope audits and of those limited-scope audits, 60 percent contained major deficiencies. In fact, as a result of the study, the DOL recommended that Congress amend ERISA to repeal the limited-scope audit exemption.

Conclusion

While Form 5500 limited-scope audits may be less costly and time consuming up front, if inappropriately used or incorrectly done, they could result in a greater expenditure of money and time in the long run.

[1] DOL, “Assessing the Quality of Employee Benefit Plan Audits,” 2015

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“Off Again” Form 5500 Compliance Questions

“For the past couple of years, the IRS has added some extra compliance questions to the Form 5500 and related schedules—but told plan sponsors not to answer them. What is the current status of these questions?”

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. 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 California is representative of a common inquiry related to Form 5500.

Highlights of Discussion

You are correct. For the 2015 and 2016 filings, the IRS added compliance questions to Forms 5500, 5500-SF, 5500-EZ and Schedules H, I and R. But, for each year, the IRS later instructed filers not to answer them. The IRS removed these additional questions from the 2017 version of Form 5500 and related schedules, which plan sponsors will file later in 2018 (see the 2017 Instructions to Form 5500).

“The IRS-only questions that filers were not required to complete on the 2016 Form 5500 have been removed from the [2017] Form 5500 and Schedules, including preparer information, Schedules H and I, lines 4o, and 6a through 6d, regarding distribution during working retirement and trust information, and Schedule R, Part VII, regarding the IRS Compliance questions.”

Be aware, however, that the DOL/IRS/PBGC are working on a long-term project that would improve and modernize Form 5500 in the areas of financial and other annual reporting requirements, and make the investment and other information more data mineable. We expect more updates to come in 2018.

Conclusion

The on again, off again additional IRS compliance questions on Forms 5500 are officially off the 2017 version of the forms that plan sponsors will file in 2018. There is more to come regarding a long-term project to overhaul the forms.

 

 

 

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