An annual report, Form 5500, is required to be filed with the Department of Labor (DOL) for almost all retirement plans. The report provides basic information about the plan, the plan sponsor, participation and financial information, in addition to certain plan activities.
This newsletter will explore the annual report requirements for the 2006 plan year as well as some significant changes that have been proposed for future years.
Who Must File
All pension and welfare benefit plans covered by ERISA, whether or not qualified, must file an annual report unless they meet one of the exceptions described below. Pension benefit plans include pension, profit sharing, 401(k) and 403(b) plans. Welfare benefit plans include medical, dental, severance pay plans, etc. SIMPLE 401(k) plans and employer-sponsored IRA plans must also file.
The following plans do not have to file annual reports: SIMPLE IRA plans, simplified employee pension (SEP) plans, certain church-sponsored plans, government plans, certain unfunded plans and certain fully insured welfare plans.
Plans that cover only a single owner (and spouse, if applicable) of a wholly owned trade or business, or only partners of a partnership (and spouses, if applicable), can file Form 5500-EZ, a shorter version of Form 5500. Such employers are exempt from filing until total plan assets, when combined with all other plans of the employer, exceed $100,000 (increasing to $250,000 for 2007 plan years).
Due Date for Filing
Form 5500 must be filed by the last day of the seventh month after the close of the plan year. An automatic extension of time of up to 2½ months can be obtained by filing Form 5558 with the IRS by the original due date of the report.
Alternatively, an approved extension to file the employer’s income tax return can be used to extend the due date of Form 5500 if the fiscal years are the same and the extended due date is beyond the original filing date of the 5500. Special filing extensions may be announced in the event of declared natural disasters.
Significant penalties may be assessed for the failure to file or the late filing of an annual report, unless reasonable cause can be shown. Reduced penalties may be available for late reports filed under the Delinquent Filer Voluntary Compliance Program.
Form 5500 Schedules
There are a number of schedules which may have to be attached to the annual report. The determination of which schedules need to be attached is dependent in part on the size of the plan.
Small Plan versus Large Plan
Generally, plans with less than 100 participants on the first day of the plan year are considered “small plans” and those with 100 or more participants are considered “large plans.” However, a plan that filed using small plan status in the previous year can continue to file as a small plan as long as the participant count does not exceed 120. Conversely, a large plan can continue to file with that status as long as participation does not fall below 80.
It is usually more convenient and less costly to file as a small plan. This provides an incentive for paying out terminated participants where possible when the participant count approaches 120. All participants, active as well as inactive, are considered, including those in salary deferral plans who choose not to defer and may have no account balance.
It is important for the employer and the trustee to provide complete and accurate information to the Form 5500 preparer so that all of the necessary schedules can be properly completed and the report can be filed timely.
Schedules for All Plans
The following schedules may be required for both small and large plans:
Schedule A: Reporting information about insurance/annuity policies including commissions, fees and financial activity.
Schedule B: Actuarial information required for defined benefit plans (other than fully insured plans).
Schedule D: Listing the value of plan investments in pooled or collective funds.
Schedule E: Annual information required of ESOPs (Employee Stock Ownership Plans).
Schedule R: Reporting distribution, funding, amendment and coverage information. Profit sharing plans with no distributions need not file.
Schedule SSA: Reporting deferred benefits of terminated participants to the Social Security Administration (SSA), which contacts them when they reach retirement age. It also notifies the SSA when reported terminees have been paid out and no longer have benefits under the plan.
Schedules for Large and Small Plans
The following schedules are required for large plans only:
Schedule C: Listing service providers paid $5,000 or more and the termination of a plan accountant or actuary.
Schedule G: Reporting loans, fixed income obligations or leases in default and prohibited transactions.
Schedule H: Reporting financial information.
Small plan filers report financial information on Schedule I, a shortened version of Schedule H. Both schedules disclose the late transmittal of salary deferrals and participant loan repayments to the plan. Transmittal is required as soon as administratively feasible but no later than the 15th business day of the month following withholding. The 15th business day rule is not a safe harbor but an outside limit. Depending on the employer’s payroll system, the deadline could be as soon as a few days following withholding.
Schedules H and I also report the amount of the trustees fidelity bond in force during the year as required by ERISA. Most plans must carry at least 10% of the value of plan assets. Small plans with certain types of non-qualifying investments may need additional bonding to avoid being subject to the audit requirement for large plans discussed below. The maximum required bond will increase from $500,000 to $1,000,000 as of 2008 for plans that hold employer securities.
Accountant’s Audit Requirement
The most significant difference between large plans and small plans is the requirement that large plans engage an independent qualified public accountant to audit the plan each year. The audit report must be attached to the 5500. The audit verifies the accuracy of financial data, employee participation and other compliance matters.
Special Rules
Fully insured plans are not required to attach Schedule H or Schedule I and are not subject to the accountant’s audit requirement. Section 403(b) tax deferred annuity arrangements and IRA plans need only complete portions of Form 5500 without attaching any schedules. Section 403(b) plans are also exempt from the accountant’s audit requirements (but see proposed changes below).
Summary Annual Report
Every plan that files an annual report must provide a summary annual report (SAR) to participants, which is a brief explanation of the information contained in the annual report. The deadline is 9 months after the close of the plan year, or 11½ months if the plan obtained a 2½ month extension for filing the annual report.
The Pension Protection Act of 2006 (PPA) made a number of changes to the annual report and SAR requirements for defined benefit (DB) plans, effective in 2008. DB plans will no longer have to prepare SARs. Instead, all DB plans will have to provide a detailed annual funding notice, expanding a requirement that previously applied only to multiemployer DB plans. Multiemployer DB plans will be subject to additional disclosure requirements in their summary reports to participating employers, unions and the Pension Benefit Guaranty Corporation.
Expanded information will be required for all DB plans on the annual reports. In addition, employers with intranet websites for communicating with employees will have to display basic and actuarial information from the annual report on their intranet sites. Such information will also be posted on the DOL’s website.
Electronic Filing of Annual Reports
For plan years beginning in 2008, annual reports will have to be filed electronically. Until then, electronic filing is optional. The DOL is expected to issue guidance in this area. Original signed copies of the reports will have to be kept on file by the plan administrator. Form 5500-EZ filers may have the option of continuing to file paper copies. Once the electronic filing requirement becomes effective, amended reports and prior year reports filed late will have to be filed electronically.
Proposed Changes to Form 5500
In anticipation of the impending electronic filing requirement, the DOL proposed significant changes to the annual report in July of 2006. A supplemental proposal was issued in December of 2006 to incorporate changes mandated by PPA. The proposed changes are as follows:
- Establishment of Form 5500-SF, a new two-page short form for plans with less than 100 participants that meet certain investment requirements. All schedules, except Schedule B, would be eliminated although much of the same information would be included on the condensed form.
- For plans still filing Form 5500, Schedules E and SSA would be eliminated.
- Section 403(b) plans would become subject to the full financial reporting rules.
- Schedule C, reporting service provider information, would be revised.
- Schedule B would be replaced with two new schedules: Schedule SB for single employer DB plans and Schedule MB for multiemployer DB plans, which would accommodate the new disclosure requirements under PPA. Schedule MB would be required for all money purchase pension plans.
- Additional questions would be added to Schedule R to meet PPA requirements.
- For 2007, most plans with less than 25 participants will be able to file an abbreviated version of the current Form 5500, pursuant to a provision under PPA. Some schedules and certain items will be excluded. As of 2008, these plans will be able to file the new 5500-SF form.
Conclusion
Retirement plans must file an annual report, Form 5500, with the DOL each year or be subject to hefty fines. Complete and accurate information will enable the report preparer to complete the proper schedules on a timely basis.
The 2008 electronic filing requirement and new disclosure rules under PPA are expected to result in major revisions to Form 5500. The same basic information will need to be collected each year in order for the report to be prepared. But the proposed format changes will save a lot of paper, and the additional disclosure requirements should provide added protection for plan participants.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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