Form 5500 FAQs

The Form 5500 is an information return that is filed, usually with the Department of Labor, each year to provide certain details about the operations and financial status of an employee benefit plan. I know, it sounds about as interesting as watching paint dry, but it is actually quite important. There are actually entire books written on the who, what, why, where and when of the Form 5500. We will spare you that amount of detail and just touch on some of the more common questions we’ve received.

Why is the Form 5500 important—as a fiduciary?

Many plan sponsors outsource preparation of this important form and then simply sign on the bottom line and electronically file it without giving it a second though. But, a closer review of the form reveals that it covers areas such as fidelity bonding, timely deposit of employee deferrals, and defaulted participant loans, just to name a few important details.

In addition, the statement that appears directly above the signature line reads:

Under penalties of perjury and other penalties set forth in the instructions, I declare that I have examined this return/report, including accompanying schedules, statements and attachments, as well as the electronic version of this return/report, and to the best of my knowledge and belief, it is true, correct, and complete.

While the Department of Labor isn’t in the habit of throwing people in jail for perjury for making an honest mistake on a Form 5500, they do expect plan sponsors to take it seriously and report all of the requested information in a complete and accurate manner.

As a result, we highly recommend that you review your Form 5500 and work with the preparer to ensure you understand what is reported.

Which plans are required to file Form 5500?

As a general rule, most employee benefits plans are required to file Form 5500 each year. This includes almost all retirement plans as well as some health & welfare plans.

You said “almost all” retirement plans. Are there exceptions?

Yes. As a general rule, the requirement to file a Form 5500 is driven by the Employee Retirement Income Security Act of 1974 (ERISA), which is one of the primary laws that govern retirement plans. So, if a plan is not covered by ERISA, it is not required to file a Form 5500.

In the world of retirement plans, there are a couple of key types of plans that are exempt.

Owner-Only Plan

A retirement plan that covers only the owner(s) of the company and, if applicable, the spouse(s) of the owner(s) is generally exempt from filing a Form 5500 until the total plan assets are at least $250,000 as of the first day of the plan year. This assumes that the company doesn’t have any employees that have met the plan’s stated eligibility requirements. If there are employees who have been improperly excluded, then the ERISA exemption is void, and a Form 5500 must be filed.

Non-ERISA 403(b) Plans

Churches and government entities are generally exempt from ERISA coverage, and it just so happens that both types of entities also frequently sponsor 403(b) plans. Such plan are not required to file Form 5500.

There is another way a 403(b) plan might be exempt. If the employer sponsoring the plan has only limited involvement in its operation and maintenance, that plan is also exempt from ERISA and, therefore, the requirement to file Form 5500. A word of caution is in order. The “limited involvement” exemption can be tough to satisfy, so please be sure to work with a knowledgeable provide (like DWC) to determine whether it applies in a given situation.

Wait! Does that mean some 403(b) plans are required to file?

Indeed, it does. Any 403(b) plan that does not qualify for the ERISA exemption described in the previous questions is required to file a Form 5500 each year.

What accounting methodology should be used in preparing the financial statement on the Form 5500?

The instructions to the forms indicate that cash, modified cash, and accrual accounting are all acceptable methods to use as long as a plan sponsor is consistent from one year to the next. Often times, the method used will align with how the plan is recordkept. For example, the records for balance forward plans are often kept on an accrual basis, so the financial statements are typically shown on an accrual basis. Conversely, daily valued plans are typically recordkept on a cash basis, so the Form 5500 will show cash basis financial statements.

Large plan filers typically report their financial statements on Form 5500 using the accrual method, because the independent auditors report is typically presented on an accrual basis.

What is the threshold for being a large plan filer?

If a plan has 100 or more participants on the first day of a plan year, then that plan is a large plan filer for that year. There is an important exception to that trigger point. It is referred to as the 80/120 rule. It says that a plan that is a small plan filer can continue to file as a small plan until the first plan year it has more than 120 on the first day of the year.

The participant count is comprised of:

  • All employees who are eligible for the plan (even if they don’t have an account balance), plus
  • All former employees with remaining plan balances.

Plans that are close to the large-plan-filer threshold can often stay below it by being diligent about processing mandatory pay-outs of terminated participants with small account balances so that they are not picked up in the participant count.

What is the difference between a large plan and small plan filer?

The most significant difference is that large plan filers are required to engage an independent qualified public accountant (IQPA) to audit the plan’s financial statements each and attach the audit report to the Form 5500 when it is filed. That report includes the IQPA’s opinion as to whether or not the plan’s financial statements are fairly presented in conformity with generally accepted accounting principles (GAAP).

Since the fee for such an audit is typically in the high four-figure to low five-figure range, plan sponsors are generally eager to postpone that expense for as long as possible. In addition to the fees, the plan sponsor can expect to spend additional time working with the auditor; however, working experienced service providers, e.g. recordkeeper, TPA, etc., can greatly reduce the additional budgeted time.

Our outside bookkeeper used to work in a CPA firm. Can we hire him/her to perform the audit and save a few bucks?

The Department of Labor has very strict requirements for how the annual audit is to be conducted and what it must report. As a result, working with someone who is not well-versed not just with audits in general but specifically with employee benefit plan audits can amount to playing with fire. The reason is that the DOL will completely reject a Form 5500 that includes a deficient audit and fine the plan sponsor for being delinquent. It sounds like a harsh penalty, but it is consistent with the general rule that plan sponsors are ultimately responsible for the compliance of their plans.

A 2014 report by the DOL’s Employee Benefit Security Administration found that 39% of plan audit reports contained major deficiencies. That report and the American Institute of CPAs Employee Benefit Plan Audit Quality Center provide useful tools to help plan sponsors hire auditors that are well-qualified and experienced.

If I am a large plan Form 5500 filer, is it ever possible to become a small plan filer in future years?

Yes. A plan’s filing status is determined on a year-by-year basis, so once a large plan filer drops to fewer than 100 participants on the first day of a year, that plan becomes a small plan filer.

What is the deadline for filing Form 5500?

The Form 5500 is due seven months after the end of the plan year and can be extended for an additional two and a half months by submitting Form 5558 by the initial due date. For calendar year plans, the initial deadline is July 31, and the extended deadline is October 15. Most large plan filers extend to allow plenty of time for the IQPA audit to be completed.

Are there penalties if the Form 5500 is filed after the deadline?

Yes, both the IRS and DOL can assess significant penalties for failure to file timely.

  • Internal Revenue Service: $25 for each day the form is late up to a maximum of $15,000
  • Department of Labor: Up to $2,063 for each day the form is late with no overall maximum

Yikes! Those are some hefty penalties! What should I do if I discover that I am late?

Fortunately, the DOL maintains a correction program called the Delinquent Filer Voluntary Correction Program (DFVCP). The program is very easy to use and includes a substantially reduced penalty (only they call it a user fee instead) as shown below:

  • Small plan filers: $750 for each year that is late with a maximum of fee of $1,500 if two or more late filings are submitted together. Note that for small, non-profit organizations, the maximum is reduced to $750.
  • Large plan filers: $2,000 per year up to a cap of $4,000 for two or more years submitted at the same time.

It is important to note that as soon as a plan sponsor receives a delinquency notice from the DOL, the DFVCP is no longer available. However, the IRS is usually quicker on the draw with these notices, and an IRS notice does not preclude use of the program. So, if you are the recipient of an IRS notice, file under DFVCP as quickly as possible and then respond to the IRS to let them know that you have done so. Presto! You’re back in the good graces of both agencies.

I heard there are different versions of the Form 5500. Which one do I file?

Large plan filers only have one option — the full Form 5500. Small plan filers, however, can choose between the full form (minus a few schedules) or the shorter Form 5500-SF. You’ll never guess what the SF stands for…yep, short form.

Although there are some theoretical differences between the two forms, our experience is that using the SF doesn’t really save that much time or effort. And, since there are certain features that might make a plan ineligible to use the SF, we find that is generally more efficient to use the regular form.

My plan doesn’t have any assets at the end of its first year, because the contributions won’t be deposited until early in the following year. Do I still have to file a Form 5500 for the first year?

In a word, yes.

I am the only participant in my plan. Do I still have to file a Form 5500?

That one requires a few more words. Owner-only plans (described above) are not required to file Form 5500 until the first year the plan’s assets exceed $250,000 on the first day of the year. Once the plan hits that threshold, it is required to file Form 5500-EZ with the IRS.

Since the EZ must be filed as a paper copy, some choose to file the Form 5500-SF instead so that they can take advantage of the electronic filing system and receive immediate confirmation of its acceptance. However, once a plan begins using the SF, it must continue to do so.

For plans that choose to stick with the EZ, we strongly recommend submitting it via certified mail or private deliver service so that there is documentation of timely filing.

I’ve heard the government uses the Form 5500 to determine which plans it will audit. Is that true?

Generally, yes, and the IRS and DOL use it in several ways.

For starters, there are certain questions and cross-checks that can be audit flags if answered in certain ways. These include questions about late deposits, the funded status of the plan, number of participants who terminated employment in a given year, etc. While we never recommend being anything less than truthful on a Form 5500, DWC is aware of these audit-flag questions and works with its clients to ensure they are answered appropriately. To the extent a flag is raised, we proactively assist with correcting any issues and including documentation of those corrections along with the form.

Another way the Form 5500 is used in audit selection is via screening for certain plan features. Sometimes, the IRS/DOL are aware that a certain feature is commonly mishandled. They may then query the Form 5500 database to find all plans that include that feature and then select a random sample to audit to ascertain the seriousness of the issue overall.

Other times, there might be a plan feature that is new or has recently gained popularity, and the IRS/DOL want to find out if that feature is being handled correctly. They will then follow the same process of querying the database and taking a sample to audit. 

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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.