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.
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