A Checklist to Avoid Form 5500 Errors

They’ll be arriving soon:  IRS Forms 5500 to employers for review and signature, if they sponsor a 401k plan with a December 31 year-end. While Third Party Administrators (TPAs) prepare the form and often submit it on behalf of employers, it is the sponsors who are plan fiduciaries and responsible for accurate and timely filing of the Form 5500.

The Form 5500 filing deadline for plans with a December 31 year-end is July 31 unless an extension is requested.  Then the form must be submitted by October 15.  Meeting filing deadlines becomes even more critical this year as the SECURE Act, passed at the end of 2019, increased penalties ten-fold.  The IRS daily late filing penalty now is $250, with a maximum of $150,000. 

Likewise, inaccurate or incomplete information on the Form 5500 can have serious consequences.  Employers undergoing an IRS or DOL audit can face costly fines for errors.  Also, certain responses can lead to a plan audit.  One common audit trigger is a form with the answer NO to the question “Was this plan covered by a fidelity bond?”.   Plan sponsors may easily provide a NO answer – even when they have a fidelity bond – because the question is listed with others for which the expected – and compliant – answer is NO.

Here are some suggestions for carefully reviewing the Form 5500 before signing:

1.   Review the Form 5500 as though it is the first time you see it. Do not make assumptions regarding any numbers or copy data from another form. This includes your EIN and plan number.

2.   Make sure the time period covered by the Form 5500 is not more than 12 months.  Also check last year’s form to make sure there is no gap between the two documents; the beginning date of this year’s form should be the day after the final date of last year’s form.

3.   Choose a business code from those in the section marked “Codes for Principal Business Activity” in the Instructions for Form 5500 .  It is okay if this year’s code is different from the one used in a previous year; business operations often result in code changes.

4.   Ensure your Form 5500 distinguishes and tallies participants who are active, have balances and are terminated. Review the IRS definitions of each in the Instructions for Form 5500 .  For example, many plan sponsors are unaware that the IRS defines an active participant as any participant who was eligible to contribute during the plan year, whether they did so.

5.   Make sure the plan characteristic codes listed on the form accurately describe your plan’s operations.  For example, if you select 2F to indicate you intend to operate under ERISA 404(c) – and thus eliminate your potential liability for participants’ investment selections – then you must make sure that you provide participants notice of your intention and the necessary materials that will allow them to make an informed investment decision.

6.   Confirm you have fidelity/ERISA bond coverage, and answer YES to the question, “Was this plan covered by a fidelity bond?”  As stated above, a frequent error is to answer this question NO even when a plan is protected because the question asking for verification of coverage is listed among other questions to which the compliant answer is NO. 

7.   Understand the amount required of the plan’s fidelity/ERISA bond.  It must be 10 percent of plan assets as of the beginning of the plan year for which the Form 5500 is filed or $500,000, whichever is less.  If there is company stock offered in the 401(k) plan, then the maximum bond required increases from $500,000 to $1 million.

8.   Ensure no deferrals exceed the annual contributions limit and that all contributions are coded corresponding to their plan type, e.g. 401(k) contributions as such, rather than as 403(b) contributions.

9.   Make sure all schedules and attachments correctly reference the name of the plan, EIN, plan number and so forth.  For detailed information on which schedules and attachments to complete, consult the Instructions for Form 5500 .

10. If you terminate a plan, remember to file a Form 5500 for the plan. Also, make sure not to indicate the plan is terminated if it is simply frozen.

11 .  If a Third Party Administrator is not submitting the Form 5500 for you, know that you must file it electronically using either the EFAST2 or IFILE system .  Also, the Form must be signed ; failure to sign is the number one reason filers receive a “processing stopped” error message.

12. Retain for documentation an original copy of the Form 5500 filing with all required signatures and dates.

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans.  Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.