The IRS Form 5500 – Look before you sign!

Signing the IRS Form 5500 marks the administrative end of a retirement plan year for most plan sponsors.  But don’t be tempted by your nearness to the “finish line.”  Look carefully before you sign.  Inaccuracies on a Form 5500 could trigger a knock on your door from the IRS or the US Department of Labor with a request to review your organization’s 401(k) plan!

At plan year-end, employers performed a good data scrub, submitting employee hour and wage information, company ownership data and other plan information to their Third Party Administrators.  Using those submissions, TPAs perform plan testing and prepare the Form 5500.

For 401(k) plans whose year-end is December 31, the Form 5500 must be filed by July 31, unless an extension is requested, so TPAs are just beginning to present them to plan sponsors for signature.  (With an extension, Forms 5500 may be filed by October 15.)

Why would an overlooked error on a Form 5500 pose a problem?  The IRS and DOL believe that if there is even a small error on the Form 5500, it can be an indication that other errors and compliance problems may be present and thus warrant a closer review.  Once an audit has begun, the scope of the initial inquiry can be broadened.  Any detected compliance errors can result in costly fines.

Your attention to detail can help ensure that you reach the retirement plan annual “finish line” successfully:

  1. Review the Form 5500 as though it is the first time you see it. Do not make assumptions regarding any numbers or copy from another form. This includes your EIN and plan number.
  2. Confirm you have fidelity/ERISA bond coverage, and answer “Yes” to the question, “Was this plan covered by a fidelity bond?”  A frequent error is to answer this question “No” even when a plan is protected because the question asking for verification of coverage is surrounded by other questions to which the compliant answer is “No.” 
  3. 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, whichever is less.  If there is company stock offered in the 401(k) plan, then the maximum bond required increases from $500 to $1,000.
  4. Ensure your Form 5500 distinguishes and tallies participants who are active, have balances and are terminated. Review the IRS definitions of each to make sure.  For example, many plan sponsors are unaware that the IRS definition of an active participant is any participant who was eligible to contribute during the plan year, whether they did so.
  5. Make sure all 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. Ensure no deferrals exceed the annual contributions limit and that all contributions are coded corresponding to their plan type, e.g. 403(b) contributions as such, rather than as 401(k) contributions.
  7. Make sure all schedules and attachments correctly reference the name of the plan, EIN, plan number and so forth.
  8. If you terminate a plan, remember to file a Form 5500 for that plan. Some Forms 5500 also show a plan to be terminated when it is simply frozen, or vice versa.

At this point, you might ask “Why would I need to check the Form 5500 before signing? I hire a Third Party Administrator with expertise in this area.” The fact is that while your TPA should be knowledgeable, in many cases TPAs are preparing many Form 5500s during what is one of the busiest times of the year for them. Errors are made. Because the plan sponsor signs the Form 5500, it is the employer who ultimately is responsible for its accuracy. Yet. . . regardless of who is ultimately responsible, as noted above, an error on the Form 5500 can cause regulatory scrutiny and have a high cost.

Written by Laurie C. Wieder, PPC®, Vice President, Alliant Wealth Advisors, Qualified Plans Division

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.