Common Form 5500 Mistakes

Form 5500 is an annual return filed with the DOL that contains information about employee benefit plans subject to ERISA. Specifically, it includes information about a plan’s features, investments and funding, participants, service providers, operations, and compliance with government regulations. While third-party administrators often prepare the Form 5500 and submit it on behalf of employers, it is the plan sponsors who are the fiduciaries; therefore, they are responsible for the accurate and timely filing of the Form. Reviewing common errors in Form 5500 can help sponsors stay compliant and strengthen the standing of their retirement plans. Here are a few of the more significant mistakes to watch out for during this employee benefit plan season:

Failure to File

One of the most common errors is simply failing to file at all. A plan sponsor may assume that a filing obligation does not exist because they did not have a filing requirement in previous years. It ultimately depends on the plan’s size and structure, and it is the responsibility of the plan sponsor to determine if a filing is in fact required. The sponsor must also ensure that the correct Form 5500 is used. There are three versions to select from:

1. Form 5500-EZ is the simplest option and is meant for solo 401(k) plans (e.g., plans that cover a business owner and possibly their spouse).
2. Form 5500-SF (Short Form) may be used by plans with fewer than 100 participants with a balance at the beginning of the year, provided the following conditions are met: 1) the plan is 100% invested in assets with a readily determinable market value, such as mutual funds; 2) the plan does not contain any employer stock or hard-to-value assets; and 3) the DOL’s small plan audit waiverrequirements are met.
3. Form 5500 (Long Form) must be used if the plan has more than 100 participants with a balance at the beginning of the year, or if it does not qualify for Form 5500-SF. It should be noted that this version also requires additional schedules and possibly an independent audit.

A plan sponsor that fails to file a Form 5500 is subject to a penalty of more than $2,700 per day imposed by the DOL, with no maximum amount, and up to $250 per day from the IRS, up to a maximum of $150,000.

Late Filings

Missing the July 31 deadline (for calendar year-end plans) is a frequent and costly mistake. It is important for sponsors to set calendar reminders for key dates. If more time is needed to prepare and submit Form 5500, simply file a Form 5558 for an automatic 2.5-month extension.

Recordkeeping Errors

Entering the wrong plan name, plan type, plan number, or Employer Identification Number (EIN) is quite common and can delay processing or trigger red flags. Be sure to verify all information before submission. Leaving blank spaces may also draw unwanted attention. Instead, use “N/A” to let the regulators know the information has been reviewed and does not apply to the plan.

Inaccurate Participant Counts

Before the 2023 plan year, there was widespread confusion when it came to entering participant counts on Form 5500 because “active participants” included anyone eligible to participate in the plan, as well as individuals with account balances. Effective January 1, 2023, the methodology changed. Now, the term “active participants” refers only to individuals with account balances in the plan on the first day of the plan year. While the change provided clarification, accurate participant counts are very crucial for plans near the 100-participant threshold, as plans with 100 or more participants require an audit from an independent qualified public accountant.

Failing to Answer the Fidelity Bond Coverage Question

Plan sponsors are required to report whether the plan is covered by a fidelity bond. Some plan sponsors skip this question and fail to indicate that the plan is covered by an appropriate fidelity bond. This is sometimes the cause of a plan audit from the DOL. ERISA requires every plan fiduciary and anyone else who handles or has the authority to handle plan assets to be covered by a bond. A fidelity bond is an insurance policy that names the plan as the insured party and covers anyone who handles or has the authority to handle plan assets. The fidelity bond protects the plan against loss due to acts of fraud or dishonesty on the part of persons required to be bonded. The required amount of bond coverage is the lesser of 10% of plan assets at the beginning of the plan year, or $500,000.

Marking a Form 5500 as “Final” When the Plan Still Has Assets

Even though a plan may be terminating, a Form 5500 is required for every year there are still assets in the plan. Many plan sponsors file what they think is a “final” Form 5500, but the Form 5500 still shows assets at the end of the reporting period. For the final return to be filed properly, all assets must have been distributed from the plan.

Missing or Invalid Signatures

Form 5500 must be electronically signed via DOL’s ERISA Filing Acceptance System (EFAST2). Missing or invalid signatures will result in immediate rejection.

The Form 5500 is just one of many administrative challenges facing plan sponsors. It is recommended that sponsors engage with their accountant, third-party administrator, and/or ERISA legal counsel to make sure that the form is complete and accurate every year.

Please contact us if you have questions about the information outlined above; our seasoned and experienced employee benefit plan professionals are here to help.  You can also learn more on our Employee Benefit Plan services page.

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