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Form 5500 Mistakes Plan Sponsors Should Avoid

The 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 plan fiduciaries; therefore, they are responsible for the accurate and timely filing of the Form 5500. According to the IRS, the most common mistakes on the Form 5500 involve entering incorrect information or accidentally leaving a field blank. Here are a few more significant things to be on the lookout for during this employee benefit plan season:

Failing to File a Health and Welfare Plan Form 5500 When Necessary

A growing business having 100 or more employees may unknowingly have a Form 5500 filing requirement they did not have in previous years. Generally, a Form 5500 must be filed for health and welfare plans (e.g., health, dental, vision, life insurance, disability, etc.) with 100 or more participants on the first day of the plan year. A plan sponsor that fails to file a Form 5500 is subject to a penalty of $2,400 per day imposed by the DOL, with no maximum amount, and up to $250 per day from the IRS, with a maximum of $150,000. Note: There is an opportunity for employers that have failed to file Form 5500s to escape these penalties under the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP). The DFVCP permits plan sponsors to file delinquent Form 5500s and pay reduced penalties so long as the filing is made before the DOL identifies the failure to file. The IRS will also generally waive late filing penalties for Form 5500 filers who satisfy the DFVCP program.

Failing to Accurately Report Participant Counts

  • For retirement plans, an employee is deemed to be a participant if the employee is eligible to elect to reduce salary to participate in a 401(k) or 403(b) plan or is eligible for a contribution under a profit-sharing plan.
  • For defined benefit plans, an employee is considered to be a participant if they are eligible to receive a benefit accrual during the year. Vesting is not relevant to counting participants.
  • For health and welfare plans, participants include enrolled (active) employees, enrolled COBRA/ex-employees, and enrolled retirees (if eligible). It does not include spouses and dependents.

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 of 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.

Failing to Comply with the Retirement Plan Audit Rules

Most retirement plans with over 100 participants at the beginning of the plan year, and certain welfare plans, must provide an independent qualified public accountant’s opinion with Form 5500. The failure to provide the accountant’s opinion (which is contained in the financial audit of the plan attached to the Form 5500) can mean that the entire filing is incomplete and could be rejected by the DOL, triggering late filing penalties.

The Form 5500 is just one of many administrative challenges facing plan sponsors. It is recommended that you engage with your accountant, third-party administrator, and/or ERISA legal counsel to make sure that the Form 5500 is complete and accurate. 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 about our Employee Benefit Plan Audit  services by visiting our website.


About the Author

Steph Kramer

Steph joined McKonly & Asbury in 2016 and is currently a Manager in the firm’s Audit & Assurance Segment. Steph audits a broad spectrum of employee benefit plans, including 401(k), 403(b), retirement, profit sharing, health and… Read more

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