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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