The Form 5500 is an annual report, filed with the U.S. Department of Labor (DOL), that contains information about a 401(k) plan's financial conditions, investments, and operations. The purpose of the Form 5500 is to provide the IRS and DOL with information about the plan's operation and compliance with government regulations.
Employers that sponsor 401(k) plans must file an annual report electronically with the IRS using the Form 5500. Used to gather information about the plan, the form is due seven months after the end of the plan year, and under the Employee Retirement Income Security Act (ERISA), failing to properly submit Form 5500 can be costly. Let’s take a look at the basic requirements.
Smaller plans, generally those with fewer than 100 participants, must complete Schedule I (Financial Information—Small Plan). A plan’s recordkeeper or third-party administrator (TPA) typically fills out the forms. However, the plan administrator must sign the form under penalty of perjury, so plan sponsors can and should verify the accuracy of the form before filing. To verify the information and confirm accuracy, plan sponsors should review the completed form against the plan’s trust report, employer census information, plan document, and other plan information.
The plan administrator is subject to penalties from ERISA. In 2019, the maximum penalty for failing to file Form 5500 has increased from $2,140 to $2,194 per day that the filing is missing or incomplete. The penalties are cumulative, which means they are assessed separately for each missing or incomplete Form 5500, and there is no statute of limitations. While it is unusual to see full penalties assessed, imposition of even reduced penalties can make the cost of noncompliance very high. For this reason, the DOL offers a program for the voluntary correction of Form 5500 issues. For willful failures to file Form 5500, ERISA provides for criminal penalties as well.
In addition to the ERISA penalties, the IRS Code also imposes a penalty for failing to timely file a complete annual return of $25 per day, up to a $15,000 maximum.
If the 401(k) plan covered 100 or more participants as of the beginning of the plan year, the filing generally must include Schedule H (Financial Information), which requires an independent qualified public accountant (IQPA) to audit the plan's records and to attach a copy of the auditor's opinion to the Form 5500 each year. The audit requirement is waived for smaller plans so long as certain disclosure and increased fidelity bonding requirements are satisfied.
As mentioned above, all 401(k) plans filed as a “large” plan on Form 5500 are required to be audited annually by an independent, third-party accounting firm (IQPA as you may recall). The IQPA is required to examine the plan's financial statements and other records necessary to form an opinion as to whether they are presented fairly and in conformity with generally accepted accounting principles (GAAP).
Technically, any 401k plan with over 100 eligible participants is considered a large plan. However, due to what is known as the “80-120 participant rule,” any plan that was filed in the previous year as a “small” plan and still has under 120 participants can continue to file as a “small plan” and avoid the external audit requirement.
But if the number of eligible plan participants reaches 121 by the first day of a plan year, it is no longer subject to the “80-120 participant rule” and must be filed as a large plan — and therefore is required to go through a IQPA 401(k) audit.
401(k) plan records must be kept for a period of not less than six years after the filing date of the IRS Form 5500. However, records necessary to a participant’s claim for plan benefits must be kept longer. These records must be kept, according to ERISA, “as long as a possibility exists that they might be relevant to a determination of the benefit entitlements of a participant or beneficiary.” The IRS Code requires that, along with other tax records, the plan sponsor maintain records necessary to demonstrate compliance with the Code’s qualification requirements. The Code and ERISA also require that certain plan records be maintained permanently.
ERISA imposes a specific record retention rule for the Form 5500 reporting obligation. For Form 5500 purposes, sufficient records must be maintained to document information that is required (or would be required in the absence of a reporting exemption) by the plan's Form 5500. The record retention requirement applies not only to plan administrators but also to others with reporting requirements (for example, an accountant providing Form 5500 audited financial statements). ERISA requires these records to be kept and made available for examination for a period of not less than six years after the filing date of the Form 5500.
The IRS and the DOL have approved electronic media as a way of retaining records if certain requirements are met. IRS procedures and ERISA regulations provide specific requirements for electronic records to ensure that electronic records are as available, secure, legible, and usable as paper records.
Regulations under the IRS Code and ERISA also address the circumstances in which 401(k) plans (and other plans) may use electronic delivery methods to furnish documents, notices, disclosures, and other information required under the Code and ERISA.
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Retirement planning is very different from planning for other benefits because the end goal is many years – even decades – away. It’s impossible to develop a foolproof plan that will guide a 25 year-old to her retirement 40 years later. But the practice of planning, the financial education obtained and the savings habits created along the journey can steer employees closer to reaching their retirement goals.
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