Every year, most employers file a Form 5500 for each qualified plan that they sponsor. The purpose of the Form 5500 is to provide required information to the Department of Labor (DOL), but it can also provide valuable insight to the plan sponsor.
The Form 5500 has several “types” and the type of form you file will vary based on the size of your plan. The Form 5500-SF is generally for small plans with under 100 participants and the Form 5500, which requires a number of attached schedules, is generally for large plans with 100 or more participants. Additionally, the full Form 5500 requires an accountant’s audit. In some cases, even small plans may be required to file a Form 5500 if the plan assets include employer securities or if the plan is considered a multi-employer or pooled employer plan.
There is an even briefer version of the 5500 series called the 5500-EZ. This version of the 5500 is typically filed by one-participant plans (usually the self-employed (and spouse) or one or more partners (and spouses)). The following are examples of the useful information provided on the Form 5500-SF or Form 5500:
Small plan vs large plan
- Whether your plan is considered a large or small plan depends on the number of eligible participants at the beginning of the plan year. This includes terminated participants with an account balance as well as active participants without a balance. As your count gets closer to 100 participants, you will need to plan for the additional work and expense of becoming a large plan, which is when your Form 5500 requires an accountant’s audit be attached when filed.
- If you file a Form 5500-SF as a small plan, the 80-120 rule will apply. This means that if your participant count remains under 120, you can continue to file Form 5500-SF as a small plan and do not require an audit. Once your beginning of the plan year count reaches 121, you will then be considered a large plan with an audit requirement.
- If you are a brand-new plan, though, and have over 100 participants on the first day of the first plan year, the 80-120 rule does not apply and you will require an audit. The 80-120 rule allows you to file as you did the prior year, and new plans do not have a filing for the prior year.
Eligible participants vs active participants with an account balance
- In addition to tracking eligible participants, the number of active participants with an account balance is also listed. This shows you how many of your eligible active participants have a $0 balance.
- If your plan provides for your participants to contribute 401k deferrals, automatic enrollment is an option to increase participation. In this case they must opt out, rather than opt in.
Terminated participants with an account balance
- As this number increases, it is a good time to review the list of terminated participants with account balances. If a participant has an account balance over $5,000, they generally must make a written election in order to withdraw the funds either as a cash distribution or rollover to an IRA or another qualified plan. However, smaller balances may be eligible for automatic payment without the participant’s election if the terms of the plan allow mandatory distributions (these may also be referred to as force-out distributions).
- If you are getting close to having 100 participants, distributions to terminated participants is one way to help lower the plan’s participant count and avoid the additional expense of being a large plan.
ERISA Fidelity bond coverage amount
- An ERISA fidelity bond is a type of insurance that protects the plan against losses caused by acts of fraud or dishonesty.
- The dollar amount of your bond in effect for the plan year is listed on the form. The required coverage amount is the greater of $1,000 or 10% of plan assets as of the first date of the plan year. If less, or listed as $0, it can be a red flag to the DOL.
- If it is the first year of the plan and the form shows a $0 balance at the start of the year, an estimated asset balance should be used for the 10% calculation when considering the level of coverage for your plan’s bond.
- In the event you did not establish a bond by the close of the plan year, a bond provider may be able to assist you with a policy that provides retroactive coverage. Some policies can also include an inflation guard going forward so that as plan assets increase, the bond coverage automatically increases to the required amount.
- Not sure where to obtain a fidelity bond? Your property and casualty insurance agent may be able to add this as a rider to your current business policies or your TPA may be able to provide contact information for a vendor that they have seen in the industry.
- So, what happens if I don’t have a bond? The correction for not having a bond is to get a bond put in place as soon as possible. However, having an insufficient bond amount noted on the Form 5500 could lead to an IRS or DOL audit where they may review more than just the bond amount.
Late deposits of employee contributions and loan repayments
- Another red flag to the DOL is the dollar amount of late deposits. There is a safe harbor deposit rule for small plans that states that deferrals and loan repayments must be deposited to the plan no later than the 7th business day following the paycheck date. Large plans have less time with contributions required to be remitted on the earliest date possible instead of within 7 business days.
- Late employee contributions or loan repayments for the plan year are reported on the Form 5500 or Form 5500-SF. In addition, if the correction for late deposits took place the following year, the amount is reported again on that year’s Form 5500.
Your Form 5500 preparer, often your TPA, will prepare the form on your behalf for your review and signature. They will be able to help guide you through the information that is reported on the form and be sure you understand the information as it reflects on the plan year. The more you understand the Form 5500, the more proactive discussions you can have.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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