The Right way to File the Form 5500
The Form 5500 is an information return filed with the IRS, each year. It’s an important part of the Employee Retirement Income Security Act’s (ERISA) reporting and disclosure framework designed to ensure that employee benefits plans are operated and managed in accordance with prescribed standards.
FORM 5500 BASICS
The information below outlines the who, what, when and where of your Form 5500 filing.
IS IT REQUIRED?
» In most cases, YES. Few exemptions apply.
WHICH FORM TO FILE?
» Over 100 Participants = Form 5500
» Less than 100 Participants = Form 5500-SF
WHO CAN FILE?
» Plan Sponsor or Plan Administrator (TPA)
WHERE TO FILE?
» Must be filed electronically through EFAST2
WHEN TO FILE?
» July 31 for a calendar-year plan
ARE EXTENSIONS ALLOWED?
» Must be requested using Form 5558
While guidance and instructions are provided for many of the basic details, other important aspects, such as accounting methodology are left for interpretation. However, there is a superior method… Accrual based 5500 accounting is typically preferred by most ERISA experts, Plan Sponsors, and high-quality TPAs; the chart below illustrates why:
With Accrual based accounting being a superior method, why would you ever file cash?
CASH vs ACCRUAL
When preparing financial statements for the Form 5500, DOL instructions indicate that cash and accrual accounting are both acceptable methods, however experts unanimously agree that the accrual method is more accurate.
Cash basis is a simple snapshot of the plan’s finances on the day the statement is produced. It shows total balances of income and distributions. This data, coming from the recordkeeper, is not reconciled or verified. It’s largely a pure administrative task.
This type of reporting can create a lot of downstream errors and future plan sponsor headaches if not completely accurate. Here is a summary of how this information is processed and potential issues:
» Financial information is transposed exactly as it was received from the Recordkeeper without reconciliation or review.
» Timing related contribution information is gathered from client without additional verification.
» Payroll information regarding contributions is NOT considered.
» No verification of contributions and deposits is done.
» Less likely found to be in compliance if investigated by the DOL or IRS.
» Issues related to plan contribution deposits have the tendency to go un-noticed, until one of the following costly situations occur:
o Plan becomes audit size,
o Plan Participants raise questions/ report issues,
o IRS or DOL conducts an investigation.
» Corrections that are needed to keep the plan in compliance
o can be much more expensive
o can involve many plan years that may need to be addressed
o may require more in the way of corrective contributions and IRS/DOL penalties associated with plan compliance failures.
» Contribution issues reported to the DOL (e.g. Deferral contributions not being made to the plan), can open the plan and company up to further DOL scrutiny.
Accrual Basis is a completely verified record of the plan’s financials that recognizes income and disbursements data, and reconciles to assure that all of these transactions were properly applied. This superior method reduces the likelihood of mistakes, accounts for all monies, and paints a vivid and accurate picture.
Accrual based 5500 accounting is typically preferred by most ERISA experts, Plan Sponsors, and high-quality TPA’s for the following reasons:
» Financial Information is fully reconciled before Form 5500 submission.
» Yearly activity at the recordkeeper is compared to the expected contributions per payroll information/calculated employer contributions.
» Any discrepancies found are addressed with the plan sponsor before the 5500 is filed.
» Plan contribution discrepancies are an indicator of other plan compliance issues, and internal controls can be put in place at the plan sponsor level to help prevent future issues.
» Deposit and/or Adjustments to participant accounts are done on a yearly basis so that problems do not compound over multiple plan years.
» IRS and DOL correction programs that reduce costs and/or penalties most likely are available due to the timing of any needed corrections.
» Higher confidence by the plan sponsor if the plan is ever investigated by the IRS or DOL.
» Lower risk of participants losing confidence. (e.g. low confidence equates to low participation which could result in ADP/ACP testing issues).