• A plan will not meet the rules and will be required to attach an auditor’s report.
• A plan will fully satisfy the requirements by the nature of its investments and participant-direction features and not require the audit.
• A plan will be entitled to relief from the audit requirement by making certain additional statements in its SAR.

Practitioners will find that the adjustments to the SAR required for each of these situations may be further complicated by the particular facts and circumstances of a specific plan. It appears the most logical place to insert any additional SAR disclosures is in conjunction with other information presented in the standard SAR format under the section entitled “Your Rights to Additional Information.”

The following suggestions for the modified SAR disclosures are based upon the three most likely scenarios you will encounter. It should be noted that although the determination of whether the plan qualifies for the audit waiver is based upon facts as of the beginning of the plan year, it is the values and detail as of the last day of the plan year that are disclosed in the SAR.

Small Pension Plans Required To Attach an Auditor’s Report
Anytime the response to line 4k of Schedule I is no, the report of an independent accountant must be part of the Form 5500 filing for the plan. The SAR section entitled “Your Rights to Additional Information,” for such a plan must identify “an accountant’s report” as an item available for inspection by the participant or beneficiary.

It should be noted that no schedules of assets held for investment or 5% reportable transactions, similar to those required to be attached to Schedule H (see lines 4i and 4j), are required for small pension plans subject to the audit requirement.

Small Pension Plans With No Audit or Additional SAR Disclosures Required
Many small pension plans may qualify for the relief from the audit requirement with little or no effort. For example, suppose a small 401(k) plan permits participants to direct the investment of their individual accounts among various mutual funds. Thus, 100 percent of the plan’s assets are considered qualifying plan assets. In this situation, there is no fidelity bond requirement beyond that normally required under ERISA §412 [DOL Temp Reg §2580.412-1-36]. The appropriate response to line 4k of Schedule I is yes.

Although there is no additional SAR disclosure required, the plan sponsor may want to include the following statement in its SAR.

This plan is not required to attach an accountant’s report because it satisfies all of the conditions to qualify for a waiver of the audit requirement.


Small Pension Plans With Additional SAR Disclosures Required to Qualify for Audit Waiver
Some small pension plans will be required to insert more information about who holds the plan’s investments and the fidelity bond coverage in order to be entitled to relief from the requirement to attach an audit. Typically, the following information must be included in the SAR in order for the plan to be entitled to relief from the audit requirement:

• The name of each institution holding qualifying plan assets and the amount of such assets held by each institution as of the end of the plan year;
• The name of the surety company issuing the fidelity bond if more than 5% of the plan’s assets are non-qualifying plan assets;
• A notice that participants and beneficiaries may, upon request and without charge, examine or receive copies of the (a) statements that describe the assets held by each institution and that were received from each institution holding qualifying plan assets, and (b) evidence of the required bond; and
• A notice that describes the rights of participants and beneficiaries to contact the PWBA for assistance if they are unable to examine or obtain copies of the statements or evidence of the bond (if applicable).

The following examples illustrate a variety of facts and circumstances the practitioner may encounter.

Example 1
Plan A has total assets of $600,000 as of the start of the June 1, 2001 plan year. The plan’s assets include: investments in various bank, insurance company, and mutual fund products of $520,000; investments in qualifying employer securities of $40,000; participant loans, meeting the requirements of ERISA section 408(b)(1), totaling $20,000; and a $20,000 investment in a real estate limited partnership.

The only asset at the end of the plan year that is not a qualifying plan asset is the $20,000 real estate investment. That investment represents less than 5% of the plan’s total assets and, therefore, no additional fidelity bond was required as a condition for the waiver for the plan year beginning June 1, 2001. If the mutual fund investments are participant-directed and this is an individual account plan, no SAR disclosure of the mutual fund assets is necessary. The SAR disclosure for the plan year ending May 31, 2002 might read:

The plan has met the requirements to waive the annual examination and report of an independent qualified public accountant. As of the end of the plan year, the following regulated financial institutions held or issued plan assets that qualified under the waiver:

• ABC Insurance Company in the amount of $50,000
• DEF Trust Company in the amount of $30,000
• XYZ Insurance Company in the amount of $20,000.

You have the right to examine or receive from the plan administrator, on request and at no charge, copies of statements from the regulated financial institutions describing the qualifying plan assets. If you are unable to examine or obtain these documents, contact a Pension and Welfare Benefits Administration Regional Office for assistance. Information about contacting PWBA regional offices can be found at http://www.dol.gov/dol/pwba.

Example 2
Plan B has total assets of $600,000 as of May 1, 2001, the first day of the plan year. Of this amount, $558,000 are qualifying plan assets and $42,000 are non-qualifying plan assets. Because 7%–more than 5%–of Plan B’s assets are non-qualifying plan assets, Plan B, as a condition to qualifying for the audit waiver for its plan year ending April 30, 2002, must ensure that it maintains a fidelity bond in an amount equal to at least $42,000 covering those persons handling the non-qualifying plan assets. A fidelity bond in the amount of $60,000 is maintained. As of the plan year end, assume all of the plan’s assets are invested in qualifying employer securities and there are no longer any non-qualifying plan assets. Although the employer securities are exempt from disclosure, the fidelity bond must be disclosed because of the status of the plan as of the first day of the plan year.

A paragraph may be added to the plan’s SAR as follows:

The plan has met the requirements to waive the annual examination and report of an independent qualified public accountant. The plan has been issued a fidelity bond by XYZ Surety Company in the amount of $60,000. The bond protects the plan against losses through fraud or dishonesty and covers any person handling plan assets. You have the right to examine or receive from the plan administrator, on request and at no charge, evidence of the required bond. If you are unable to examine or obtain these documents, contact a PWBA Regional Office for assistance. Information about contacting PWBA regional offices can be found at http://www.dol.gov/dol/pwba.

Example 3
Assume the same facts as in Example 2, except that in this case the qualifying plan assets at the end of the plan year include $58,000 of qualifying employer securities with the balance held in investment and annuity contracts issued by an insurance company. As above, $42,000 of investments are in non-qualifying plan assets as of the first day of the plan year and, therefore, fidelity bond coverage is required and must be disclosed. The SAR disclosure might read:

The plan has met the requirements to waive the annual examination and report of an independent qualified public accountant. As of the end of the plan year, the following regulated financial institutions held or issued plan assets that qualified under the waiver:

• ABC Insurance Company in the amount of $500,000,
• DEF Insurance Company in the amount of $50,000,
• XYZ Savings & Loan in the amount of $25,000.

The plan has been issued a fidelity bond by XYZ Surety Company in the amount of $60,000. The bond protects the plan against losses through fraud or dishonesty and covers any person handling plan assets. You have the right to examine or receive from the plan administrator, on request and at no charge, copies of statements from the regulated financial institutions noted above describing the qualifying plan assets and evidence of the required bond. If you are unable to examine or obtain these documents, contact a PWBA Regional Office for assistance. Information about contacting PWBA regional offices can be found at http://www.dol.gov/dol/pwba.

Example 4
Profit Sharing Plan C has total assets of $600,000 as of its June 30, 2001 plan year end. All of these assets are invested in qualifying plan assets as a result of individual participant-direction. Therefore, no special SAR disclosure is needed for the plan year ending June 30, 2002. Because all assets are qualifying plan assets, there is no fidelity bond requirement beyond that normally required under ERISA Section 412. [DOL Temp Reg §2580.412-1-36]

Although there is no additional SAR disclosure required in this example, the plan sponsor may want to include the following statement in its SAR.

This plan is not required to attach an accountant’s report because it satisfies all of the conditions to qualify for a waiver of the audit requirement.

There is no requirement to identify in the SAR the name of each person or entity holding non-qualifying plan assets. Also, no disclosure is required for the following types of assets:

• Qualifying employer securities [ERISA §407(d)(5)];
• Participant loans meeting the requirements of ERISA §408(b)(1); or
• Qualifying self-directed accounts, if the participant has the opportunity to exercise control over such accounts and the participant is furnished, at least annually, a statement from a regulated financial institution describing the assets held (or issued) by that institution and the amount of such assets.
  
  
  

IRS Notice 2002-24
IRS wisely delayed issuing this guidance until April 4th - none of us would have believed it had it appeared on April 1st! Effective with the release of this notice, the IRS has formally suspended the need to file Form 5500 for fringe benefits plans under IRC Sections 125 (cafeteria plans), 127 (educational assistance programs), or 137 (adoption assistance programs) and the relief applies to all plan years for which returns have not been filed. That means this year, last year, or five years ago; this notice effectively eliminated any potential late filing issues associated with these fringe benefit plans.

Schedule F (Fringe Benefit Plan Annual Information Return) was introduced with the 1992 reporting year to provide the information return required under IRC §6039D for certain fringe benefit plans. The instructions for completing the schedule have been very sketchy, causing confusion for plan sponsors and preparers; so, the elimination of this data gathering and reporting is welcome.

IRS and DOL were deluged with calls following the release of the notice because it was confusing as to whether or not the suspension only applied to the filing of Schedule F. The welfare features of Section 125 plans must continue to be reported on Form 5500 and, therefore, IRS could not completely rule out a Form 5500 filing requirement for every cafeteria plan. For example, a flex plan that includes a medical expense reimbursement feature must continue to file Form 5500 if that feature covers more than 100 participants. Similarly, if the cafeteria plan has been used as an umbrella plan for all of the plan sponsor’s welfare benefits, the plan must continue to file under ERISA.

The bottom line: do not file Schedule F. Do not check the box at line 8c or at line 10c. All premium only plans (POP) and any flexible benefits plan that does not cover more than 100 participants do not file Form 5500.

Delinquent Filer Voluntary Company (DFVC) Program
Effective March 28, 2002, the DOL announced revisions to its DFVC program, hoping to make the relief more attractive by reducing the penalties that applied to voluntary submissions of late Form 5500 filings. The IRS chimed in by posting Notice 2002-23, thereby making formal their practice of not imposing their own late-filing penalties on plan sponsors who file under the DFVC. Section 5.03 of the new DFVC program confirms that PBGC has likewise agreed to forego penalties under ERISA §4071.

Background. The Secretary of Labor has the authority under ERISA §502(c)(2) to assess civil penalties of up to $1,100 a day against plan administrators who fail or refuse to file complete and timely Form 5500 reports. The IRS may separately assess penalties for late filing of Form 5500 under IRC §6652(e) of $25 per day up to $15,000. Both agencies could waive or abate those penalties if the plan sponsor can establish “reasonable cause” for the late filing.

The DFVC program was originally adopted by DOL on April 27, 1995 in an effort to encourage delinquent filers to voluntarily comply with the ERISA reporting requirements without the need to establish reasonable cause. Since then, the program has been used primarily by large plan sponsors due, in part, to the penalty structure associated with the program.

The DFVC program contains these basic rules:

• Eligibility for the program continues to be limited to plan administrators with filing obligations under Title I of ERISA. Filers of Form 5500-EZ or Form 5500 for plans without employees (as described in 29 CFR 2510.3-3(b) and (c)) are not eligible.
• The plan sponsor must not have received written notice from DOL regarding a failure to file the Form 5500.
• All late filings must be submitted to PWBA in Lawrence, Kansas for each year for which relief is requested. Simplified rules apply to “top hat” plans and apprenticeship and training plans. Line D of the 2001 Form 5500 is checked to identify plans filing under the DFVC program. Plan sponsors may either file the Form 5500 that would have been used if the filing had been timely, or simply use the most current Form 5500 showing the information for the plan year that is being filed late.
• The plan administrator is personally liable for the DFVC penalty and it may not be paid from plan assets. The penalty must be remitted to the DFVC Program, PWBA, P. O. Box 530292, Atlanta, Georgia 30353-0292, along with a paper copy of the Form 5500 (but not attachments and separate schedules). As noted above, the complete Form 5500, including all schedules and attachments, is sent to Lawrence, Kansas.
  

New Penalty Structure. The most visible changes in the DFVC program are the penalties on either a “per day”or “per filing” basis:

• The $50 per day penalty is reduced to $10 per day for delinquent filings.
• The $2,000 penalty cap for a small plan has been reduced to a $750 “per filing” limit.
• Large plans are subject to a $2,000 “per filing” cap rather than the $5,000 ceiling under the prior program.

The revised program introduces a “per plan” limit, probably its most attractive feature. Any plan sponsor with more than two years of late filings for the same plan can grab a bargain. The “per plan” cap limits the penalty to $1,500 for a small plan and $4,000 for a large plan regardless of the number of late annual reports being filed for the plan at the same time. Special concessions have been made for small plans sponsored by §501(c)(3) tax-exempt organizations, authorizing a $750 “per plan” limit.

In addition, the penalty for “top hat” plans and apprenticeship and training plans is reduced to $750. Sponsors of such plans are required to file an annual Form 5500 unless the appropriate registration statement was filed with DOL; however, that ongoing Form 5500 obligation can be eliminated if the appropriate filing is made under the DFVC program. It seems an easy decision to pay the $750 to get out from under the annual filing requirement.

There is no “per administrator or “per sponsor” cap under the revised DFVC program. So, if a single employer has late filings for more than one plan, the penalty for each plan is separately calculated.

Reasonable Cause. The revisions to the DFVC program and IRS’s formal announcement regarding its intention to forego penalty assessment on plan sponsors who file under DFVC is not a signal that “reasonable cause” submissions will be rejected. Both agencies are required to consider reasonable cause for late filings and will continue to do so. What has changed are the practical considerations and cost/benefit analysis, now that DFVC penalties are lower:

• What fees will be incurred to construct “reasonable cause” attachments to late filings?
• Are there compelling reasons for the late filing, such as death or disability of the preparer or person authorized to execute the filing, destruction of records, or reliance on the advice of a competent tax professional?
• Does the plan sponsor seek absolute assurance that the matter is behind them?

None of my clients - large or small plan filers - have used the DFVC Program since 1995. Instead, reasonable cause letters were submitted along with each late filing resulting in no penalties being imposed by either IRS or DOL. That picture could change. There are situations where fees for drafting reasonable cause letters, including review by an ERISA attorney, may exceed the new DFVC Program penalties. Such plan sponsors may be better served to simply file under DFVC.

The bottom line: the DFVC program warrants serious consideration, but don’t rule out “reasonable cause” solutions.

Small Plan Audit Regulations
By now, most plan consultants are familiar with the requirements for small pension plans to be audited for plan years beginning after April 17, 2001. It should be fairly easy for most small pension plans to qualify for a waiver of the audit requirement; however, that assumes there is universal agreement on whether certain types of investments are qualifying plan assets.

Qualifying plan assets, as defined in the regulations, include:

• Any plan asset held by any of the following regulated financial institutions:
• A bank or similar financial institution as defined in 29 CFR 2550.408b-4c;
• \An insurance company qualified to do business under state law;
• An organization registered as a broker-dealer under the Securities Exchange Act of 1934; or
• Any other organization authorized to act as a trustee for individual retirement accounts under IRC §408.
• Shares issued by an investment company registered under the Investment Act of 1940 (e.g. mutual funds);
• Investment and annuity contracts issued by any insurance company qualified to do business under state law;
• Qualifying employer securities, as defined in ERISA §407(d)(5);
• Participant loans meeting the requirements of ERISA §408(b)(1); and
• In the case of an individual account plan, any assets in the individual account over which the participant or beneficiary has the opportunity to exercise control and with respect to which a statement is delivered at least annually to the participant or beneficiary from a regulated financial institution (as first referred to above) describing the assets held or issued by the institution and the amount of such assets.

This last category -- the self-directed account -- is being interpreted inconsistently by practitioners. Some consultants believe that any investment that is held as a result of participant self-direction meets the definition of qualifying plan asset. The DOL uses language in these regulations that is distinct from the rules for disclosing five percent reportable transactions on Schedule H (see instructions to line 4j of Schedule H), where the relief applies to any investment resulting from participant-direction. For purposes of identifying qualifying plan assets, however, the DOL requires the assets under self-direction to be “held or issued by” the financial institution furnishing the annual statement.

Relief from the Audit Requirement. A small pension plan will qualify for a waiver of the audit requirement if it meets the following conditions:

• At least 95% of the plan assets are qualifying plan assets as of the end of the preceding plan year; or
• Any person who handles assets of the plan that do not constitute qualifying plan assets is bonded in accordance with the requirements of ERISA §412, except that the amount of the bond shall not be less than the value of such non-qualifying plan assets.
• In addition to the fidelity bond requirement, the plan administrator must expand the plan’s summary annual report to include (a) the name of each regulated financial institution issuing or holding qualifying plan assets and the amount of such assets as of the end of the plan year; (b) the name of the surety company issuing the fidelity bond if the plan has more than 5% of its investments in non-qualifying assets; (c) a notice that participants and beneficiaries may have access to evidence of the required bond and copies of the statements from the regulated financial institutions describing the qualifying plan assets; and (4) a notice that participants and beneficiaries can contact the PWBA Regional Office if they are unable to examine or obtain the copies just mentioned.

The determination of whether or not the plan qualifies for waiver of the audit requirement is based upon the facts as of the first day of the plan year; however, the additional disclosures on the summary annual report relate to the facts as of the last day of the plan year.

The DOL is currently formulating a series of questions and answers (Q&A) about the small plan audit rules, including the fidelity bond requirements and summary annual report disclosures. Some issues the Q&A will address:

• If non-qualifying plan assets exceed $500,000, then the amount of the fidelity bond coverage must be at least equal to the amount of the non-qualifying plan assets. The $500,000 cap contained in the ERISA §412 rules applies only when the small pension plan has at least 95% of its investments in qualifying plan assets.
• Plans filing Form 5500-EZ are not subject to the small plan audit rules. Similarly, there is no audit requirement for a plan filing Form 5500 (and reporting code 3G at line 8a) because the plan covers only owner-employees but is aggregated with another plan of the employer for nondiscrimination testing.
• A plan that has at least 95% of its investments in qualifying plan assets as of the first day of the plan year can use the traditional summary annual report format at the end of that plan year. There is no need to disclose institutions holding qualifying plan assets or to provide information about the fidelity bond in this situation.
• A contribution that is receivable as of the first day of the plan year is not taken into account in determining what portion of the plan’s assets are qualifying plan assets. It is neither a qualifying nor a non-qualifying plan asset, although someone is bound to raise an issue with regard to participant contributions or loan repayments that have not been transmitted within the time periods described in 29 CFR 2510.3-102.
• Is a checking account considered a qualifying plan asset? Does the check-writing feature on a brokerage account affect its classification as a qualifying plan asset?
• The plan sponsor has a “reasonable period” after the first day of the plan year to calculate the value of plan assets and to secure adequate fidelity bond coverage to qualify for the audit relief. A “reasonable period” may be interpreted by DOL to be as long as two to three months after the start of the plan year.
• The most common errors in fidelity bond coverage are (a) the “named insured” is the employer (the named insured should be the plan, not the sponsor of the plan), and (b) a deductible feature is in force (the coverage should provide “first dollar” recovery)

The bottom line: most small pension plans can easily qualify for the waiver by maintaining the appropriate fidelity bond coverage and making the proper summary annual report disclosures (if any). Watch for informal guidance from DOL in the form of Q&As. Evaluate your clients’ plans as close as possible to the start of the plan year so that there are no surprises when it comes time to prepare Form 5500.

Reporting Plan Mergers
The enactment of EGTRRA may result in the merger of a plan sponsor’s money purchase and profit sharing plans. It may be useful to examine the most efficient means of reporting such activity on Form 5500.

The merger document must be carefully scrutinized to identify whether or not the merger date is linked to the physical transfer of assets. Most ERISA practitioners prefer to effect the merger as of a specific date without regard to the administrative issues relating to the transfer of plan assets. Suppose Plan A is merged with Plan B effective as of the close of the 2001 calendar plan year, and that Plan A is the surviving plan. Effectively, the merger documents legally transferred to Plan A all assets and liabilities of Plan B immediately after the close of the 2001 plan year. As of January 1, 2002, Plan B has no assets or liabilities. The 2001 Form 5500 for Plan B, the disappearing plan, must be prepared so the EFAST system expects no further filings for Plan B. In essence, Plan B is terminated December 31, 2001 as far as EFAST is concerned.

The preparer of the filing for Plan B’s final return will check box (3) at Line B on Form 5500, and show a zero participant count at lines 7a through 7g. Further, the asset values as of the last day of the plan year as reported on either Schedule H or Schedule I must be zero. In some cases, it is appropriate to show the full amount of plan assets as a payable on these schedules in order to reduce the assets to zero. Also be sure the information reported on Schedule SSA is up-to-date, including the reporting for those terminated participants that were previously reported and whose benefits have been distributed prior to the plan merger.

Lines 4k and 5a of Schedule H and lines 4j and 5a of Schedule I (relating to plan termination) must be completed as though the plan was terminated. At line 5b of either schedule, report the transfer of assets to Plan A.

In contrast, the 2001 Form 5500 for Plan A will reflect nothing relating to the merger. Instead, Plan A records the transfer of assets and liabilities as of the first day of its 2002 plan year and also reports on its 2002 Schedule SSA any previously terminated participants with vested benefits from Plan B whose deferred benefits have been transferred to Plan A. Reporting in this fashion is consistent with what appears on the report of an independent accountant (for large plans). Some preparers, nonetheless, are uncomfortable with Plan B reporting a transfer of assets to Plan A without a corresponding entry on Plan A’s filing in the same year. In those circumstances, it may be appropriate to use a footnote on Plan A’s Schedule H or Schedule I to disclose the merger.

Important note: the reporting suggestions above must not be used to report a traditional plan termination. The Form 5500 must be filed until all plan assets have been distributed if the plan is terminating. The final Form 5500, including any required report of an independent accountant, is due seven months after the end of the month in which the assets are fully distributed.

Schedule D -- Direct Filing Entities (DFEs)
This schedule was first introduced for the 1999 filing year, and it has been the source of much confusion and misinformation. Schedule D requires direct filing entities to present information about plans that invest in the DFE, while plan sponsors report their investments in direct filing entities. Ideally, these reports should be mirrors of each other. To date, the DOL has not initiated any programs to compare data reported by direct filing entities and plan sponsors.

Here are tips for preparing Schedule D:

• Do not use an attachment. Each pooled separate account must be reported individually and cannot be grouped by insurance company in the same way that they are reported on Schedule A. The same is true for any other investments in direct filing entities.
• Even though the rules have been in place for several years, some DFEs fail to provide adequate information about whether they are filing Form 5500 and, if not, what the breakdown of underlying assets is for reporting on Schedule H. The DOL is aware of the problem and advises to report whatever information that is available. For example, a DFE advises the plan sponsor that it did not file Form 5500 but fails to provide any information about the plan’s share of the underlying assets. Insert “000" as the plan number on Schedule D; however, on Schedule H, report the value of the DFE on line 1c(9), (10), (11), or (12), as appropriate.

Schedule SSA - Reporting Separated Participants
This schedule is used to report terminated participants with deferred vested benefits. This phrase has multiple uses in our industry and it may be appropriate to clarify its use with regard to Form 5500 preparation.

Some practitioners have mistakenly interpreted the instructions to apply only to those situations where a participant may not request an immediate distribution of the vested benefit. For purposes of Schedule SSA, a participant has a deferred vested benefit if the participant has terminated employment and has not received his or her vested benefit. It does not matter whether the plan is a defined benefit plan or a defined contribution plan, or if the participant has a right to apply for an immediate distribution of the benefit.

The instructions generally permit plan sponsors to delay reporting participants on Schedule SSA until the end of the year following the plan year in which the participant terminates employment. Although it is not required, it is considered a “best practice” to report on Schedule SSA those terminated participants who were previously reported but who have subsequently received or begun to receive their benefit payments. The Schedule SSA is the basis for notifying participants of possible benefits available from a former employer’s plan when the individual applies for Social Security. If the Schedule SSA data has not been updated, it may result in a tremendous administrative burden at some future date to prove to a participant that he or she has, indeed, previously received the benefits to which they were entitled.

Schedule T and Multiple Employer Plans
IRS controls the content of this schedule and the agency has made improvements to either the form or the instructions each year. Unfortunately, not all of the confusion has been eliminated for preparers.

Here are some simple guidelines:

• Never file more than one Schedule T for a single employer plan. If all of the disaggregated portions of the plan cannot be reported at line 4, create an attachment as described in the instructions.
• Schedule T must be filed by every pension plan every year unless the plan meets the guidelines of Revenue Procedure 93-42, which sets forth criteria for the quality of data used in performing nondiscrimination tests and the timing of such tests. As a practical matter, very few plans rely on the substantiation guidelines of the revenue procedure.
• When filing for multiple employer plans, file a separate Schedule T for each participating employer. One exception: use an attachment to list all employers that qualify for the same exception on line 3.
• If a participating plan sponsor withdraws from the multiple employer plan, discontinue filing Schedule T for that sponsor. Report the transfer of assets to another plan on line 5b of Schedule H or Schedule I.