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| Welcome Form5500help.com is designed to complement official guidance and other internet resources available to preparers of Form 5500 for qualified retirement and welfare benefit plans. Every year, businesses and organizations that sponsor an employee benefit plan subject to ERISA must file Form 5500. These forms are filed with the Employee Benefits Security Administration’s EFAST operation in Lawrence, Kansas without regard to the plan year. All current, late, or amended filings are processed by EFAST. Plan sponsors and practitioners -- employee benefit consultants, accountants, attorneys, and other service-providers -- often find the instructions to the Form 5500 to be vague or ambiguous resulting in many hours of frustration while preparing the reports for both pension and welfare benefit plans. Form5500HELP.com offers practical advice to consider when completing the various forms and schedules associated with these filings. We also lead you to other websites so you can
The 2009 Form 5500 The 2009 Form 5500 changes all of that, not in the least because it brings to reality mandatory electronic filing of all reports. In November 2007, the Department of Labor’s (DOL) Employee Benefit Security Administration (EBSA) posted final regulations that included the 2009 forms and schedules, except for the actuarial Schedules SB and MB. As of this writing, little information is available about the electronic filing process. The EFAST2 system developer is expected to release some details later this year. New Filing Option for Certain Small Plans Although some commentary suggests that as many as 600,000 filers may use the short form (SF), not every small plan filer qualifies for the SF. A plan may file Form 5500-SF instead of the Form 5500 (and its schedules) only if it meets all of the conditions listed below:
The new SF simplifies reporting of the participant count (line 5) and mirrors the Schedule I financial information section to report investment activity at lines 7 and 8. Plan characteristic codes (line 9) are expanded to include two new defined contribution feature codes to identify plans with automatic enrollment for purposes of employee deferrals (code 2S) as well as those participant-directed plans that provide a default investment for participants who fail to direct assets in their account (code 2T). These new codes apply to all Form 5500 filers, not just the short form filers. Part V of the SF includes some of the compliance-oriented questions that have appeared at line 4 of Schedules H and I in prior years, but also introduces some new ones. Questions about the timeliness of deposits of participant contributions, prohibited transactions, and fidelity bond continue to appear on the form. Five new questions include:
The remainder of the SF pulls questions from Schedule R regarding minimum funding, and from Schedules H and I regarding plan termination and transfers of assets. There is no need to file Schedules A, D or R with the SF; however, Schedule SB (the new schedule for single employer defined benefit plans) must be attached to certain small defined benefit plan filings. One-Participant Plans Not surprisingly, there are other restrictions as to which one-participant plans may satisfy their filing obligation with the SF. One-participant plan filers that meet the following conditions are allowed to electronically file the SF instead of filing a paper EZ:
It should be noted that actuaries of one-participant defined benefit plans subject to the minimum funding standards for the year must complete Schedule SB and provide it to the person responsible for filing the SF (or Form 5500-EZ). However, as with current filings for one-participant defined benefit plans, the Schedule SB is not part of the filing submitted to either IRS or DOL. The IRS has not released the 2009 Form 5500-EZ or its instructions. Whether the filer chooses to file the SF or the EZ, software packages will offer both options to facilitate preparation of the report. The 2009 Form 5500 and its Schedules The Form 5500 itself has a number of changes, including the elimination of space to insert the contact information for the paid preparer. One notable change is at line 7, which requires a multiemployer plan filer to insert the total number of employers obligated to contribute to the plan. As previously discussed, the feature codes at line 8 have been expanded to include code 2S (automatic enrollment) and 2T (default investment) for defined contribution plans. Schedule A (Insurance Information) has a new Part IV that allows the filer to state whether or not the insurance company provided information necessary to complete Schedule A. If the insurer was not forthcoming with the data, space is provided to indicate which data was not made available. Preparers of Form 5500 have consistently complained about the failure of insurance companies to provide data; however, it remains to be seen whether the inclusion of this new section on the form results in any new behavior in this regard. Schedule SB and Schedule MB have been provided in draft form, but no official instructions have been released. The 2008 forms package will include the Schedules SB and MB and these will be transitional forms that are intended to be the basis for the 2009 forms. Schedule C (Service Provider Information) experienced a major overhaul and is causing quite a stir in the investment and service-provider community. EBSA has already issued a series of 40 FAQs in response to questions raised by the benefits community and is working on additional guidance to aid in understanding the information to be reported. It will take some time, perhaps years, for plan administrators and practitioners to become comfortable with the data collection and actual data entry on this new approach to disclosing information about service providers. To put it simply, the new format was designed to expand reporting of indirect compensation. Persons or entities that provide investment management, recordkeeping, participant communication, and other services to the plan as part of a transaction with the plan are treated as providing services to the plan or its participants for purposes of Schedule C reporting. In other words, it will no longer appear that services are being provided to the plan at no cost. It also means the entries on Schedule C will, in most instances, not directly tie to the amounts shown on line 2i of Schedule H.Examples of reportable indirect compensation include any fees and expense reimbursements received by a person (or entity) from mutual funds, bank commingled trusts, insurance company pooled separate accounts, and other separately managed accounts and pooled investment funds in which the plan invests that are charged against the fund or account and reflected in the value of the plan’s investment. For example, the “expense ratio” associated with a mutual fund includes management fees paid to its investment adviser, sub-transfer agency fees, shareholder servicing fees, account maintenance fees, and 12b-1 distribution fees, all of which are reportable indirect compensation. One attempt to narrow the amount of detailed information that must be shown on Schedule C is the introduction of the concept of “eligible indirect compensation” in the instructions. Eligible indirect compensation is indirect compensation that meets the following two conditions:
The goal for many investment institutions and service providers will be to provide the necessary written materials to ensure that the eligible indirect compensation classification is achieved whenever possible. Don’t be surprised if you begin seeing substitute Schedule C information routinely provided in the same way that insurance companies provide Schedule A data - the only difference, though, is that there is no requirement that Schedule C data be provided. Most of the 40 FAQs posted on the EBSA website on July 14, 2008 aid in understanding the types of investment-related fees and expenses that must be disclosed. FAQ40 provides some “good faith” relief, but continues to put the burden on the plan administrator -- and not the person (or entity) receiving the compensation -- to determine whether all appropriate disclosures have been made. Stay tuned. The new Schedule C will continue to be dissected by both service providers and the EBSA. Regulations proposed under ERISA Section 408(b)(2), when finalized, may add some clarity to this area. Schedule D (DFE/Participating Plan Information) and Schedule G (Financial Transaction Schedules) have some formatting modifications but the content of the disclosures remains unchanged. Schedule H (Financial Information) has one substantial change beyond the blackout questions at lines 4m and 4n already described above. At line 2b(C), dividends attributable to registered investment company shares (e.g. mutual funds) must be carved out and separately reported. Until now, those dividends have been rolled up in the net investment gain (loss) reported at line 2b(10). This change is a nuisance and may require some systems adjustments in order to capture this detail. Also, it is unclear whether capital gains distributions are included on line 2b(C) or continue to be reported as part of the net investment gain (loss) shown on line 2b(10). Schedule I (Financial Information -- Small Plan) now includes the blackout questions at lines 4m and 4n. In addition, the income and expense detail at line 2 has been refined by requiring reporting of administrative service provider salaries, fees, and commissions separately from other expenses. It is a minor change, but reflects concerns about adequate fee disclosures. Lines 1 through 6 of the 2009 Schedule R (Retirement Plan Information) are identical to the current form, and the existing lines 7 and 8 are now lines 8 and 9. A new line 7 has been inserted to confirm that the minimum funding amount reported on line 6c for a defined contribution plan will be deposited by the funding deadline. The existing line 9, which reports compliance with coverage rules under IRC §410(b) is eliminated. There are three new sections added to the Schedule R. Part IV is applicable only to ESOPs and replaces the current Schedule E with only 3 questions taken from that schedule and moved to the R. This reduced reporting for ESOPs provides information that is available for public disclosure in contrast to the current Schedule E, which is not open to public inspection. Part V asks for additional information about multiemployer defined benefit plans, so only a few plans will need to complete this section. The data entry includes names, EINs, and amount of contributions made by each contributing employer that represents more than 5% of total contributions to the plan. Information about the date the employer’s collective bargaining agreement expires and the contribution rate also must be inserted. Finally, Part VI of the Schedule R requires information about the duration of investments held by defined benefit plans covering 1,000 or more participants. No specific instructions have been issued to date; however, this information must be presented for 2008 plan years and, therefore, instructions for this section should be part of the 2008 forms package. What Happened to Schedule SSA? Schedule SSA is another matter. IRS is charged with collecting this data for the Social Security Administration and, so, is developing a process for accepting the SSA data both on paper and electronically, but not through EFAST2. Schedule SSA will become Form SSA and be filed directly with IRS. While few details are available today, it is anticipated that the due date for filing Form SSA will be the same as the due date, with extensions, for filing the Form 5500 for the related plan. Practitioners should expect little change in the format, at least in the short term, as IRS is focusing its energy on managing this new process before attention is given to the structure of the data collection effort. In Closing Coordinating the Benefit Plan Audit and Form 5500 Preparation The AICPA’s Audit & Accounting Guide for Employee Benefit Plans is an indispensable tool that should be on your shelf if your firm provides services to large plan filers. It contains a wealth of information about audit objectives and procedures, includes sample opinion letters and financial statements and notes, and is updated annually with the latest guidance. It has become a very robust reference. You may purchase a single copy or sign up for an annual subscription service at http://www.cpa2biz.com. You do not have to be an AICPA member. Learn the Lingo Suppose a plan sponsor tasks one individual with responsibility for all activities associated with the plan’s day-to-day operation, including drafting of the financial statements. The audit risk in this example may be higher because the opportunity for fraud is increased. When specific duties associated with the plan’s operation are allocated among several individuals, the audit risk may be reduced because the likelihood of these individuals joining forces to misuse plan funds is lower. Ideally, assignment of duties to multiple individuals or entities creates inherent checks and balances that minimize risk. Internal controls. Beginning with audits for 2007 plan years, many employers are for the first time completing internal control questionnaires to document their day-to-day handling of plan activities. This narrative includes discussions about the type of business the plan sponsor conducts and the current condition of its industry, as well as internal controls related to investments, contributions, distributions, payroll, and participant accounts. These can be lengthy documents; however, after the preparation of the documentation this year, the plan sponsor should be able to merely update this document in subsequent years. New Statements of Accounting Standards (SAS). Auditors are implementing SAS 104 through 111 this year. The objective of these standards is to enhance the auditor’s application of the audit risk model by requiring them to have a deeper understanding of the entity, its environment and the risks of material misstatement and how the entity is mitigating these risks. This should enable the auditor to achieve a more thorough assessment of the risks associated with an engagement and then to improve the link between the estimated risks and the audit procedures to be performed on that engagement. There is no magic formula for assessing audit risk. The auditor seeks to gather enough information to understand the risks of the entity and its environment (including internal control), evaluate the data, and then design an audit program that responds to the situation at hand. Financial statements. It should be noted that the first paragraph of the auditor’s opinion letter always notes that....”These financial statements (and schedules) are the responsibility of the Plan’s management.” The purpose of the audit is not to create the financial statements and notes; rather, the audit process earns the plan the opinion letter that becomes part of what we reference generically as the “audit report.” To improve efficiencies, audit firms often provide report templates to aid the plan administrator in drafting the report before field work begins. In order to maintain independence, the accountants who audit the plan should not be preparing the plan’s financial statements. Considering that many plan sponsors are hard pressed to add the burden of financial statement preparation to an already overworked in-house employee’s duties, pension practitioners members may fill a need by adding financial statement preparation to their menu of services. It can result in significant efficiencies for the plan sponsor, the service providers, and the auditor. Even if a third-party develops the financial statements, the plan administrator must demonstrate that they are sufficiently knowledgeable about the financial statements but that time or resources prevented them from generating the statements themselves. The auditor would be required to issue a letter under SAS 112 if they believed the plan administrator was deficient in this regard. SAS No. 70 (“SAS70") An example may help. ABC Pension Company (“ABC”) offers in-house daily valuation and administration. ABC uses SunGard daily valuation software and Schwab’s investment platform. Each of these entities - ABC, SunGard, and Schwab - typically engage auditors each year to produce a Type 2 SAS70 report that focuses on that entity’s operation. This report will be useful to the auditor in understanding each service organization’s controls in order to make an assessment of the risks of material misstatement and, ultimately, to determine the extent of further audit procedures. Without the SAS70, the benefit plan auditor would need to spend time with each of the entities providing services to the plan (in this case, ABC, SunGard and Schwab) to understand and evaluate their environment and internal controls. Depending on the service menu your firm offers, there may be no SAS70. Pension firms that partner with insurance companies to provide services generally will not have a SAS70 if the pension firm’s duties relate primarily to nondiscrimination testing and reporting and disclosure matters. However, the insurance company that is providing recordkeeping, custody, transaction processing and other services to the plan will include a SAS70 report as part of its audit package. Another point about SAS70 reports: these reports are not just casual reading for auditors. A thorough review of the report will show plan administrators situations in which the service organization is relying on the plan administrator (or another service provider) to have its own controls in place with respect to an activity. For example, the service organization processes distributions for terminated participants relying on the receipt of the plan administrator’s approval to do so. In this case, the plan administrator must have adequate controls in place so that only those participant or beneficiaries who have satisfied the terms of the plan are allowed to be paid out. Limited-Scope Audits and Certifications This limited-scope exemption does not apply to information about investments held by a broker or dealer or an investment company. The exemption applies only to the investment information certified by the qualified trustee or custodian, and not to participant data, contributions, benefit payments or other information whether or not it is certified by the trustee or custodian. The trustee or custodian may or may not be certifying the fair value of the assets under their control; rather, the certification may merely relate to the best available information in the records of the trustee or custodian. In this case, the limited-scope exemption may have narrow application if the fair value of certain investments must be independently ascertained and, therefore, full-scope procedures applied. The limited-scope election is not available to plans that must file Form 11-K with the SEC. Fair Value A look at the official instructions to Form 5500 shows that terminology used to identify asset valuation requirements are inconsistent amongst the various schedules: Schedule A uses both Current Value and Contract Value; Schedule D asks for Dollar Value; and Schedules H and I use the terms Current Value, Fair Market Value, Fair Value, and Transaction Date Value (for 5% reportable transactions); and, also, Contract Value. The only definition of value in the official instructions to Schedules H and I is as follows: “... Current value means fair market value where available. Otherwise, it means fair value as determined in good faith under the terms of the plan by a trustee or a named fiduciary, assuming an orderly liquidation at the time of determination. See ERISA section 3(26).” There is no specific definition for Dollar Value (Schedule D), nor are there examples of when the separate terms are not synonymous (and how so). Furthermore, there is disagreement among professionals as to the intended coordination of SOP 94-4-1 valuation criteria with values required to be disclosed on Form 5500 series reports. DOL agrees that contract value may only be reported at line 6 of Schedule A, and otherwise on Schedules D, H, and I when the insurance contract is fully benefit-responsive. Other fully benefit-responsive stable value or synthetic contracts in defined contribution plans must be reported on Form 5500 at fair value. SOP 94-4-1 calls for defined contribution plan financial statements to be adjusted to contract value when the contract is fully benefit-responsive; therefore, any mismatch with the reporting requirements of Form 5500 must be reconciled in a Note to the financial statements. Alternative Investments. An alternative investment is one for which no market price (i.e., fair value) is readily ascertainable. Think about it this way: can you go to the newspaper and find the closing market price at the end of the last business day? So, yes, pooled separate accounts and common/collective trust investment vehicles fall into the “alternative investment” category. As do hedge funds, private equity funds, real estate investments, and other vehicles that are not registered with the SEC. So how is fair value determined? The auditor will work with the plan administrator to get values for the underlying investments. In some instances this may be a relatively simple task; for example, a pooled separate account that holds a mutual fund. The DOL has raised the focus on these alternative investments so it is likely that auditors will ask more questions about such investments when they encounter them in a plan’s portfolio. Which Comes First? The auditor’s responsibility for information reported in the Form 5500 does not extend beyond the financial information contained in the audit report, and the auditor is not required to verify any other data shown in the Form 5500. On the other hand, most auditors will want to see the entire Form 5500 filing to assure themselves of consistency between their understanding of the plan and that being reflected on the filing. In Closing Press Release March 31st 2008 The DOL awarded Vangent a $15 million development contract as the first component of the 12-year, $94 million initiative. EFAST2 will enable electronic filing of employee pension and benefit plans while also enhancing multi-agency visibility and access to Form 5500 series filings. EFAST is the filing system for ERISA, which was enacted in 1974 to increase protection for workers’ pension plans and guarantee that pension rights are not unfairly denied or taken from eligible employees. ERISA serves to protect the pension and benefit plans that cover 150 million eligible employees and their dependents, and include assets of approximately $6 trillion. The Vangent EFAST2 contract features the development of a secure Web portal to streamline electronic filing and processing of approximately 1.1 million employee benefit plan reports. The Web portal will also enable the DOL – and its partner agencies, the Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) – to review the electronic Form 5500 series filings and ensure employer compliance with pension and benefit plan mandates. Vangent will also continue to staff and manage an EFAST contact center to support the organizations that file Form 5500 series documents annually. “The Department of Labor Employee Benefits Security Administration is central to maintaining a fair work environment and safeguarding employees’ retirement funds,” said Mac Curtis, president and CEO of Vangent, Inc. “We are proud to continue our longstanding relationship with the Department of Labor and look forward to working together to provide EFAST2 electronic filing and enhance multi-agency review of these important documents.” The EFAST2 contract extends Vangent’s 10-year relationship with the DOL. The DOL first awarded Vangent the EFAST contract in 1998 to develop, implement, and manage a sophisticated imaging, data capture, and data management solution that fulfills more than 400 program deliverables, applies more than 200 data edits, and more than 1,000 data verification and validation checks for each submission. Vangent also operates the EFAST Help Line to support employers’ questions that include initial filing queries through filing revisions required. The contact center includes a cost-effective Interactive Voice Response (IVR) and Frequently Asked Questions (FAQ) features as well as live customer service support. Vangent EFAST2 program partners include IBM Global Business Services, Buccaneer Computer Systems and Services, Inc., HeiTech Services, Inc., NATEK Inc., and Riojas Enterprises, Inc. PPA Rules Affect 2007 Form 5500 Practitioners are particularly interested in how the agencies addressed the new rules in PPA §1103 which were intended to make reporting easier for small employers. If the Instructions for 2007 Form 5500 are any indication, a “simplified report” is defined by folks in Washington much differently than it is elsewhere. Relief for Small Plan Filers The requirements for the Voluntary Alternative Reporting Option for Certain Plans with Fewer than 25 Participants are not suggested by the statutory language or legislative history; however, in its December 2006 updated proposals to Form 5500, the DOL stated in the preamble that “Specifically, the Department anticipates that the simplified report will to a large extent replicate within the context of the existing Form 5500 Annual Return/Report structure the information that would be required to be reported on the proposed Short Form 5500 (Form 5500-SF), possibly by allowing certain schedules to be excluded from the filing or requiring only certain line items to be completed on required schedules.” A look at the proposed Form 5500-SF (see page 13 of the document at http://www.dol.gov/ebsa/regs/fedreg/notices/2006006329.pdf) will cast a better light on how the DOL developed the 2007 simplified reporting guidelines. So just who is eligible to file under the new rules? For the 2007 plan year, single employer plans with fewer than 25 participants as of the first day of the plan year may choose to file the simplified annual report if:
What must be filed? The “simplified” Form 5500 report is comprised of:
Of course, the sponsor of an eligible small plan may opt to continue filing Form 5500 as it has in the past, including all schedules, without regard to the Alternative Reporting Option. There appears to be no rule prohibiting an eligible plan from filing something in between the simplified report described above and the “full” small plan report; however, it is unclear whether EFAST systems have been adapted for this possibility. It is possible that filing an “in between” report will cause correspondence to be generated by the system, creating more work for plan sponsors and practitioners. The bottom line is that the plan sponsor has minimum filing requirements that must be satisfied with regard to Form 5500. Anything beyond that is optional. New Dollar Threshold for Form 5500-EZ Filers Interestingly, the statute is clear that, beginning with 2007 plan years and thereafter, one-participant plans file Form 5500-EZ only for years in which the value of the plan’s assets (or combination of plans’ assets) exceed $250,000. In contrast, the rules for filing Form 5500-EZ prior to the PPA-related change required ongoing filing of Form 5500-EZ once the plan met the requirements associated with the prior $100,000 threshold. Practitioners and plan sponsors should take note that the change in the threshold does not relieve one-participant plans from filing Form 5500-EZ for years that the plan was required to file the report under the pre-PPA rules. A natural question arises: May a plan sponsor choose to continue filing Form 5500-EZ for years after 2006 even though the value of plan assets as of the last day of the plan year is less than $250,000? As all of us are keenly aware, there have been many instances of one-participant plans dealing with late filings because of the inadvertent failure to file Form 5500-EZ under the prior rules. Practitioners may find themselves reluctant to recommend an intermittent filing pattern, as permitted under the PPA rules. In addition, the agencies have been known to issue correspondence advising plan sponsors who filed Form 5500-EZ -- for example, when plan assets did not exceed $100,000 -- that no filing was required. This action sometimes caused tension between the plan sponsor and its advisor(s), who recommended the filing of Form 5500-EZ to keep the plan sponsor from potentially running afoul of the filing requirements by instilling the filing habit. Until the IRS is able to devote resources to devising a delinquent filer program for one-participant plans, there needs to be some compromise approach for filers that helps keep them out of trouble. It’s well known that many practitioners continue to recommend filing Schedule B with Form 5500-EZ reports for defined benefit plans; however, the IRS eliminated the need to file Schedule B for such plans beginning with the 2005 reporting year. Perhaps IRS will continue to tolerate filings that include more information than is required. One other question regarding the 2007 Form 5500-EZ recently posted on my Web site poses an interesting issue: A sponsor maintained a one-participant plan and filed the Form 5500-EZ for all plan years after the assets exceeded $100,000. The plan terminated in 2005, all assets were distributed and a final Form 5500-EZ was filed. In 2007, the sponsor has adopted a new one-participant retirement plan. Should we interpret the phrase in the instructions - “and you have one or more one-participant plans that separately or together” - to refer only to plans that are currently active or to any plans ever maintained by the plan sponsor? Presumably, the rule applies only to current plans of the sponsor, but it does point out an ambiguity in the text of the new instructions. [The text of the statute seems to speak to the asset values held in active plans.] IRS has indicated it may draft FAQs regarding the 2007 Form 5500-EZ changes that could answer these questions. Another update will be posted on this Web site if such FAQs are released. Special Rules for 2008 Short Plan Year Filers Because of these changes, filers that are subject to the abovementioned rules will be granted an automatic extension of time to file their complete 2008 Form 5500 until 90 days after the 2008 forms become available to use for filing. It is anticipated that the automatic extension will be needed only for affected plans that have a short plan year during 2008 and that the 2008 forms should be released in plenty of time for use by calendar year filers. PBGC Updates Premiums for 2008
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