Understanding the Form 5500 Annual Return for Employee Benefit Plans

If you offer any type of employee benefit plan, you may be required by the Internal Revenue Service (IRS) and the Department of Labor (DOL) to file Form 5500, the Annual Return/Report of Employee Benefit Plan.  Form 5500 is due on the last day of the seventh month after the plan year ends.  That means that returns for calendar year plans are due by July 31 of the following year.

If you fail to file Form 5500 in a timely, accurate or complete manner, the IRS and the DOL may impose severe penalties.  The DOL can penalize you up to $1,100 per day for failure to file for welfare and retirement plans.  Additionally, the IRS can penalize you $25 per day up to a maximum of $15,000 for failure to file retirement plan returns.

The following information summarizes the filing and audit requirements for different types of employee benefit plans, and highlights some recent changes in the filing requirements.

Welfare Plans
Generally, if you offer a welfare plan and have more than 100 participants at the beginning of a given plan year, Form 5500 is required for that plan year.  Welfare plans include medical, dental, vision, life, disability, severance plans, employee assistance plans and travel accident policies. 

There are a few welfare plans, however, that do not require a Form 5500:

  • Fully-insured or partially insured plans with less than 100 participants
  • Unfunded and/or insured plan for select group of management or highly compensated employees
  • Church plans under ERISA § 3(33)
  • Governmental Plans

Retirement Plans
The IRS requires that Form 5500 be filed for Profit Sharing, 401(k), Money Purchase, ESOP, an employer sponsored IRA, 403(b) plans with employer contributions and Defined Benefit Plans, regardless of the number of participants.  Plans with over 100 participants at the beginning of the plan year are also required to conduct an audit of the plan’s assets by an independent public accounting firm.

80/120 Participant Rule
If a plan has been filing Form 5500 as a large plan (more than 100 participants), it is required to continue the audit requirement until the number of participants is below 80 at the beginning of a plan year.  Also, if a plan has been filing Form 5500 as a small plan (less than 100 participants), it may elect to continue to do so without the audit requirement until the number of participants is greater than 120 at the beginning of a plan year.

Mandatory Electronic Filing on Track
Mandated electronic filing by the Employee Benefits Security Administration (EBSA) is scheduled for plan years beginning January 1, 2009.  For calendar year plans, this means the first electronic Form 5500 filing would be due in 2010. 

DFVC Program
One of the most common problems employers face is dealing with delinquent Form 5500 filings.  The DOL has a program available, the Delinquent Filer Voluntary Compliance (DFVC) Program, which allows plan sponsors who have failed to timely file required Form 5500s to resolve their delinquent filing situations.  If a filing is brought into compliance prior to an audit by the DOL, significantly reduced penalties are imposed:

  • Per day penalty:  The basic penalty under the program is reduced to $10 per day.  The maximum penalty should be calculated based on the original due date and type of return.
  • Per filing cap:  The maximum penalty for a single late annual return is $750 for a small plan (one that covers fewer than 100 participants at the beginning of the plan year – mainly retirement plans) and $2,000 for a large plan (one that covers 100 or more participants at the beginning of the plan year).
  • Per plan cap:  For plan administrators who have failed to file an annual return formultiple years, the per plan cap limits the penalty to $1,500 for a small plan (mainly retirement plans), and $4,000 for a large plan, regardless of the number of late annual returns filed for the plan at the same time.
  • Small plans sponsored by tax-exempt organizations.  For a small plan sponsored by a 501(c)(3) organization, a special per plan cap of $750 applies, regardless of the number of late annual returns filed for the plan at the same time.

Taxpayer’s are entitled to request reasonable cause abatement of both IRS and DOL penalties.  Reasonable cause will typically be found in cases involving disasters (e.g., fire, floods or hurricanes), as well as in cases involving the death of significant responsible person. 

The dilemma employers are faced with is the likelihood that the IRS or DOL will accept the reasonable cause abatement request.  To the extent that the request is accepted, no penalties will be imposed.  If the request is denied, the plan administrator may not be able to file under the DFVC program, because the DOL may immediately send a notice of assessment for late filing and eliminate the ability to utilize this program.

For additional information or assistance, contact your local
CBIZ office.

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