An accurate and thorough Form 5500 is essential to protect employee benefits plans and participants. Review these mistakes before filing Form 5500 to ensure compliance and avoid penalties.
The annual Form 5500 allows the IRS and Department of Labor (DOL) to monitor pension and welfare benefits plan compliance. Compliance is essential to ensure administrative best practices and financial protection of promised benefits. On an organizational level, filing thorough and accurate information in your Form 5500 is also necessary to avoid penalties. Reviewing common errors in Form 5500 can help you stay compliant and strengthen the standing of your employee benefits plans.
Common mistakes in Form 5500
Errors may be common, but they can still be costly. Forbes magazine reports that the IRS and DOL can fine companies for insufficient or inaccurate information on Form 5500. IRS penalties can reach $250 a day up to $150,000 for the plan year until your form is properly filed. The DOL penalty is $2,670 a day, and there is no maximum to this penalty.
Common errors involve:
- Recordkeeping entries
- Plan type
- Plan participants
- Excess or incorrect deferrals
- Plan termination
- Fraud declarations
- Changing regulations
- Signatures and validations
Recordkeeping entries
The need for accuracy isn’t a secret. Even still, simple entry errors are all too common. According to the payroll and HR solutions firm Paychex, organizations often input the wrong plan number or employer identification number (EIN).
Another common entry error is failing to update inputs from previous years. Form 5500 is an annual report. This makes it enticing to reuse information from previous years. However, this practice can also lead to accidentally using incorrect numbers or codes from past forms.
Plan administration provider Congruent Solutions also warns against leaving blank spaces in Form 5500. Fill out “N/A” to let regulators know you’ve read the information and it does not apply to your plan.
Double-check your form every year to ensure accuracy and guard against recordkeeping errors.
You also need to file a Form 5500 for all applicable plans. If you have multiple welfare benefits plans, you may want to consolidate them into a single plan with a wrap document. Doing so enables you to file one Form 5500 instead of multiple forms for each benefits plan. This strategy reduces the odds of not filing a required Form 5500.
Your insurance broker or benefits adviser can help you create a wrap document that is compliant with plan documentation, communication and deadline requirements.
Plan type
According to the advisory, tax and auditing services firm Withum, many organizations wrongly mark their 401(k) plan type because they confuse single-employer and multiemployer plans.
A multiemployer plan is created through collective bargaining. It covers two or more unrelated employers in the same or related industry.
It’s commonly assumed that a single-employer plan refers solely to a plan created and maintained by one company. However, a single-employer plan can also cover multiple companies when those businesses share common control. Examples include parent-subsidiary and brother-sister business relationships.
The IRS tracks controlled groups to ensure compliance with 401(k) nondiscrimination rules, notes the 401(k) provider Employee Fiduciary. Incorrectly inputting your plan type can lead to fines and put your plan at risk for disqualification. Work with your broker or benefits adviser to determine your plan status before filing Form 5500.
Plan participants
According to the legal writing site LexBlog, recent changes have corrected and created misunderstandings when counting plan participants. Before the 2023 plan year, “active participants” included anyone eligible for a plan. Beginning on Jan. 1, 2023, the plan count methodology changed. Now, the term “active participants” refers to individuals with an account balance in your plan.
Before 2023, organizations often incorrectly stated they had zero participants for new plans because eligible employees had yet to accumulate account balances. While that aspect is no longer a concern, the new distinction is still important for plans near the 100-participant threshold. Plans with 100 or more participants require an annual audit from an independent qualified public accountant.
An inaccurate understanding of plan participants could lead to noncompliance with Form 5500 requirements. Work with a trusted adviser to get an accurate count of your plan participants each year.
Excess or incorrect deferrals
Forbes recommends that plan sponsors closely review retirement plans for excess deferrals. This mistake occurs when plan participants exceed their annual contribution limit. It can result from participant or plan accounting errors, which are often unintentional.
Another common error is directing contributions intended for a 403(b) or 457 plan to a 401(k) plan.
Catching these errors before filing Form 5500 can benefit your plan and its participants. Plans must demonstrate sound administrative practices and safeguards to stay in good standing with regulators. In addition, you must return excess deferrals to participants by April 15 in the year following the excess contributions. This error may also require you to amend a participant’s W-2 form to include excess deferrals as taxable wages.
Plan termination
Some organizations mistakenly believe they don’t need to file Form 5500 when they terminate a plan, reports Paychex. However, Form 5500 requirements don’t end when a plan is terminated. Companies are still required to file Form 5500 until all plan assets have been distributed.
Paychex reports the following common errors regarding plan terminations:
- Failing to file Form 5500 when the plan still has assets
- Mistakenly identifying a plan as terminated when it is frozen or active
- Not marking Form 5500 as a final return when a plan is terminated
Fraud declarations
Form 5500 asks organizations to declare whether a plan has lost funds due to fraud or dishonesty. If you have not suffered these losses, Congruent Solutions recommends entering “N/A” on your form rather than leaving this spot blank.
A blank space or an incorrect response could lead regulators to think you are evading the question or your plan experienced fraudulent or dishonest losses. Providing an answer lets regulators know you have seen the question and your plan has not experienced these losses.
Changing regulations
Another common error is failing to adapt to new regulations. For example, LexBlog notes recent changes to required financial information on Schedule H of Form 5500.
Schedule H now requires a list of administrative expenses to ensure your plan is paying reasonable fees and receiving appropriate services in return. According to LexBlog, you must report the following administrative expenses:
- Salaries and allowances for plan employees
- Actuarial fees
- Auditing fees
- Legal fees
- Recordkeeping fees
- Trustee/custodial fees
- Valuation/appraisal fees
- Other expenses, such as office equipment, supplies, rent and similar costs related to the operation of your plan
Identify a point person or work with a trusted adviser to track new and changing regulations for employee benefits plans in general and Form 5500 in particular.
Signatures and validations
According to Withum, invalid signatures are a top reason organizations receive an error message on Form 5500. The signature must come from a registered and credentialed signer. You can acquire credentials through the DOL’s ERISA Filing Acceptance System (EFAST2).
EFAST2 also offers a prevalidation check to scan for errors, reports Withum. It checks to make sure your data is consistent with Form 5500 requirements. If you do not correct highlighted errors, regulators will receive an alert for your form.
Turn to trusted partners
It’s important to carefully review and submit your Form 5500 each year. Work with a trusted partner to complete and validate your form.
For more information on Form 5500 and evolving regulations, reach out to our Employee Benefits team and we’ll be happy to help. They can help you review and file your annual Form 5500 reports.
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