Compliance September 27, 2009

Tax Officials Post Form 5500 FAQs

Have a question about electronically filing a Form 5500 report on the Department of Labor (DoL) Web site?

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Just the information you need to answer your inquiry might be among the 45 FAQs addressing EFAST2, the all-electronic filing system for Form 5500 that is scheduled to be available beginning January 2010. DoL 2007 regulations require that all Form 5500s be filed electronically for plan years beginning on or after January 1, 2009.

Topics covered in the new FAQs include filing preparation software, registering for EFAST2 credentials, signing a return/report, and checking the status of an electronically filed Form 5500.

Some examples include:

  • Q/A-3 explains that 2009 short-plan-year filers whose filing due date is before January 1, 2010, will receive an automatic extension to electronically file their Form 5500 within 90 days after the EFAST2 system is available on the DoL’s Web site.
  • Submitting Form 5500 and Checking Its Status. Q/A-34 clarifies that although a third-party preparer can submit a Form 5500 that a plan sponsor or plan administrator has signed electronically, the plan sponsor or plan administrator retains legal responsibility for the timeliness, accuracy, and completeness of the submission. Q/A-36 explains that the individual who transmits Form 5500 to EFAST2 (or its signers) should be able to check its filing status about 20 minutes after submission, using the software used to submit the filing. Q/A-37 contains a chart listing seven filing statuses and what they mean.

The material is available here.

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Data & Research September 27, 2009

Sponsors Need To Plug Leaks for Loans, Withdrawals

Rules barring participants from making 401(k) contributions for six months after taking a hardship withdrawal should be eased to help employees more quickly recover a more substantial retirement nest egg by resuming savings more quickly, a new government report suggests.

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Treasury and Labor Department regulators also should encourage sponsors to provide participants with more detailed information including various financial scenarios to amply illustrate the potential negative effects on the person’s ultimate retirement account balance of taking loans or accepting a final account cashout, according to a Government Accountability Office (GAO) report, “401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings,” released Friday.

Regarding cashouts, the GAO contended some participants are opting to go that way because they have never gotten detailed data about the potential damage it could bring to their retirement savings balance. “However, many participants continue to take this option when separating from their employer, in part because the option is often presented to them with little or no information on its long-term consequences,” the GAO said. “With better information on the consequences of the various forms of leakage, participants may choose to preserve their retirement savings, resulting in a better retirement outcome.”

Hardship Cases

Regarding hardship withdrawals, the GAO investigators said plans should not approve such withdrawals until the person has exhausted their ability to take a plan loan. In fact, the GAO said the Secretary of the Treasury should clarify that the loan exhaustion provision applies to all plans that permit both participant loans and hardship withdrawals, and should require plans to document that participants have exhausted available plan loans before allowing a hardship withdrawal, the GAO said.

The current period during which participants can't make new deferrals after taking a hardship withdrawal could actually be making the situation worse, by keeping workers who could afford such savings from actually making it for six months.

"[U]nder current hardship rules, participants who could continue making retirement contributions after taking a hardship withdrawal are barred from doing so," the GAO report said. “This suspension of contributions also prevents participants from receiving employer matching contributions and will likely leave them with a lower account balance at retirement. Ensuring that participants choose the path that causes the least harm to their retirement accounts and continue to make retirement contributions whenever possible may help mitigate the adverse impacts of leakage that otherwise will linger into retirement.”

The GAO also recommended the Labor Department encourage plans to provide separating participants with a projection of their account balance under different scenarios, such as when assets are left in a tax-deferred retirement account compared with those assets cashed out in the form of a lump-sum distribution.

The GAO worked with 26 plan administrators in the report. The report is available here.

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