Mistakes on Form 5500, a key part of the overall reporting and disclosure of the Employee Retirement Income Security Act (ERISA), can shut down a plan, says James Holland, director of business development, MillenniuM Investment and Retirement Advisors LLC. Forget to file, or misreport data, and the Department of Labor (DOL) can start levying penalties, which can add up to as much as $30,000 a year. “The fines and penalties can add up pretty quickly,” Holland says. “They’re a lot tougher on those fines and penalties than in the past—you don’t say you’re sorry and walk away anymore.”
Every year, on January 1, the DOL issues the Form 5500 reporting form with highlighted changes in the front section. Some people wince at the idea of reading through to see if anything has changed, but not Linda Fisher, principal of Linda T. Fisher Form 5500 Consulting, who specializes in training and consulting on the process.
“The instructions are great, and there’s a lot in there,” Fisher says, noting that the DOL makes improvements every year. The person who picks it up once a year as a refresher course could find it a challenge, but she takes a deep dive into the questions and answers each year. “I kind of enjoy it,” Fisher admits. “It could change my process drastically or a little.”
A common mistake is relying on last year’s form, Fisher says. Plan sponsors do not always understand the questions and if anything has changed from the previous year. “They have last year’s form in front of them along with this year’s, and they assume last year’s is OK unless they heard otherwise,” she says. But problems can be perpetuated year after year if a plan sponsor simply fills out the form using information from the previous year without double-checking or understand what the questions mean.
Plan sponsors often do not understand participant counts, Fisher says. A common error is counting only people who have account balances instead of all eligible participants. “That’s a big oops,” she says, and one even recordkeepers that provide the information for a Form 5500 can make. “They may have only the people who have money in the plan,” she says. Employees who have met eligibility requirements, such as having to work for a year before becoming eligible, still must be counted as participants, according to Fisher.
Another common error occurs with companies that started small then reach 100 employees, Fisher says. Some companies do not realize they have to prepare a Form 5500 for health and welfare plans once the enrollment hits 100 enrolled participants in a medical or dental plan. Reports for retirement plans must be filed no matter how few employees are in a firm.
What if a plan sponsor realizes the form was sent with a mistake? There’s nothing wrong with amending your filing, Holland says. If you have a review and you have something wrong, correct it and file an amended one. You’re taking your responsibility as a plan fiduciary very seriously. Don’t be afraid of filing an amended return.
Holland recalls a client who transposed two numbers and hit “send”—the form is filed electronically—and almost immediately realized the mistake. The next day, the recordkeeper fixed it and resent the form, and all was well, Holland says. Plan sponsors should not worry that amending a form will put them on a DOL radar screen. “You’re much better off saying you made a mistake and refilling,” he says.
Fisher notes that plan sponsors that realize a mistake and come forward can get their penalty reduced. The penalties and fines are laid out in the instructions.
But, Form 5500 filing, and the audit required for those companies that have 100 or more retirement plan participants, is not cause for panic. It is a non-issue, according to Ellen Lander, principal of Renaissance Benefit Advisors. “It seems to go awfully smoothly when you're dealing with high-quality service providers and conscientious clients,” she says. “Everyone seems to file on time.”
The only complaints Lander hears are client grips about the time and the cost of the required audit. The cost of an audit can be $30,000, Landers points out, but it may be unavoidable for some companies. Two of her plan sponsor clients were so frustrated by cost and processing time of the audit, they hired a new auditor, Caron & Bletzer PLLC, a CPA firm in New Hampshire that specializes in ERISA audit services. But, Lander notes, “If you have a complicated corporate situation, you’re going to want to stay with your corporate auditor.” Some companies are not in a position to leave their auditors because they know the full scope of the company situation.
Preparing the Form 5500 filing can also be time-consuming. “Even a small plan filing can take six to eight hours,” Fisher says. Larger plans take much longer, because there are more questions to answer and much more information to assemble from multiple sources: the recordkeeper, the bank, the employer, the insurance companies. “It drags on for weeks,” she says. “The process can be a bit scary, and [companies] procrastinate.”
Holland reminds plan sponsors that the filing deadline is the end of the day on July 31, but not everyone is able to make the deadline. “File for an extension,” he says. “All is not lost.”
Holland recalls a plan sponsor that did not file for three years; the penalty was capped at $30,000 per year for each year. But penalties are easily avoided, Holland says: “Get help if you don’t know something.”
An adviser can use expertise in Form 5500 as a significant value-add as well as a tool to help a plan sponsor, Holland says, by making sure the information is correct before it’s signed, and by putting the plan sponsor in touch with people to help.
Fisher offers training for plan sponsors at $250 an hour. A small plan with 100 or fewer participants will likely need two to three hours, she says; large plans can take up to 12 hours. More information about Fisher’s company is at her website.