10 Mistakes Plan Sponsors May Make When Filing Form 5500
We all make mistakes, and generally the more complex a task, the more room for human error. Take, for example, the difficulty of filing tax and benefit paperwork such as Form 5500.
According to the IRS, entering incorrect information, or accidentally leaving a field blank when filling out Form 5500, may increase your chances of being selected for an employee plan compliance check by the Department of Labor. If you prepare this form for your business, be on the lookout for some of the most common errors, as noted by the IRS:
1. Plan Participants
All eligible employees and employees with balances in the plan are considered plan participants on Form 5500. Often companies mistakenly answer there are zero plan participants. This error especially is especially prevalent with new programs.
2. Excess Deferral
This error means that plan sponsors have allowed contributions to exceed the annual limit a participant is able to contribute. The IRS also found that some 403(b) or 457 contributions were coded as 401(k) deferrals.
3. Plan Termination
When a plan is terminated, Form 5500 is still required. Documenting terminated plans is a part of compliance during annual reporting. Common errors include: not filing the form, accidentally marking a plan terminated when it wasn't, mistaking a frozen plan for a terminated one, using the same plan number for more than one plan, not marking the form as a final return, or showing zero assets after all plan assets are distributed.
Form 5500 asks if a plan had a loss caused by fraud or dishonesty. The IRS has found that employers often answer this section incorrectly. Most often, this area should be left blank (assuming a company did not endure fraud).
5. Puerto Rico
When plan sponsors have employees in Puerto Rico, codes can be mislabeled. Plan sponsors should use pension feature code 3C if they intend their plan to be qualified only under the Puerto Rico Code and not the U.S. Internal Revenue Code. Code 3J applies if they intend their plan to be qualified under both the Puerto Rico Code and the Internal Revenue Code.
6. Frozen Plans
Code 1l means that a plan is frozen, or non-active. Organizations have been known to accidentally use code 1l for active accounts.
7. Simplified Employee Pension (SEP) Plans
SEP plans require Form 5498 (vs. Form 5500) and these are also prone to errors including contributions that exceed the Code limits, rollover contributions shown as SEP contributions, and not showing all eligible employees as plan participants.
For added security, here are a few additional mistakes to look for when completing Form 5500:
8. Incorrectly Entering the EIN and Plan Number when Filing
9. Providing Too Much Information, such as returns dated over 12 months
10. Not using EFAST Software or Approved Vendors for Filing your Form
Form 5500 requires a significant amount of information. It's easy to enter wrong codes, or mistake figures.
How can you Avoid These Mistakes?
Double check your work. Go back through the form to ensure you've:
- Reread the questions to ensure you've answered correctly
- Double checked that answers are in the correct boxes
- Re-checked the codes to ensure you've recorded everything properly
- Avoided copying your answers from a previous year's form.
- Consulted with professionals to ensure you're answering each question correctly.
Many plan providers prepare a signature-ready Form 5500 as part of their administration services, allowing you to simply review for accuracy, sign, and file the form. This helps minimize your workload and risk.