The Form 5500 is an annual report, filed with the U.S. Department of Labor (DOL), that contains information about a 401(k) plan's financial conditions, investments, and operations. The purpose of the Form 5500 is to provide the Internal Revenue Service (IRS) and DOL with information about the plan's operation and compliance with government regulations.
In general, all retirement plans, such as profit-sharing and 401(k) plans, must file a Form 5500 for every year the plan holds assets.
Form 5500 and your small business
Understanding Form 5500 is crucial to businesses with retirement plans. Among the many fiduciary responsibilities that must be reported on the Form 5500, plan sponsors must deposit employees' salary or wage deferrals into their accounts as soon as administratively feasible, but no later than the 15th business day of the month following the month in which the contributions occurred.
Essentially, a plan is required to make those deposits at the earliest reasonable date so that it can segregate participant contributions from the employer's general assets.
Small employers — classified as those with 100 or fewer employees — are subject to a safe harbor deadline that gives them seven business days after collecting employee deferrals to deposit them into the plan.
Due date and extension options
Just as with a personal tax return, you can file an extension for your company’s Form 5500 (The Application for Extension of Time to File Certain Employee Plan Returns). If the extension is filed in a timely and complete manner, it is due two-and-a-half months after your Form 5500 was due.
For most plans, the Form 5500 is due the last day of the seventh month after the plan year ends, or typically July 31 for a calendar-year plan (or the following business day if July 31 falls on a weekend). If you cannot complete your form by July 31, you will need to file an extension using a Form 5558 with the IRS before July 31 to avoid late filing penalties.
The plan administrator must electronically sign and file the Form 5500 with the DOL. In addition, the plan administrator must keep a copy of the Form 5500, including schedules and attachments, with all required ink signatures on file with the plan's records.
Summary annual report
A summary annual report (SAR) is a document required under the Employee Retirement Income Security Act (ERISA) that summarizes the information reported on the Form 5500 and schedules. The SAR must be distributed to each participant and their beneficiaries receiving benefits under the plan no later than two months following the Form 5500 filing deadline which is normally Sept. 15th. If the client filed for a filing extension, they have until Dec. 15.
The SAR provides participants with a summary of the plan’s financial status as reported on the Form 5500. Participants are also informed of their right to receive a copy of the Form 5500 if requested from the employer.
Is a fidelity bond required for retirement plans?
ERISA requires every plan fiduciary and anyone else who handles or has the authority to handle plan assets to be covered by a bond. A fidelity bond is an insurance policy that names the plan as the insured party and covers anyone who handles or has the authority to handle plan assets. The fidelity bond protects the plan against loss due to of acts of fraud or dishonesty on the part of persons required to be bonded
The required amount of bond coverage is the lesser of 10 percent of plan assets at the beginning of the plan year, or $500,000.
The Form 5500 filing process
If you don't already have DOL signing credentials, you can obtain them at www.efast.dol.gov. The DOL requires that all Form 5500 annual returns be filed electronically using its ERISA Filing Acceptance System (EFAST2) program. The agency no longer accepts paper filings.
The DOL and IRS may impose penalties or fines if a plan sponsor fails or refuses to file a complete return, or if the Form 5500 is rejected for insufficient information. Additional penalties may be incurred for willful violations, which include making false statements. Filings will be rejected by the DOL if required questions are left unanswered.
Form 5558 must be mailed to the IRS by the filing deadline to receive an extension on the due date.
Common Form 5500 errors
According to the IRS, entering incorrect information, or accidentally leaving a field blank when filling out Form 5500, may result in an employee plan compliance check by the DOL.
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. Noting "zero" 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 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 can contribute. The IRS has 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 until all assets are distributed from the plan. 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.
- 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. 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.
6. Additional pitfalls
For added security, here are a few additional mistakes to look for when completing Form 5500:
- Incorrectly entering the EIN and plan number when filing.
- Providing too much information, such as returns dated over 12 months.
- 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. To avoid these mistakes, double-check your work. Go back through the form to ensure you have:
- 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.
Using a third-party administrator can help you effectively prepare to file this form, and minimize your plan-related workload and risk. 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.