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What the New Form 5500 Questions Mean for Plan Sponsors

With the regulations being implemented for the 2019 plan year, now is the time for plan sponsors to ensure that systems are in place to capture the additional data that will be required.

By Tom Reese

Human resource departments and plan sponsors are very familiar with the Form 5500. Regardless of size, retirement plans governed by the Employee Retirement Income Security Act are subject to annual reporting and are required to file a Form 5500 with the Internal Revenue Service. 

However, last year, the Department of Labor, IRS and Pension Benefit Guaranty Corporation proposed new reporting obligations that, if enacted, will require more detailed reporting on the Form 5500 and may increase plan scrutiny and litigation.

While the primary purpose of the Form 5500 is to gather basic plan information, it also serves as a compliance tool for the DOL to identify ERISA violations. The DOL and IRS are increasingly relying on the Form 5500 to look for patterns that indicate if a plan complies with the law, if it satisfies discrimination testing and if plan sponsors are making timely revisions.

The proposed regulations will be implemented for the 2019 plan year, which means plan sponsors need to complete the additional questions in 2020. So, with 3 years until the reporting obligations are mandatory, why should plan sponsors pay attention to the changes now?

Plan sponsors should ensure that their plan is in compliance and consider if there’s a system in place to capture the additional data that will be required by the new regulations. Reviewing the proposed changes from the IRS now will provide the time necessary to implement any changes so that the plan administrator is able to complete the more granular questions when they go into effect. If plan sponsors just begin thinking about this in 2019, it may be too late to make all the necessary changes.

To better understand what additional data will be captured and what aspects of retirement plans the DOL and IRS will be looking at more closely in 2020, consider the three major themes from the proposed reporting obligations:

1. Increased Financial Reporting for Non-standard Investments

One area of change will be the financial information on Schedule H of the Form 5500. The proposed changes aim to more clearly and accurately look at assets held in retirement plans. This means that additional investment categories will be added to gather more granular information on alternative investments, investments through collective investment vehicles and other hard-to-value assets.

Currently, non-standard investments don’t fit into clear categories on the Form 5500 and are reported in the “other” group.

The proposed changes will also take a closer look at self-directed brokerage accounts. These accounts put the responsibility of creating a sustainable retirement plan in the hands of the plan participant. Unfortunately, many plan participants don’t understand how to select investments that will fit into their financial plan.

These changes will allow the IRS and DOL to more easily identify alternative investments and whether employers are disclosing complete and clear information to plan participants.

2. Clear Disclosure of Fees and Administrative Expenses

In 2012, the DOL introduced the 401(k) fee disclosure to educate employers and employees on the true cost of the fees in their retirement plan. Despite the increased attention on transparency for plan fees, many plan participants are still unclear about the fees in their retirement plans and how they are covered.

The proposed changes on the Form 5500 will update how service provider fees are reported and make them more in line with the DOL’s requirements for providers reporting fees to plan fiduciaries.

These changes take fee transparency to the next level with more specific questions and clarity on employers’ fees. Plan sponsors will be required to disclose when participants are charged for plan expenses and how these expenses are passed on and allocated to participants.

The proposed Form 5500 changes will also require plan sponsors to disclose the plan’s administrative expenses. New reporting will look at the costs for salaries, audits, legal, recordkeeping, actuarial fees and other expenses. The proposed changes serve as a reminder for plan sponsors to look at plan expenses carefully.

3. A Closer Look at Plan Compliance

The Form 5500 revisions also aim to make sure that retirement plans comply with ERISA and federal tax codes. New compliance-focused questions will expand on plan operations, service provider relationships and financial management of plans. The updated form will look more closely at how plans satisfy discrimination testing, such as what techniques and methods are used.

These areas of focus provide helpful insight and guidance for plan sponsors to make sure that their retirement plan is in compliance.

While a plan’s recordkeeper most likely completes the Form 5500, plan sponsors should verify its accuracy. Plan sponsors should work with their advisors to ensure that compliance questions are answered without creating increased scrutiny from the IRS. They should have a clear understanding of who the plan’s fiduciary is and ensure that that person has the expertise to oversee the plan.

Tom Reese is a consulting actuary with Conrad Siegel, specializing in investment policy statements, investment oversight, employee communications and fiduciary governance for non-qualified plans and ESOPs.

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