Employers and benefit plan administrators are facing a mountain of annual federal reporting requirements this summer with shorter deadlines, heftier fines, and new audit standards—all complicated by the waning Covid-19 pandemic.
The complex web of employer-sponsored benefit disclosures known as the Form 5500 Series is due Aug. 2 for calendar-year plans, and the U.S. Labor Department and Internal Revenue Service aren’t offering the same limited pandemic-related extensions they granted late filers last year.
New filing procedures and delayed auditing rules that take effect this year are likely to cause headaches for employers and plan administrators recovering after the pandemic. But the penalties for failing to comply with the rules have never been more steep.
Plan sponsors who don’t file complete Form 5500 disclosures on time can now expect concurrent DOL fines of up to $2,259 a day with no maximum and IRS penalties of $250 a day up to a $150,000 cap.
“The fines employers can be hit with have gotten really, really high,” said Richard Rausser, senior vice president of client services at Pentegra Retirement Services, a bundled third-party administrator in White Plains, N.Y. “It can be really detrimental—enough to bankrupt a business.”
In addition to late penalties, filing procedures and requirements also have changed, according to draft 2020 plan year documents the DOL released.
One-participant and foreign plans that historically have filed separate paper-copy Form 5500s with the IRS now have their own Form 5500-EZ that must be used to file electronically using the DOL’s EFAST2 filing system. They no longer can use Form 5500-SF, which is reserved for small employers with fewer than 100 employees.
New forms have also been modified to reflect updated required minimum distribution ages passed under the 2019 SECURE Act, and traditional single-employer and multiemployer pension plans have more streamlined instructions for filing actuarial assumptions and insurance coverage disclosures.
“The Form 5500 can be painlessly easy or extensively complicated,” said Pauline Lau, a manager at EisnerAmper LLP who leads the tax and accounting firm’s Form 5500 work. “Much of it depends on the plan administrator’s maintenance of records, understanding of their plan’s operations, and working with their plan’s trust financial institution.”
Another potential source for that complication this year could be due to a new Auditing Standards Board policy for employee benefit plans. The DOL reflected the new standard for limited-scope audits in its 2020 Form 5500 documents, but the ASB gave auditors until next year to implement it, and very few have, said Wendy Terry, a partner at WithumSmith+Brown PC in Orlando, Fla.
“You have a situation now where Form 5500 documents have an option for an auditing standard that very few auditors are using, and it’s leading to a lot of confusion,” Terry said.
Large plans with more than 100 participants usually have to file an independent financial audit in addition to their Form 5500 documents. Often those auditors conduct what, until recently, was called a limited-scope audit that didn’t test investment information held by certified financial institutions such as banks and insurance companies. Their audit opinion would be listed on the Form 5500 as a “disclaimer,” meaning, essentially, that there was no opinion due to a lack of complete information.
Misconceptions that the “disclaimer” option meant auditors didn’t have to test other elements of a plan’s census or financial outlook led to deficiencies in the plan’s filings. A 2015 DOL study found that roughly two-thirds of all limited-scope audits had at least some deficiencies that could lead the department to reject the Form 5500s and slap sponsors with hefty fines.
“Form 5500s are never easy, but this is a critical change that can make things even more difficult,” Terry added.