Monday, October 23, 2017
 

Avoid Increased Penalties by Filing Annual Benefit Plan Reports on Time

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Clock iconBy Jennifer Kupper, In-house Counsel & Compliance Officer for iaCONSULTING, a UBA Partner Firm

Form 5500 is the annual report that group benefit plans use to report required information about the plan’s financial condition and operations. Most group and pension plans that are subject to ERISA are required to file a Form 5500. With the July 31 deadline for calendar year plans fast approaching, and higher penalties for not filing taking effect in August, this is a good time to review this important plan filing.

What is a Form 5500?

Generally, the Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) all require an annual benefit plan report filing, although there are many exemptions. A single annual report, known as a Form 5500 or Form 5500-SF, satisfies all three. It includes basic plan, sponsor, and administrator identifying information, the type of annual report being filed, and any related Schedules as attachments to the Form 5500.

Who must file the Form 5500?

Form 5500 is needed for both qualified retirement plans and group welfare plans. For this article, we’ll focus on group welfare plans, which include plans that provide medical, prescription drug, dental, vision, long term and short term disability, group term life insurance, health flexible spending accounts, accidental death and dismemberment benefits, long term care, formal severance policies, and telehealth. While other plans may also be considered welfare plans, these are the most common.

Group welfare plans generally must file Form 5500 if:

  • The plan is fully insured and had 100 or more participants on the first day of the plan year (dependents are not considered “participants” unless they are covered because of a Qualified Medical Child Support Order).
  • The plan is self-funded and it uses a trust, no matter how many participants it has.
  • The plan is self-funded and it relies on the Section 125 plan exemption, if it had 100 or more participants on the first day of the plan year.

Are there exemptions?

Yes, there are several exemptions to Form 5500 filing. The most notable are:

  • Church plans defined under ERISA section 3(33)
  • Government plans, including tribal government plans
  • “Top hat” plans that are unfunded or insured and benefit only a select group of management or highly compensated employees.
  • Small insured or unfunded welfare plans. This includes plans with fewer than 100 participants (including qualified former employees and COBRA beneficiaries) at the beginning of the plan year that are fully insured, entirely unfunded, or a combination of both. An unfunded plan has its benefits paid as needed directly from the general assets of the sponsoring organization.

How many Forms 5500 must be filed?

Generally, the number of Forms 5500 depends on the number of ERISA benefits the sponsor maintains, whether those ERISA benefits are combined into one plan, and whether the sponsor is part of a controlled group or is part of a multiemployer welfare arrangement (MEWA).

The plan’s governing documents and operations determine whether benefits are being provided under a single plan and can be reported on one Form 5500. The Summary Plan Description (SPD), required by ERISA, is a document which designates the ERISA plan number and can be used to bundle multiple benefit lines into a single plan for Form 5500 filing purposes.

When must Form 5500 be filed?

A plan’s Form 5500 must be filed by the last day of the seventh month after the close of the plan year. The filing date is based on the “plan year,” which is designated in the SPD or other governing document. If a plan does not have a SPD, the plan year defaults to the policy year.

For calendar year plans, the due date for the Form 5500 is July 31. Employers may obtain an automatic 2-1/2 month extension by filing Form 5558 by the due date of the Form 5500.

Can the Form 5500 be amended?

Yes, it is recommended that the plan sponsor file an amendment for any of the following situations:

  • The original filing omitted a benefit
  • The original filing created a gap in benefit reporting
  • The Schedule A forms were updated with a 10 percent or more increase in commissions or premiums than originally reported by the carrier
  • Mandatory information critical to the report was incorrect or omitted

What happens if the plan has failed to file a Form 5500?

Penalties!! Under ERISA Section 502, the Secretary of Labor may assess civil penalties of up to $1,100 per day against a plan administrator who fails or refuses to file Form 5500. The DOL is able to assess penalties in connection with Form 5500 failures reaching as far back as the 1988 plan year. Penalties are based on whether the Form 5500 was incomplete, deficient, filed untimely or never filed, and if there was willful disregard for refusing to file.

The current penalty for failure or refusal of a plan administrator to file a Form 5500 is up to $1,100 per day. In August 2016, those penalties will increase from $1,100 per day to $2,063 per day, regardless of whether the violation occurred before or after August 2016. If an annual report is rejected for failure to provide material information, it is treated as not having been filed.

In order to encourage sponsors to file, the DOL created the Delinquent Filer Voluntary Compliance Program (DFVCP). It was created as a means for sponsors to “self-report” their non-compliance, and includes a monetary incentive. If a plan sponsor qualifies for the DFVC Program, the penalties are reduced significantly to $10 per day for the first 199 days. If the plan is within a year of being late, the penalty it is capped at $2,000 per plan. If the plan is more than a year late in filing, there is a $4,000 per plan cap.

If the DOL notifies a plan sponsor of its failure to file a Form 5500 or of the assessment of penalties for failure to file, the plan sponsor is no longer eligible to participate in the DFVCP. Penalties may be assessed for the date the reports were initial due, not the date the sponsor was notified of its delinquency.

It is important to note that criminal sanctions and imprisonment are also possible for willful violations of the reporting and disclosure requirements.

As an example, Employer A and Employer B both sponsor a fully insured medical plan and group term life (GTL) plan for their employees. Each employer has the same number of participants in their medical and GTL plans: 75 participants in the medical plan, and 150 participants in the GTL plan.

The plan year for Employer A’s medical plan is December 1 through November 30. The GTL plan is on a calendar year contract. Employer A does not have an SPD wrap document combining these two plans. Employer A does not have to file a Form 5500 for the medical plan because it is fully insured and has fewer than 100 participants. However, it must file Form 5500 for the GTL plan because it has more than 100 participants. Since the GTL plan is on a calendar year (January 1 to December 31) contract, its Form 5500 is due by July 31, the end of the seventh month following the last day of the plan year.

Employer B, on the other hand, has an SPD wrap document which combines the medical and GTL plans into the same ERISA plan year and plan number. The employer chose that plan year to align with the medical plan’s December 1 – November 30 contract year. In this case, Employer B must file a single Form 5500 for both the medical and GTL benefits information because at least one of the plans has more than 100 participants. Its Form 5500 is due by June 30.

Employers should note that government agencies recently proposed significant changes to Form 5500 reporting, and should ensure they stay up to date on requirements as they change.

For more information on Form 5500, subscribe to the UBA blog.

For more information on IRS reporting and penalties under ACA, request UBA’s ACA Advisor, “IRS Reporting: Now What?”.

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