Small Employers Ask about Form 5500
By Danielle Capilla, Chief Compliance Officer for United Benefit Advisors
UBA’s compliance team leverages the collective expertise of its independent partner firms to advise 36,000 employers and their 5 million employees. Lately, a common question from employers is: If a health and welfare benefit plan has fewer than 100 participants, then does it need to file a Form 5500?
If a plan is self-funded and uses a trust, then it is required to file a Form 5500, no matter how many participants it has.
Whether the plan must file a Form 5500 depends on whether or not the plan is "unfunded" (where the money comes from to pay for the self-funded claims).
Currently, 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" for this purpose 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.
There are several exemptions to Form 5500 filing. The most notable are:
- Church plans defined under ERISA Section 3(33)
- Governmental plans, including tribal governmental plans
- Top hat plans which are unfunded or insured and benefit only a select group of management or highly compensated employees
- Small insured or unfunded welfare plans. A welfare plan with fewer than 100 participants at the beginning of the plan year is not required to file an annual report if the plan is fully insured, entirely unfunded, or a combination of both.
A plan is considered unfunded if the employer pays the entire cost of the plan from its general accounts. A plan with a trust is considered funded.
For smaller groups that are self-funded or partially self-funded, you'd need to ask them whether the plan is funded or unfunded.
If the employer pays the cost of the plan from general assets, then it is considered unfunded and essentially there is no trust.
If the employer pays the cost of the plan from a specific account (in which plan participant contributions are segregated from general assets), then the plan is considered funded. For example, under ERISA, pre-tax salary reductions under a cafeteria plan are participant contributions and are considered plan assets which must generally be held in trust based on ERISA's exclusive benefit rule and other fiduciary duty rules.