Under the provisions of ERISA, most 401(k) plans are required to annually file a Form 5500. Although many plan sponsors have this prepared for them by a retirement plan service provider, they should be familiar with the requirements. Understanding these requirements can help plan sponsors monitor plan service providers – an important fiduciary responsibility.
Currently the federal government offers three versions of the Form 5500. Which form a plan should use is generally based on the plan's participant count.
Required for “solo 401(k) plans” which covers a business owner and their spouse.
Required for “small 401(k) plans” which covers plans with less than 100 participants on the first day of the plan year that meet the following requirements:
- The plan satisfies DOL independent audit waiver requirements
- The plan is 100% invested in “eligible plan assets” with readily determinable fairvalue (e.g., mutual funds, variable annuities)
- The plan holds no employer securities
Required for “large 401(k) plans” which covers plans with more than 100 participants and small 401(k) plans that don’t meet the Form 5500-EZ or SF filing requirements.
Plans that meet the requirements to file Form 5500 must also file certain schedules and/or attachments as seen below.
The 80-120 Rule
There is one exception to the Form 5500 filings known as the “80-120 participant rule”. This allows any plan which filed in the previous year as a “small plan” and still has under 120 participants to continue to file as a “small plan”. But if the number of eligible plan participants reaches 121 by the first day of a plan year, it is no longer subject to the “80-120 participant rule”.
This is an important provision for plan sponsors to understand because all 401(k) plans that filed a Form 5500 as a “large plan” are required to be audited annually by an independent, external accounting firm. An audit requirement can add thousands of dollars to the cost of filing a Form 5500. Strategies, such as cashing out small account balances related to terminated plan participants, can typically be leveraged to mitigate a plan’s participant count avoiding this requirement and additional cost.
Avoid These Penalties
A failure to properly report an annual Form 5500 can increase the likelihood of a Department of Labor audit and/or substantial financial penalties levied against the employer. Employers that file a late Form 5500 are subject to the following penalties:
The IRS penalty for filing a late 5500 is $25 per day, up to a maximum of $15,000.
The DOL penalty for filing a late 5500 is indexed for inflation and can run up to $1,100 each day, with no maximum.
Many employers faced with these penalties often don’t even realize they’ve missed a filing until they’ve been contacted by the IRS or DOL. Of course, by that time, significant penalties will have already accrued.
The DOL does offer a program for employers who have not yet been notified to voluntarily report a late or missing Form 5500. Through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP) the maximum penalty for a single late Form 5500 is $750 for “small plans” and $2,000 for “large plans”. The DFVCP also includes a “per plan” cap of $1,500 for “small plans” and $4,000 for “large plans”.
More information about the filing requirements are provided by the DOL’s Reporting and Disclosure Guide for Employee Benefit Plans.