Form 5500 Precision Is All in the Details

“It’s a good idea to review,” Mike Webb, vice president of Cammack Retirement Group, tells PLANADVISER. The Form 5500 is complicated, and requires a full audit, which is also complicated. Webb recommends plans work with a trusted adviser to review the document before submitting it. Sometimes the plan sponsor picks up an irregularity; sometimes the adviser does. Webb says it is possible for either to find a problem area, and mistakes are common. “Fifty percent of the time, I find a mistake,” he says.

They sound simple, but they are common, Webb says. Especially common: a nonmatching number of participants from the previous year. Every year, the form asks two questions: the number of participants at the beginning of the year, and the number at the end of the year. The year-end number of participants should match the number at the beginning of the next year, Webb says, but a lot of times this number does not match up. This is often because the plan sponsor didn’t bother to check the previous year and reconcile, Webb notes. The Department of Labor (DOL) does actually investigate these numbers, he warns.

Sometimes the plan sponsor has the wrong number of participants on the form. The reason? “A lot of people don’t get the employer contribution right away, but they can make their own contributions,” Webb explains. The form asks the plan sponsor to count everyone eligible to make contributions whether they do or not. Counting just the employees who are actually contributing to the plan is a very common mistake, he says, for 403(b) plans as well as 401(k) plans.

Finally, Webb says, every plan has its own plan number. “Most plan sponsors assign it as 001, 002, 003 if you have multiple plans,” he says. However, over time, plan sponsors may forget that a number has been used for a previous plan—and the same plan number cannot be used on different plans, which a sponsor that froze a plan could be tempted to do. The result would be that the DOL thinks the old plan is being resurrected, and the plan sponsor would have to explain why it is filing under this plan.

For plan sponsors with multiple plans that want to create new plans, Webb recommends making the number one digit higher than the last number used. “Always go up a number,” he says. “And sometimes the recordkeeper puts the wrong number on the form, so always check that number.”