What to Expect in the New Form 5500

The big news on Form 5500, according to Linda Fisher, principal of Linda T. Fisher Form 5500 Consulting in Chicago, and Form 5500 fangirl, are the new compliance questions for the 2015 plan year. “Optional,” the IRS says, “but we strongly encourage you to answer them.” When the instructions accompanying the questions turned out to lack sufficient detail for plan sponsors, Fisher says, a flurry of comment letters motivated the Internal Revenue Service (IRS) to make those questions optional. “There was a huge sigh of relief,” she says, “because of the lack of clarity and the big changes.”

The compliance questions are noteworthy, according to Michael Krucker, senior manager of employee benefit consulting at Plante Moran, a certified public accounting and business advisory firm that prepares, reviews and assists with Form 5500, among other services, because back in 2004 certain types of information was requested, then cut from the form in an effort to streamline the process.

“Now they’re back,” Krucker says, noting that Form 5500 now asks for information on how the plan satisfies discrimination testing, methods for testing requirements, if the ADP or ACP test is used, and the timeliness of plan amendments. “Pure compliance,” he says.

The compliance questions can be filed on paper, using Form 5500-SUP—a paper-only form—by some small plan sponsors that are not required to file electronically: those smaller companies that do not file at least 250 government forms, such as W-2s and 1099s. The form will contain the same IRS compliance questions on Form 5500 and Form 5500-SF. The advantage of paper-filing is that the answers to the new IRS questions aren’t made public on the Internet, but it may not apply to many plan sponsors. “We don’t think many people will be doing the paper form,” Fisher says.

Krucker notes that the compliance section could bring to light compliance issues that plan sponsors weren’t aware of. “There’s a lot we don’t know yet,” he says. “Previously, where issues might have gone undetected, Plante Moran might come across issues relating to ADP or coverage testing, and quietly address them through the self-correction program. We had more opportunity to go through things on a self-correction basis,” he says. “But now there could be more exposure to quicker follow-up from the IRs on these items.”

The self-correction program is not being dismantled, Krucker says, but the new questions could reduce the time that a plan has to correct errors. “Self-correction is only available to the extent that you’re not under examination,” he points out.

Also significant, Krucker says: plans are providing more information about their plans—how they operate, how compliant they are—to the government, possibly giving government agency some more tools to gauge and enforce compliance. “To be honest,” he says, “plan sponsors don’t know much about this yet.”

More of a burden on the recordkeeper than the plan sponsor, Schedule H and Schedule I will ask plan sponsors for more information on plan leakage, a/ka/ “in-service distributions.” The reason, Krucker thinks, stems from the critical issue of retirement unpreparedness, an area of great concern for both the DOL and the IRS.

Krucker believes the two agencies are trying to quantify the distributions taken for hardship reasons. “They are trying to look at leakage from these plans, trying to get at the hardship and the purpose behind it,” he says. “What rules or guidelines might they try to put in to help people retire? They are trying to gauge how much goes out in terms of hardship or other in-service forms. Schedule H previously asked plans to report simply on ‘distributions.’ ” Now they are being asked for a more precise definition.

Fisher notes that the name of the preparer, at the very bottom of the form, is still optional, but the word is no longer there. “But the instructions still say it is optional,” she says, pointing to concerns among preparers about a possible requirement to answer this information. “One concern is being contacted by the IRS or the DOL when I’m not a power of attorney for the company,” she says. “The plan sponsor should be the one that’s responsible for answering questions on the Form 5500.”

Unrelated business taxable income is a growing area of concern for retirement plans, Krucker says. “Depending on the types of investments the plan is invested in, that could kick off income that would be unrelated to the business’s taxable income. So some portion of that trust’s income would be subject to tax. The easiest example is a partnership. If a retirement or welfare trust engages in a partnership, it’s a partner in that business and is unrelated to the tax-free nature.”

Income that is distributable to the plan could be taxable, he explains, or any unrelated business taxable income the trust incurred. “Could bring to light something the plan sponsor wasn’t aware of,” Krucker says. “It is becoming more and more important to review.”

Fisher points out there’s a good possibility the questions that are optional now will be mandatory for the 2016 plan year filing. “They’ll have another year to work out the guidance,” she says. “I hope the FAQs will be answered sooner than a year from now, so we can adjust systems, and determine who to contact at the plan sponsor. But the questions need to be defined better.” 

FAQs about the compliance questions are on the IRS’s website. Instructions for Form 5500 are on the DOL’s website. The IRS also has information on Form 5500-SUP.