Don’t Play Roulette with the 5500

By John Iekel • July 13, 2018 • 0 Comments

A good offense is often the best defense. A maxim used in many contexts, and a July 10 ASPPA Webcast suggests that taking extra care to ensure that your Form 5500 is correct is one of them.

In “Resolving 5500 Filing Issues,” Kristina G. Kananen, QPA, QKA, DC Customer Support for DATAIR Employee Benefit Systems, Inc. outlined some of the issues that can arise when filing the Form 5500 and offered her insights on addressing them.

Highlights of her presentation include the following.

Review Prior-Year Filings

One way to head off potential problems, Kananen suggests, is to review prior-year filings. “Your service agreement should set the standard for prior-year reviews,” she remarked. She noted that such filings can be obtained from a variety of sources, including prior-year filings, a plan sponsor, the EFAST website for filings from 2009 and subsequent years, and for filings made before 2009.

What to look for when reviewing a prior-year filing? Kananen suggests the following, and why they matter.

Incomplete characteristic codes. Kananen advised against underestimating the importance of missing or incorrect characteristic codes. “They may seem simple, but they tell the government what to expect in the filing,” she said. “Leaving codes out will not give the fill picture,” she cautioned, adding that providing an incomplete report of codes “skews the government’s understanding.”

EIN/PN. The EIN is “apparently not as obvious” an issue as one may think, Kananen said. She reminded that one needs to determine the responsible party reported to the IRS, and cautioned that if the IRS is not informed about any changes that have taken place concerning the EIN, the IRS will think its correspondence is being ignored — which has consequences.

Beginning-of-year assets and prior-year end-of-year assets. “The government expects the beginning asset balance to equal the end-of-year assets,” Kananen said. She noted that there is software that can be downloaded from the Department of Labor to help, but if it’s not possible to do so, another avenue would be to match the form in question to the prior year’s forms.

Participant counts. The participant count matters because it determines whether or not a plan must be audited, Kananen said. She noted that the count at the beginning of the year is not carried over from the end of the previous year, and that a plan “can’t bounce back and forth” between accounting methods and plan types.

Correct forms. Filing the correct form is very important, Kananen noted. For example, she said, filing a Form 5500-SF when a plan is not eligible to do so can result in a filing being disallowed by the government — and considered to not have been filed. And she warned against letting the fear of telling a client that an audit is required from stopping a service provider from doing so. “It’s sometimes difficult for a service provider to tell plans an audit is required,” she said, but to not do so is an error.

To Fix or Not to Fix

What constitutes a material or immaterial error? That determination is “often in the eye of the government agency,” Kananen said.

And that determination matters. If an error is not material, she said, an adjustment must be made and there must be an attachment that explains it. If there is a major error, it will be necessary to file an amended filing. “It is tempting to play audit roulette,” she said, “but it’s not a good idea,” and doing so “runs the risk of huge penalties.”

What of those penalties? The determination of which ones will be imposed if an error is not fixed, she said, lays with the government. “You can do a lot to reduce or avoid” penalties, she noted, “but it’s up to the government.”

Problems with Filings

There are a variety of problems that can cause the government to stop processing a form, Kananen said. These include:

  • missing or inappropriate signatures

  • plan administrator’s User ID and PIN not present or not valid; E-signature alternative service provider User ID and PIN can suffice

  • failure to include any characteristic codes

  • Form 5500-SF shows more than 120 participants at the beginning of the year (BOY)(except one-participant plans can have more than 120 participants at BOY)

  • Form 5500-SF Item 6a indicates the plan assets are not restricted to eligible assets

  • Form 5500-SF Item 6b indicates the plan audit has not been waived

Additional concerns include the following.

Mailing addresses. Not including the plan sponsor’s mailing address is a filing error, Kananen noted. But one also must be careful how it is reported, she said. “It’s all where you put it,” she said, and noted that if it’s put in the wrong place on the form, EFAST will “think” that the address was not reported.

Characteristic codes. Including incorrect characteristic codes for the plan type is an error with consequences, Kananen noted. “You have no idea how it drives the government crazy” if the character codes don’t match the plan type, she said.

Another filing error occurs when the schedules indicated on Form 5500 do not match the schedules attached, Kananen said, as is not including Schedule A when insurance is indicated.

Invalid EIN. Using an invalid EIN for a plan sponsor is a problem. And using an incorrect prefix has consequences, Kananen noted. If a service provider notices that a client has an incorrect prefix, it is necessary to get a new EIN, she said.

Warning Status

If a filing elicits a response that the filing has been received but it has a “warning” status, it could be for a variety of reasons, Kananen noted, including:

  • transmitting the filing more than seven months after the end of the plan year, but not indicating there was an extension

  • entering an amount for pooled separate accounts, but not including a Schedule A

  • entering an amount for assets held in an insurance company general account, but not including a Schedule A

  • E-signature alternative being used, but manual signer’s date is earlier than the plan year end or after the date filing is submitted

  • total assets equal zero, but final filing is not checked

  • plan year end on Schedules MB or SB need not match the plan year end on the Form 5500/5500-SF when the plan is terminating

Amended Filing

All amended filings must be complete filings, Kananen cautioned. “You must include all schedules even if they are the same,” she said, because filing an amended form and schedules overwrites previous schedules that were filed.

Government Correspondence

Plan sponsors and plan administrators must be aware that ignoring government correspondence is unwise and costly, Kananen warned. “Train your clients that if they don’t want to open their government correspondence, they should send it to you so you can open it,” she said. And, she added, just receiving a letter from the government is not necessarily bad news. A letter from the IRS does not always mean there was a problem with the filing, she noted.

About ASPPA Webcasts

More information about upcoming ASPPA webcasts is available here. Information on ASPPA webcasts that have taken place but are available can be accessed here.