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How To Minimize Pitfalls In Form 5500

With the clock ticking down on the extended October 15, 2013 Form 5500 deadline for pension plans with a December 31, 2012 year end, it’s not too late to put your game plan in place to gather all the necessary information for a successful Form 5500 submission.

The information required to accurately complete Form 5500 comes from a number of different sources.  Coordinating these sources involves advance planning and a basic understanding of how the information is interrelated.

By working closely with your plan’s professionals and service providers, you can avoid many of the common pitfalls that can lead to delays or possible rejection of your plans Form 5500 filing.

Listed below are the various discussion points you should consider when working with your professionals and service providers.

I.  Plan Administrator

The Form 5500 preparation process starts with the plan administrator.  The plan administrator is not only responsible for the day to day operation of the plan, but also functions as the custodian of plan records with participant data, contribution history, benefit payments and administrative expenses.

Information from these records are needed by benefit consultants and actuaries to determine whether the retirement plan is in compliance with the certain funding levels for defined benefit pension plans or in compliance with the non discrimination requirements for defined contribution plans.

Additionally, the plan administrator maintains information on all service provider and trustee necessary to gather the information required for completing Schedule C of Form 5500.

Finally, the plan administrator maintains the financial records of the plan.  This is the information necessary to prepare Schedule H for large plans or Schedule I for small plans.  Generally, if your plan has 100 or more eligible participants as of the beginning of the plan year, you are required to retain the services of an independent Certified Public Accountant (CPA) to audit the plan’s financial statements.  There are special rules for plans with between 80 and 120 participants and who counts as a participant for 401(k) plans; therefore, it is important to read the Form 5500 instructions and consult with a knowledgeable CPA before determining a course of action.

II.  Benefit Consultants/Actuaries

For defined benefit pension plans, either Form 5500 Schedule SB for single employer plans or a Schedule MB for multiemployer plans must be included with your Form 5500 submission.  These schedules contain information about the funded status of the plan and contributions information.  These schedules must be prepared and signed by a licensed actuary.

Due to the complexity of the calculations and the significant amount of information required to be processed, data must be provided to the actuary early enough for the actuary to be able to prepare the appropriate schedule by the Form 5500 due date.

For defined contribution plans, adequate time must be allowed for the required non discrimination testing which includes identification of key employees, testing for compliance with certain annual compensation limits, maximum contributions limits and calculating the percentage of plan assets made by key employees.

We also recommend asking the plan’s benefit consultant the following questions:

1.  Has the plan has made adequate participant investment education programs available for those plans allowing participant directed investing?

2.  Have all required participant notifications been sent?

3.  Is the language in the summary plan description consistent with the plan document?

III.  Investment Custodian

Many plans have their investments held in an investment custodial account.  Typically, this involves a bank, an insurance company, or a retail broker.  To complete Form 5500, you need to obtain the following information from your investment custodian:

A.  Schedule of Investments

A schedule showing the issuer name, the original cost of the security, the December 31, 2012 market value of the security, maturity date, par or face value and interest rate if applicable.

B.  Calculation of Realized and Unrealized Gains and Losses

Plans generally use historical cost when determining investments realized and unrealized gains or losses.  This method is a requirement of generally accepted accounting principles and is required by the plan auditor.

Form 5500, however, requires “current value” reporting for computing realized and unrealized gains and losses.  Under this methodology, the market values of investments as of the beginning  of the year and the cost of investments purchased during the year are used in determining realized and unrealized gains and losses.

Ask in advance whether your investment custodian has the ability to produce “current value” investment reports to avoid unnecessary delays at the filing deadline.

C.  Investment Certification

If  your plan is required to be audited, conditions of your plan may allow you to engage an auditor to perform a limited scope audit.  Under a limited scope audit engagement, the auditor is able to rely upon the certification of plan investments by the bank, insurance company or similar institution with custody of the investments.  Auditing procedures are “limited” and the cost of a limited scope audit can be significantly lower.

Not all plans, however, are eligible for a limited scope audit.  Eligibility depends, in part, upon the type of investments held by the plan and the type of organization with custody of the plan assets.  Early discussions with your auditor could allow you to implement changes that will enable the plan to be eligible for a limited scope audit.

IV.  Valuation Specialist

If your plan holds hard to value assets such as real estate or company stock, in the case of an ESOP, the use of an appraiser may be required to determine an assets fair market value.

V.  Insurance Company

Retirement plans that invest in annuity contracts or similar products provided by insurance companies will be required to obtain a Form 5500 Schedule A from each insurance company.

VI.  Service Providers/Trustees

Schedule C of Form 5500 has been expanded to include both direct and indirect compensation paid to service providers and trustees.  It is important to note that employees of a retirement plan are considered service providers.

If an organization, employee or trustee provided services to the plan, written communication should request them to identify any direct and indirect compensation received by them in conjunction for their providing services to the plan.

Examples of an information request to solicit this information are attached.  This written correspondence helps the plan trustees determine that the fees paid are reasonable, identify potential conflicts of interest, and help document the trustees meeting their fiduciary requirement of monitoring services providers.

VII.  Auditor

For those plans required to be audited, adequate analysis and review of the following potential problems areas, prior to the start of the audit, can prevent unnecessary delays in the completion of the audit:

1.  Review late remittance of employee 401K deferrals including 401K loan repayments, if any.

2.  Review any transactions between the retirement plan and related parties.

3.  Review administrative expenses to determine necessity and reasonableness of expenses.

4.  Review participant loans for compliance with tax requirements for defaulted loans, hardship distributions, loan amounts and  number of loans allowed per participant.

5.  Review plan investments for possible unrelated business income tax issues.

VIII.  Legal Counsel

Ensuring compliance with all ERISA and IRS guidelines is a common oversight by plan fiduciaries.  Deficiencies in this area can result in significant penalties and costs to correct the problems.  You should contact the plan’s legal counsel annually to review the following:

1.  Ensure all plan amendments related to tax compliance have been adopted and submitted to the IRS for redetermination.

2.  Minutes of trustee meetings have been reviewed to ensure all actions have been properly documented.

3.  Any operating changes affecting the Plan Document have been properly amended.

If you have questions regarding the topics covered in this article contact us.  We have a team of experienced benefit plan professionals to ensure your Form 5500 is properly prepared and filed.