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ERISA INSIGHTS: FORM 5500 DELINQUENCY CAN BE COSTLY

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Form 5500 Delinquency Can Be Costly

Article Highlights

  • Department of Labor has established a new maximum penalty for failure to file
  • Maximum monetary fine for Form 5500 filing violations is now $2,063 per day
  • Penalties stemming from delinquent 5500 filings are to be treated on a cumulative basis

Brief Overview of Form 5500 Series

If you're a business owner or an executive of a company with more than 100 employees, you should be no stranger to filing Form 5500. You can essentially consider 5500s the equivalent of filing your income taxes for a fiscal year. Developed in unison by the Department of Labor, Internal Revenue Service and the Pension Benefit Guaranty Corporation, the 5500 series serves as an important means of compliance and disclosure for employee benefit plans. Form 5500 currently addresses and monitors roughly 806,000 health and retirement plans, which cover 143 million employees, retirees and dependents and an estimated 8.7 trillion dollars in assets.

Form 5500 was created under the Internal Revenue Code, as well as under Title I and Title IV of the Employee Retirement Income Security Act (ERISA). It's primary function is to collect information in regards to the benefits being administered under company sponsored programs. This information is used in a research context by federal agencies to uncover insurance, tax and economic trends. However, the 5500 also serves as a watchdog of sorts. In order to ensure a benefits plan is ERISA compliant, the 5500 is thoroughly reviewed by the IRS and the DOL. The purpose of this review is to verify that a company’s benefits are being managed in harmony with U.S. laws and regulations, and to make sure that plan participants have appropriate access to information about their coverage.

Fines and Exposure Associated with Delinquent 5500's

Because the Form 5500 series is such an important compliance tool for these regulatory agencies, there are substantial penalties and consequences for failing to file the document or for filing it past it’s due date. The financial penalties issued to companies that fail or refuse to file the 5500 used to be up to $1,100 per day. However, the DOL recently established a new maximum penalty for failure to file. Any filing violations occurring after November 2, 2015 that were penalized after August 1st of 2016 are now subject to a maximum fine of $2,063 per day. This steep monetary fine is evidence of the weight that the federal government puts on the 5500 series.

Consequences and penalties handed down to businesses with 5500 delinquency are not limited to the per day fine of either $1,100 or $2,063 (depending on date of penalty assessment) The Department of Labor has deemed that financial penalties stemming from delinquent 5500 filings are to be treated on a cumulative basis. This means that the fines facing delinquent companies are not limited to a single plan year. Let's say a company failed to file or filed incorrectly in 2014, '15 and '16. The first penalties assessed would be from plan year 2014. So, the DOL would determine the amount of days since 2014’s 5500 was due and calculate the fines stemming from that year (now three years) of delinquency. The same calculation would be done for the 2015 plan year and again for 2016. Keeping in mind that the daily fine from a violation occurring after November 2, 2015 could carry the new maximum fine of $2,063, the DOL would calculate the sum of all the days from the three delinquent plan years and assess their cumulative penalty. Needless to say, the fiduciary ramifications in this scenario would be potentially devastating for any business.

The reoccurring themes in dealing with Form 5500 are diligence and timeliness in the filing process. Whether or not your company has the financial stability to afford a considerable penalty is not the issue. Avoiding an entanglement with the federal government at all costs IS. The Department of Labor, in addition to treating 5500 penalties cumulatively, offers no statute of limitations in regards to their financial audits on delinquent filers. Therefore, the DOL has the authority to assess penalties connected to 5500 delinquency dating back as far as the 1988 plan year! If your company has filed incorrectly or failed to file without knowing you were required to, you are opening yourself up to severe financial liability. If your failure to file is a result of a lack of communication or knowledge on the part of your insurance broker or plan administrator, these fines might very well be mounting without you even knowing it. And, as the example in the previous paragraph illustrates, once the penalties are assessed by the DOL, your company could find itself in hot fiduciary water with the federal government.

Even if your company has filed the 5500 on time for a given calendar year, there still might be some lingering compliance hang-ups. If the DOL reviews your submission and concludes that it is missing pertinent information or that required benefit plan schedules have not been attached, then your 5500 is treated as having not been filed at all. Under ERISA regulations, the DOL has the authority to reject any 5500 that it deems incomplete. Once a company has received the DOL's notice of rejection, they have 45 days to resubmit a satisfactory 5500 and avoid the monetary penalties.

How to Prevent and Correct 5500 Delinquency

In the past, the submission of a company's form 5500 series has typically been conducted internally by a payroll, HR or employee benefits administrator. However, especially in recent years, the handling and preparation leading to the submission has shifted primarily to a third party – in the form of an insurance broker or third-party administrator. If your company uses a broker or TPA, they should be taking care of a great deal of the filing responsibilities. Assuming a company is unfamiliar with the filing process or form 5500 in general, their rep should serve as their guide to ensure a smooth and timely submission each plan year. Even if the company is familiar with 5500 filing, they should lean heavily on their agent to make sure that all the plan schedules are correct and available well before the forms are due.

According to 5500 filing guidelines, the document and all associated materials need to be submitted no later than seven months after the end of the plan year. If your benefit renewal date was December of 2016, for example, you would have until July 1st of 2017 to file your 5500. Fortunately, the IRS does provide some leeway, in the form of an extension, to businesses that aren’t able to file within that seven-month window. Companies that file form 5558 with the IRS before the seven-month due date are granted a two and half month extension in which they can legally file their 5500 without it being considered delinquent. In this scenario, the granted extension would push the due date to the middle of September 2017.

In addition to the availability of filing extensions, the DOL has created a program to help companies that have already filed delinquent 5500s. The Delinquent Filer Voluntary Compliance (DFVC) Program provides reduced penalties to benefit plan sponsors that have either failed to file or filed late or incorrectly. Let's jump back to the example of the company who filed delinquently from 2014-16. The DFVC program would allow the company to go back and refile the 5500 correctly for the three benefit plan years in question. After the DOL had received and approved the rectified 5500s, the company would then be responsible for paying the penalty amounts designated by the program. The reduced penalty issued by the DFVCP would be calculated based on the size of the benefit plan itself and the length of time that the 5500 had been overdue. If you know that your company has filed delinquently in years past, and you haven’t yet paid the penalties handed down by the DOL, join the DFVC program immediately! The monetary fines were already high at $1,100 per day. But now that they have nearly doubled, it is imperative to utilize the assistance provided by the Department of Labor. Moral of the story: Keep the federal government happy and do not give them a reason to audit your business for something as simple as filing your Form 5500.

Sam Odishoo
Consultant
April 19, 2017

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