For most Minnesotans, summer is the season of cabin weekends, meals enjoyed al fresco, and garden harvests. For employee benefit plan auditors like myself, it’s also the season of IRS Form 5500 filings.
Form 5500 is the return employers must file to satisfy annual employee benefit plan reporting requirements under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. The return must by filed by the last day of the seventh month after the plan year ends, which for employers on a calendar-year plan, is July 31 and can be extended until October 15.
As I reflect on this year’s Form 5500 filings, I feel compelled to share some of my observations from the audits we completed. Complying with the complex ERISA laws can be confusing, and the penalties for noncompliance can be severe. By pointing out some of the more common issues we noticed, I hope I can help you avoid a potentially costly mistake in the coming year.
Here are the most common issues we observed during our 2019 Form 5500 audits:
1. Incorrect definition of compensation
This was by far the most common error detected by our auditors this summer. Each retirement plan has a provision that defines the compensation eligible for deferrals and, if applicable, employer contributions. The concept is straightforward, but as employers begin to add different types of compensation, such as gift cards, health plan reimbursements, STD/LTD benefits, and other fringe benefits, their payroll systems often misappropriate these compensation types. The moral of the story: Make sure your payroll system is set up to correctly account for retirement plan contributions on these compensation types.
2. Missed opportunities for employer-matching contributions
Some retirement plans have matching formulas that are based on the employee’s deferral. If employees maximize their deferral before year-end, they may be missing out on a significant portion the employer’s matching contribution. However, if the plan has a true-up provision, which allows the employer to make an additional contribution for employees who maximize their deferral, it will prevent these employees from missing out.
3. Documentation of investment committee meetings and activities
One of the more recent initiatives of Department of Labor’s ERISA arm is the concept of fiduciary responsibilities. In short, fiduciary responsibility means that the plan must be run in the sole interest of the participants and beneficiaries. There are many ways to ensure that you’re complying with the DOL’s fiduciary responsibility rules. Unfortunately, this is often overlooked because employers assume their third-party service providers are taking care of it. The takeaway: Give these rules a thorough review and make sure you’re in compliance.
Start next year’s Form 5500 filing season off on the right foot.
It’s never too early to start planning for next year’s summer—or for an error-free Form 5500 filling. If you have questions about your Form 5500 or the tax implications of your employee benefit plan, the Peterson Whitaker & Bjork, LLC experts can help. Contact us today.
PWB CPAs & Advisors
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