A Matter of Form (5500)

.S. workers hold more than $4.3 trillion of assets in private pension plans for themselves and their beneficiaries. As retirement plans and other benefits become an increasingly integral part of an employee’s compensation package, public concern is growing as to how to safeguard these assets. In response to these concerns, the Department of Labor and the IRS have initiated a number of efforts over the past 25 years to direct more attention to employer-sponsored employee benefit plans.

The most significant oversight mechanism these agencies have to help them safeguard employee benefit plans is the annual information report, Form 5500, Annual Return/Report of Employee Benefit Plan. Each year more than a million pension, welfare and fringe benefit plans file the form 5500 series.

In September 1997 the DOL and the IRS issued a proposal to replace the complicated form 5500 and 5500 C/R with a single form. After a period of practitioner comment, the new form 5500 debuts this year. Plan administrators and sponsors should use it for their 1999 plan year filings—for plan years that began in 1999. CPAs who prepare form 5500 for their clients or employers will benefit from a detailed look at what changes the overhaul brought about.

WHEN CONFUSION REIGNED

Under ERISA and the 1986 IRC, pension and welfare benefit plan administrators and employers sponsoring fringe benefit plans, as well as other deferred compensation plans, are required to file form 5500 annually to report on the plans’ financial conditions and operations. The IRS, the DOL and the Pension Benefit Guaranty Corporation all share the data on form 5500—the primary information source these agencies have to help them regulate the operations, funding, assets and investments of employer-sponsored employee benefit plans.

With the old form 5500, many plan administrators and employers found the annual filing requirement to be a difficult task. The requirement was particularly confusing because IRS and DOL rules were not identical; they differed depending on the type of plan, the number of participants, whether the plan was funded, how it was funded and how it used employee contributions. To complicate matters, a plan’s administrators and sponsors had to decide which of several forms in the form 5500 series was the correct one to file for their particular plan. Some plan types required a complete form 5500 while other plans could file an abbreviated form 5500–C or a form 5500–R. As a result, most plan administrators and sponsors had trouble complying with the rules.

THE STREAMLINED MODEL

The new form 5500 is intended to simplify the report and the way it is filed and processed. For the first time, entities will file form 5500 with the DOL rather than with the IRS. The structure of the new form 5500 is patterned after individual and corporate tax returns, which should make it easier to read and to fill out. In addition, the revisions eliminated duplicate or obsolete questions.

The streamlined version is one page followed by more detailed schedules that are customized to each filer’s specific type of plan. That initial page contains basic information to easily identify the plan as well as a checklist to guide filers to the more detailed schedules. Participant coverage is reported on the first page and filers must now identify the return preparer. The financial information is reported in the detailed schedules.

The 13 schedules accompanying form 5500 include 5 pension schedules, 7 financial schedules and 1 fringe benefit schedule. These are listed in exhibit 1. Schedules A, C and G were revised. Schedules D, H, I, R and T are new. No revisions or only minor changes were made to schedules B, E, F, P and SSA. All existing exemptions from the annual reporting requirements remain in effect and small plans continue to have simplified reporting requirements.

A pension or welfare benefit plan that covered fewer than 100 participants at the beginning of the plan year can file under the small plan requirements. For example, a small pension plan must attach, if applicable, schedules A, B, D (part 1), E, I (to report small plan financial information), P, R, SSA and T. A small welfare benefit plan must attach schedules A, D (part 1) and I (to report small plan financial data).

A plan that covered 100 or more participants at the beginning of the plan year should file under the large plan requirements. For example, a large pension plan must attach, if applicable, schedules A, B, C, D, E, G, H (to report large plan and DFE financial information), P, R, SSA and T. A large welfare benefit plan must attach, if applicable, schedules A, C, D (part 1), G and H (to report large plan financial data). Both large pension and welfare benefit plans also must attach Schedule of Assets Held for Investment Purposes, Schedule of Assets Both Acquired and Disposed of Within the Plan Year and/or Schedule of Reportable Transactions as well as the report of the required accountant’s opinion, if applicable.

Sponsors of IRC section 125 cafeteria plans, IRC section 127 educational assistance programs and IRC section 137 adoption assistance programs must attach schedule F. Exhibit 2, provides an overview of the schedules particular plans have to file.

THE SCHEDULES ON PARADE

The following is a brief description of each form 5500 schedule.

Schedule A (revised). All pension and welfare benefit plans that have insurance contracts must file schedule A, which was modified to more closely align it with GAAP on reporting investment contracts with insurance companies. These changes require better identification of the type of insurance contracts and the type of benefits each plan’s insurance contracts provide.

Filers can continue to choose to report insurance information according to either the plan year or the insurance contract policy year ending within the plan year. However, a filer must include a separate schedule A for each insurance contract as part of the shift to computer scannable forms. The instructions address how a filer should complete the form if the insurance provider fails to supply the filer with the necessary information.

Schedule B. All defined benefit plans subject to ERISA’s minimum funding standards are still required to file schedule B to provide actuarial data. Only minor revisions were made to update schedule B for 1999 annual indexing adjustments.

Schedule C (revised). Larger pension and welfare benefit plans that paid service providers $5,000 or more or that terminated an accountant or actuary during the plan year are required to file schedule C. Filers have to identify only the 40 highest paid service providers that were compensated from plan assets and no longer have to identify plan trustees annually.

Schedule D (new). All direct filing entities (DFEs) now must use form 5500. DFEs, including bank common/collective trusts (CCTs), insurance company pooled separate accounts (PSAs), master trust investment accounts (MTIAs), 103-12 investment entities (103-12 IEs) and group insurance arrangements (GIAs), are investment arrangements used by employee benefit plans. These entities are required to file financial information directly with the DOL. Schedule D and its instructions were created to clarify the new rules affecting DFEs and participating plans. This new schedule is intended to standardize DFE reporting and to ensure adequate reporting on the approximately $2 trillion in plan assets held in CCTs, PSAs, MTIAs, 103-12 IEs and GIAs.

For reporting purposes, a master trust is one that holds the assets of more than one plan sponsored by a single employer or by a group of employers under common control. A regulated financial institution typically serves as trustee or custodian. A master trust must file no later than the due date of the plan with the earliest form 5500 filing date. An individual plan does not need to attach the master trust filing to its filing. Rather, the master trust files directly with the DOL. If the master trust does not file, the DOL will consider each participating plan’s form 5500 filing incomplete. Each plan participating in the master trust must complete part 1 of schedule D. Regardless of whether the master trust files with the DOL, the plan is required to complete only item 1c(11) and item 2b(8) on schedule H.

CCTs are trusts that banks, trust companies or similar institutions maintain to collectively invest and reinvest employee benefit plan assets from plans maintained by more than one employer or by a controlled group of corporations. PSAs are accounts insurance companies maintain for a similar purpose. CCTs and PSAs may elect whether to file a form 5500 with the DOL. If they elect to do so, their participating plans must file form 5500 and complete part 1 of schedule D as well as items 9 and/or 10 and items 2b(6) and/or 2b(7) of schedule H. If a CCT or PSA elects not to file a form 5500, its participating plans must allocate and report the CCT’s or PSA’s underlying assets on a line-by-line basis on part 1 of schedule H.

For reporting purposes a 103-12 IE is an entity—other than a CCT, PSA or MTIA—that facilitates investing the assets of two or more employee benefit plans that are not members of a related group. A 103-12 IE sponsor may elect whether to file a form 5500 with the DOL (no later than the due date of the plan with the earliest form 5500 filing date). An individual plan does not need to attach the 103-12 IE filing; rather, the 103-12 IE files directly with the DOL. If this happens, participating plans must file only form 5500, complete part 1 of schedule D and items 1c(12) and 2b(9) of schedule H. If the 103-12 IE elects not to file directly, each participating plan must file a form 5500 and allocate and report the 103-12 IE’s underlying assets on a line-by-line basis on part 1 of schedule H.

Two transition rules give DFE filers additional time to adjust to the new rules. A DFE with a fiscal year ending in 1999 may file the 1999 DFE form 5500 on or before October 16, 2000. The requirement that large plans report their percentage interests in CCT and PSA assets on schedule H if either chooses not to file as a DFE is deferred until returns are filed for plan years beginning in 2000.

Schedule E. Employee stock ownership plans (ESOPs) are still required to file schedule E, but no material revisions were made.

Schedule F. Sponsors of section 125 cafeteria plans, section 127 educational assistance programs and section 137 adoption assistance programs must file schedule F. No material revisions were made.

Schedule G (revised). Large pension and welfare benefit plans that report financial transactions such as loans or fixed-income obligations in default or determined to be uncollectible as of the end of the plan year; leases in default or classified as uncollectible; and nonexempt transactions must use schedule G.

Plans no longer use schedule G to report assets held for investment purposes or reportable transactions. However, in view of the importance of this information to employee benefit plan participants and beneficiaries, the DOL retained the schedules as part of the annual report for large plan filers (see schedule H); the required accountant’s opinion also must cover these schedules.

Participant loans no longer have to be reported on the Schedule of Loans in Default if the loans are (1) part of a nondiscriminatory program, (2) secured by the participant’s account and (3) in a self-directed investment environment.

Schedules H and I (new). The schedules consolidate financial reporting questions into one schedule. Schedule H, which replaces questions 31 and 32 on old form 5500, reports key financial data for large plans and DFEs. Schedule I maintains the reporting of simplified financial statements for small plans from old form 5500-R.

The instructions provide additional guidance on reporting certain expenses, including

• “Deemed distributions” of participant loans.
• “Corrective distributions” from pension plans.
• Welfare benefit plan “incurred but not reported” claims.

For example, the instructions say that after participant loans have been deemed distributed and reported on item 2g of schedule H or I, they no longer have to be reported as assets.

Corrective distributions are reported as item 2f on schedule H or I. The instructions require plans to report distributions of excess contributions, excess deferrals and aggregate contributions paid during the plan year. Any elective deferrals and employee contributions distributed or returned to employees during the plan year also must be reported.

Welfare benefit plans should include incurred-but-not-reported benefit claims in item 1g of schedule H.

Schedule H requires that large plan filers attach certain schedules to form 5500. These include Schedule of Assets Held for Investment Purposes, Schedule of Investment Assets Both Acquired and Disposed of Within the Plan Year and Schedule of Reportable Transactions. Plan sponsors may omit cost information from the first two schedules for participant- or beneficiary-directed transactions under an individual account plan. Filers also should not take such transactions into account when preparing the Schedule of Reportable Transactions. A transaction is considered directed by a participant or beneficiary only to the extent that such individual, in fact, affirmatively authorized the investment of the asset allocated to his or her account.

Schedule P. Tax-exempt pension trusts are required to file schedule P to start the IRS statute of limitations running on the trust. No material revisions were made to schedule P.

Schedule R (new). This schedule reports retirement plan distributions and funding. Filers now must report the employer identification number (EIN) of the entity(ies) that make the actual distributions under the plan and the number of single-sum distributions.

Schedule T (new). This schedule consolidates the reporting of coverage information for pension plan tax qualification under IRC section 410(b). The new form 5500 provides a space to allow filers to report that their pension plans are not attaching schedule T because the plans are relying on coverage testing information for a prior year under the three-year testing rule in revenue procedure 93-42.

Schedule SSA. Schedule SSA provides information required by the Social Security Administration. All plan administrators and sponsors of pension plans that have participants who have separated from service with rights to future benefits must file schedule SSA. No material revisions were made.

FILE FAST WITH EFAST

The government also developed a computerized system to process the new form 5500—the new ERISA filing acceptance system (EFAST). Designed to reduce government and plan costs, EFAST is expected to simplify and expedite filing and processing by relying on computer scannable forms and electronic filing. The DOL will begin using EFAST to process the 1999 plan year filings.

The new form 5500 is available in two computer scannable formats: machine print and hand print.

Machine print. Filers can use a machine print format to complete the form with computer software. Those interested in using this format must use EFAST-approved software, which is listed at www.efast.dol.gov . Filers may file the machine print form electronically or by mailing printed copies. A filer electing to file electronically must complete a short application, form EFAST–1, also available at www.efast.dol.gov , to obtain a digital number that will serve as its electronic signature.

Hand print. Filers also can use the hand print format. This format is printed on special paper with special green ink. Filers must complete it by hand or with a typewriter. The EFAST system scans the filer’s handwritten or typewritten entries using optical character recognition technology. A plan can file the hand print form only by mail or by approved private delivery service. To help with the transition to the new EFAST system, the DOL will not reject any 1999 forms 5500 solely because the filer submitted it in whole or in part on an unofficial computer-generated version of the hand print form.

EASY STREET

With so much of the nation’s wealth invested in private pension plans, it’s understandable that the DOL and the IRS have gone to the time and expense of developing, testing and introducing a simplified way for plan administrators and sponsors to file employee benefit plan information. The agencies created a streamlined form 5500 to improve the report as well as the methods to file and process it. As with any change, it will take some time for CPAs, plan administrators and sponsors to become accustomed to the new form and the electronic filing process. With proper planning and an early start, however, filers can make an easy transition.