Commentary: Draft versions of forms and publications issued by the Internal Revenue Service often reveal agency intentions with respect to purpose or function. Two Form 5500 draft documents released earlier this year suggest the IRS intends to begin collecting retirement plan compliance data on an annual basis from both ERISA-governed and certain non-ERISA plans.
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The draft 2015-version forms include Form 5500-SUP, Annual Return of Employee Benefit Plan Supplemental Information, released in March, and Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, released in August. Plan sponsors may have some concerns as the new documents take hold, but there is time to prepare and tap your plan’s ERISA experts for help.
What is the IRS seeking on Form 5500-SUP?
The new Form 5500-SUP is proposed to be filed for the first time for 2015 plan years. If finalized as currently drafted, it would capture a significant amount of operations-specific information that was formerly disclosed only in the event of plan audits or in determination letter applications. This includes how the plan satisfies coverage and nondiscrimination testing, amending dates and timeliness, Form 5500-SUP preparer identity, etc.
Some of these information requests have been described as ambiguous or poorly defined, potentially leaving filers in the position of unintentionally providing inaccurate information. For example, filers are asked to declare whether a plan passed coverage testing by using the ratio percentage test or the average benefits test. Many employers could not answer with a simple affirmative response, since differing types of contributions can satisfy this test by different means.
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The request for a plan’s amendment history holds another ambiguity. One of the questions asks employers to report the date of the most recent “plan amendment/restatement for the required tax law changes.” Is this question limited to full restatement events only? Or is it intended to capture a more recent date associated with a required interim amendment?
Apart from having to disclose information not previously reported on Form 5500, some believe that the IRS may have misjudged the amount of time that may be necessary for plan administrators or their service providers to obtain and assemble the information sought on Form 5500-SUP.
Given the fact that many plans are presently in the throes of restatement for the Pension Protection Act of 2006, the timing of the initial year’s Form 5500-SUP is problematic, at best.
What is being requested on Form 5500-EZ?
Plans that cover owners-only have some inherent differences from plans of employers that have employees.
It is clear that in both cases, however, that the IRS is seeking information that will help it make some judgments about plan compliance. Information not previously sought on Form 5500-EZ includes contact information of the plan’s trustee or custodian; information on total participants, active participants, and participants separating from service and not fully vested; information on plan amendments, IRS opinion or advisory letters, required minimum distributions paid to five-percent owners, unrelated business taxable income, and in-service distributions granted during the plan year; and the Form 5500-EZ preparer’s name and phone number.
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If these proposed changes become final, it would add to the complexity of Form 5500-EZ preparation. That is not the only consideration, however. As with Form 5500-SUP, concern is being voiced over the ability to comply with the 2015 plan year filing deadline.
Is preparer identity a liability issue?
Asking that the preparers of Form 5500-SUP and Form 5500-EZ be identified may seem an obvious and innocuous request. However, given the fact that these filings are part of the public record, this is a de facto disclosure of whose client the plan is.
Beyond the potentially undesirable consequence of disclosing a preparer’s client base, there are questions on Form 5500-SUP whose answers will come from other service providers. The preparer may be in no position to verify them.
Compliance data collection: IRS audit material or a judicious use of resources?
Some believe that a plan providing data on its coverage and nondiscrimination testing, amending history, opinion or advisory letter information, etc., is making itself a target for an IRS audit. On the other hand, it is clear that the IRS’ compliance oversight job is becoming more challenging with diminishing personnel and budget resources. Self-reporting by plans may be the IRS’ answer to this challenge.
In the absence of any suggestion that the IRS will delay this requirement, plan sponsors should waste no time in preparing to comply.
Mike Rahn is an ERISA consultant for Ascensus, Inc. where he works on the team that monitors all legislation, regulatory pronouncements, and industry developments affecting retirement plans and ensures that these developments are reflected in the company’s products and services.
