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401(k)ology: The Large Plan Form 5500 Filing Dilemma

The large plan Form 5500 filing dilemma is a fairly common problem; and, the solution depends on the timeframe involved and the risk the plan sponsor is willing to assume. Practitioners are split on the best approach when the financial audit is not ready in time to file by the extended due date. According to the results of my recent LinkedIn poll, 41% of responders indicated they would file by the extended deadline without the audit attached then amend with the audit attached later; and, 59% indicated they would wait and file the Form 5500 with the complete audit report under DFVCP.

What Are Some of the Common Reasons the Audit May Be Delayed?

  1. The plan sponsor was not aware the plan was subject to an audit for the plan year
  2. The Independent Qualified Plan Auditor (IQPA) was not timely engaged
  3. The data requested by the IQPA was not timely provided

Let’s review these reasons in more detail to see how they can be avoided and explore the solutions.

#1 Small Plan Filers That Become Large Plan Filers

Generally speaking, qualified plans with fewer than 100 participants as of the beginning of a plan year may file as a small plan filer. Small plans may become large plans and it is important to know when the large plan filing requirements will apply to your plan.

For the participant count, “participants” includes anyone who is actively employed and eligible for the plan, regardless of whether they have an account balance, and any terminated employees with an account balance in the plan. The participant count is based on the beginning of the plan year and includes employees who become newly eligible on the first day of the plan year.

There is an exception for small plans filers who exceed 100 participants in a subsequent plan year, as long as the participant count does not exceed 120 participants. This is commonly referred to as the 80-120 rule, which permits the plan sponsor to continue filing as a small plan filer even if the participant count exceeds 100.

For example, the 2021 Form 5500 (Form 5500SF or 5500 with Schedule I) indicates that as of the end of the plan year there are 105 participants. As long as there are no more than 15 newly eligible participants on the first day of the 2022 plan year, the plan may continue to file as a small plan filer for 2022. If there are 16 newly eligible participants on the first day of the 2022 plan year, that plan is now subject to the large plan filing requirements, including engaging the IQPA.

Best practices: If you are a small plan filer and there are over 100 participants reported at the end of the year on the most recent 5500 filing, consult with your service provider to determine if the number of newly eligible participants for the subsequent year will result in the participant count exceeding 120.

#2 Timely Engagement of IQPA

Once it is determined that your plan must file the Form 5500 as a large plan filer, engage the auditing firm as soon as possible. The auditors will not begin the work until they have been engaged to do so and delays in engagement may result in the auditor’s opinion not being completed until after the extended filing due date for the Form 5500.

When selecting the auditing firm, it is vital that the auditor have the training and experience in performing employee benefit plan audits. The Department of Labor (DOL) will review the IQPA opinion attached to the Form 5500 filing and may assess civil penalties for a deficient IQPA opinion if it is determined that the audit report is incomplete or inadequate.

Best practices: The expense of the IQPA opinion may be paid by plan assets. If the plan fiduciaries elect to have that expense paid from the plan, the associated fees should be benchmarked and reviewed for reasonableness.

#3 Provide the Data Requested by the IQPA as Soon as Possible

Once engaged, the IQPA will provide the plan sponsor a detailed list of items needed to begin work on the audit for the plan year. It is critical for the plan sponsor to review the list of requested items and to determine which parties are responsible for providing each of the items.

The IQPA reviews significantly more than the financial activity of the plan. As part of the audit process, the IQPA is tasked with auditing deferral elections, plan compensation, eligibility, benefit payments and plan expenses. The audit work is comprehensive and, depending on plan size, may take months to complete.

Annual nondiscrimination testing may also delay the work of the auditors; therefore, it is equally important to ensure that the annual testing is timely completed by your service provider. Plan sponsors should provide the annual census data to the service provider as soon as it can be completed following the end of the testing year.

Best practices: Coordinate the delivery of the required audit items with the IQPA and the plan’s service providers. Schedule the on-site visit with the IQPA before the regular 5500 filing deadline (last day of 7th month following the end of the plan year). Have procedures and policies for plan operation in place and well documented.

What to do if the Audit Report is not Ready by the Extended Form 5500 Due Date

Unfortunately, employers often face a situation where the IQPA opinion (commonly referred to as the audit report) will not be ready to submit with the Form 5500 by the standard Form 5500 due date (seven months after the end of the plan year, or by July 31 for calendar plan years) or the extended filing due date available by filing a Form 5558 (15th day of the 10th month following the end of the plan year, or October 15th for calendar year plan years). In those situations, employers face two imperfect options for how to best approach the late audit report:

Option 1: Incomplete Filing – File the 5500 by the extended deadline without the IQPA opinion, and subsequently file an amended return with the completed audit report attached. This option should only be used when the audit report is expected to be completed within a very short period (30 days) after the filing. This option is not risk free, as the DOL will issue deficient filing letters when the complete audit report is not submitted with the 5500. Timing is critical, as the DOL deficiency letters will generally be sent out within 30-45 days of the deadline. Once you receive the deficiency letter (which may include civil penalties), you are not eligible to file under DFVCP (with significantly reduced penalties, see Option 2 for details). Where things can go awry is if the audit report is not ready when the DOL letter is received. If that happens, you will need to work with your IQPA and/or ERISA counsel to negotiate the civil penalty. The DOL may reduce any penalty assessed, depending on the facts and circumstances.

Option 2: Late Filing – Wait to file the complete Form 5500 with the IQPA opinion under the Delinquent Filer Program. Under this option, the employer files the Form 5500 with the “DFVCP” box checked, and a submission is made using the DFVCP online penalty calculator and online payment. The maximum penalty is $2,000 for a single plan year filing for a large plan filer and is capped at $4,000 for a single plan that submits multiple years under DFVCP. Letters regarding a late 5500 filing typically take much longer than 30-45 days to be issued. Therefore, if the audit will not be ready within a short period after the filing deadline, this late filing via DFVCP approach may be the preferred option. Employers should consider consulting with counsel to determine if it may be more prudent to use the late filing through DFVCP option.

Note: The individual signing the Form 5500 on behalf of the plan sponsor and/or as “Plan Administrator” is signing under “penalty of perjury” that the return is complete and accurate. Both the IRS and DOL may impose penalties for failure to comply with the reporting requirements. Ultimately, it is the plan sponsor’s decision which option is best, given all of the facts and circumstances.

Conclusion

Employers should carefully consider the decision to file the Form 5500 without the complete audit report to meet the extended Form 5500 filing deadline (typically October 15). The incomplete filing approach may result in the loss of the DFVCP option if the DOL issues the letter of deficiency before the amended return is filed. The late filing approach does have an associated cost (DFVCP penalty); however, it may provide less risk than the incomplete filing approach. The upfront cost for using DFVCP may save the employer money (and headaches) down the road—particularly if the employer suspects the audit report will not be complete within a short period after filing the Form 5500.

Our retirement services team at Newfront is available to assist you with any questions about the Form 5500 filing requirements or other plan operational matters that may arise.

Helpful Quick Links

Selecting an Auditor for your Employee Benefit Plan

Delinquent Filer Voluntary Correction Program FAQ

DFVCP Penalty Calculator and Online Payment


Joni L. Jennings

About the author

Joni L. Jennings

Retirement Services Compliance Manager

Joni Jennings, CPC, CPFA is Newfront Retirement Services, Inc. Compliance Manager. Her 30 years of ERISA compliance experience expands value to sponsors of qualified retirement plans by offering compliance support to our team of advisors and valued clients. She specializes in IRS/DOL plan corrections for 401(k) plans, plan documents and plan design.


The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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