Form Reform! You Must Conform! Changes to Form 5500 Series!

Background information

Each year, most employee benefit plans covered by ERISA must file a form with the Department of Labor and the IRS known as the Form 5500 Series, or the “Annual Return/Report of Employee Benefit Plan.” It’s called a “series” because there are several different versions of the form. Which version of the form a retirement plan must file depends on the number of participants, as well as the amount and types of assets in the plan. There are also various schedules and attachments that may be required with the form.

Form 5500 Series requires reports on the provisions, operation, and financial condition of the plan. It is generally due by the end of the seventh month following the end of each plan year (1).

For plan years beginning in 2023, several changes have been made to the information requested on Form 5500. This article focuses on a few of the changes that may impact our clients’ plans.

Determining the number of participants for small plan reporting

If a plan covers fewer than 100 participants (2), it’s considered a “small plan” and can file a less extensive version of Form 5500. Importantly, a “small plan” is not required to attach an audit of the plan assets. Audits can be time-consuming and costly, so employers generally wish to avoid them if possible.

In the past, all participants who met the plan’s eligibility requirement were counted, even if they elected not to participate or didn’t have an account balance. Starting in 2023, for defined contribution plans (including 401(k) plans) the determination is based on the number of participants who have an account balance at the beginning of the plan year. In other words, for purposes of determining whether a plan is required to have an audit, a participant does not count unless they have a balance in the plan at the beginning of the year.

New IRS Compliance Questions

Three new questions have been added to the form, which concern the following:

(a) Does the plan use “permissive aggregation rules” to satisfy coverage and nondiscrimination tests? In other words, does the plan pass these tests by using the contributions or benefits provided by more than one plan?

(b) This question applies only to 401(k) plans. It asks how the plan intends to satisfy nondiscrimination tests for deferrals and matching contributions. Specifically, does the plan use a “Safe Harbor” or “Qualified Automatic Contribution Arrangement?” If not, does the plan use the current year testing method or the prior year testing method?

(c) If the plan sponsor is an adopter of a pre-approved plan that received a favorable IRS Opinion Letter, the date and serial number of the Opinion Letter must be entered.

Multiple Employer Plans and Defined Contribution Groups

A new Schedule MEP has been developed to take the place of a previously required attachment for plans that are considered multiple employer plans (i.e., plans that are sponsored by more than one unrelated employer), including pooled employer plans (3).

For plans that are members of a Defined Contribution Group (DCG) (4), a single Form 5500 may be filed for the group. However, each plan must file a separate Schedule DCG. For any large plans which are part of the DCG, the auditor’s report for that plan must be attached to the Schedule DCG.

Expanded Financial Information

Plans that don’t meet the small plan filing exception must include Schedule H, Financial Information. New breakout categories have been added under “Administrative Expenses.” The new categories include audit fees, legal fees, salaries, valuation fees, and trustee fees and expenses.

Defined Benefit Plans

Defined benefit plans (including cash balance plans) must include Schedule SB, Actuarial Information, in the Form 5500 Series filing. Some of the questions on this form have changed. The changes are technical and have to do with the actuarial calculation of the minimum required contribution to the plan.

Whoever files your Form 5500 Series may need additional information to prepare the form. Don’t be surprised if you get a few new questions from your pension administrator this year!

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1. Form 5558 can be filed to extend the filing deadline by 2 1/2 months; i.e., from 7 months to 9½ months after the end of the plan year. Late filing penalties are imposed by both the IRS and DOL and can be extremely large.

2. Plans that cover between 80 and 120 participants on the first day of the plan year can elect to file the same form as the previous year. For example, a calendar year plan that had 90 participants on 1/1/2022 and 110 participants on 1/1/2023 can still file as a small employer in 2023.

3. Employers are unrelated if they are not members of a Controlled Group or Affiliated Service Group. The definition of these terms is complex, but it generally concerns common ownership among the employers (including ownership by certain relatives of the owners); whether the employer is a service organization; and whether the employers perform services for each other. Other employers may be related if they share employees or are members of a Management Function Group.

4. A Defined Contribution Group, sometimes referred to as a “Group of Plans,” consists of more than one employer with separate defined contribution plans, which have the same trustee, named fiduciary, plan administrator, plan year, and investment options.

If Your Company Sponsors A Retirement Plan, What Records Do You Need To Keep?

If your company sponsors a retirement plan, such as a 401(k) plan or a cash balance plan, you know there are frequent reports, forms, notices, and other documents that are sent to you. Which of these records must you retain?

There’s a long list of records, but you do not have to be the one keeping and organizing all this information yourself – that’s why you hire professionals, which may include a pension administration firm, actuary, financial advisor, lawyer, payroll company, recordkeeper, or other service providers. You need to know who has each of the required records, and how you can access them if you ever need them. The amount of time these documents must be retained varies, and that is beyond the scope of this article.

Why might you need these records? Here are a few examples:

• If a former employee claims they were never paid a benefit, or claims they weren’t paid in full, but you know they were paid, could you prove it?

• If you change service providers, the new provider may need some or all of the plan records in order to service your plan.

• Very important: if the IRS or other government agency requests information or conducts an audit, they may request any or all plan records.

While you don’t need to keep all these records yourself, if you don’t have them, you need to make sure that you know who has them, and what the arrangements are if you ever need them. Some service professionals charge a document retrieval fee, especially if they have already sent the information to you. If you change service providers, it’s a good idea to make sure you get the records pertaining to your plan forwarded to the party taking over that role at the time of the change. If you try going back to a former provider years after you’ve left them, there’s a good chance they will no longer have the records you need, especially if some time has passed since you worked together.

The list below is not a complete list of plan information that must be able to be accessed, and not all the information applies to every plan. This list will give you a good idea of the large amount of data that is involved with respect to your retirement plan.

Plan Documents

• Plan documents (which may include an IRS opinion letter, basic plan document, adoption agreement, trust agreement, and adopting resolutions, all possibly in separate documents). All plan documents since inception of the plan must be retained indefinitely. Documents must be signed and dated.

• Plan amendments also must be signed and dated.

• Summary Plan Description and Summary of Material Modifications

Government Filings (proof of filing or distribution must be retained for all items)

• Form 5500 Series, including all extensions, schedules, and attachments

• PBGC Comprehensive Filing (for defined benefit plans covered by PBGC)

• Summary Annual Reports or Annual Funding Statements

• Forms 1099-R and W-2P (for benefit payments)

• Forms 5329 or 5330 (if any excise taxes were payable)

• All other government forms filings on behalf of the plan

Compliance testing

• Results of compliance tests, such as top-heavy, coverage, participation, nondiscrimination, maximum deferral, ADP/ACP, maximum benefit and annual additions

• Corrections of any failed tests

• EPCRS filings

Valuation results

• Census and payroll data

• Enrollment, participation, and vesting records

• Minimum required contribution and maximum tax-deductible contribution calculations

• Participant account balance and benefit statements and proof of distribution

Financial records

• Statements from the asset provider (e.g., bank, brokerage account, mutual fund, insurance company)

• Annual accounting of plan assets

• Verification of dates and amounts of all contributions to and distributions from the plan

Fiduciary records

• Fidelity bond

• Documentation of the process of hiring and monitoring service providers

• Service agreements and fee schedules from service providers

• Investment policy statement and monitoring of plan investments

• Fee disclosure statements

• Participant notices (e.g., safe harbor, automatic contribution, QDIA, QPSA)

• Minutes of meetings with service providers and investment committee

As always, when in doubt contact your trusted pension professional.

Welcome to the Danger Zone: SECURE 2.0 Optional Provisions

By: Corey Zeller, MSEA, CPC

As seen in our 2023 EOY Newsletter: Click Here

To say that SECURE 2.0 added a large number of new retirement plan provisions is an understatement—it was the largest and most far-reaching retirement plan bill in many years! Some of the new provisions are clear wins for plan sponsors and participants. Others are mandatory, and plans will have to implement them whether they like it or not. However, a large number of the SECURE 2.0 provisions are optional. This article will review a number of the optional provisions, and make some suggestions about whether or not you might want to incorporate them into your plan.

Roth Match

What is it?

SECURE 2.0 added the ability for an employee to elect to have matching contributions (and other employer contributions, such as profit sharing or safe harbor contributions) made on a Roth basis. As with Roth 401(k) contributions, the amount of Roth employer contributions is included in the employee’s taxable income in the year in which the contributions are made, and both the contributions and earnings can be withdrawn tax-free if the requirements for a qualified Roth distribution are met.

To avoid a situation where the employee pays taxes on a contribution that is later forfeited, the law only permits the Roth election to be made on employer contributions that are 100% vested.

Should you do it?

This is an unequivocal no. There is a great deal that can go wrong when allowing Roth employer contributions, and virtually no benefit.

The tax treatment of Roth employer contributions is not yet clear. Are they required to be included in an employee’s wages for withholding purposes? If yes, then it is going to add complexity as they are not subject to FICA taxes. If no, then employees will have to be careful to adjust their withholding elections to avoid underpayment penalties.

Besides that, Roth employer contributions are completely redundant, since plans can already allow employees to elect an in-plan Roth conversion of all or part of their account—including employer contributions! The conversion results in a taxable event in the amount of the conversion, and the amount converted is treated as Roth thereafter.

The only scenario where Roth employer contributions might make sense would be for a defined contribution plan that is not a 401(k) plan—for example, a money purchase plan—that wishes to allow its participants to elect Roth treatment on their accounts. However, money purchase plans are rare these days and have been mostly replaced by profit sharing and 401(k) plans.

Student Loan Matching

What is it?

Many younger employees in the workforce are carrying a substantial amount of student loan debt. With limited income, they may be forced to make a decision between paying down those loans, or contributing to the 401(k) plan offered by their employer. While paying down the debt may be the right choice, it could mean giving up any matching contributions offered by their employer if they can not contribute to the 401(k) plan.

Student loan matching programs are designed to make it easier for employees to pay down their student loans, by allowing employers to make 401(k) matching contributions based on qualified student loan repayments. In other words, the employer may treat the student loan payment as if it were a 401(k) plan contribution when calculating their match. The employee must certify to the employer each year that they made the student loan payments.

Should you do it?

While it’s admirable to encourage employees to pay back their student loans, and any assistance the employer can provide is welcome, this may not be the best way to approach it. Adding student loan matching would require the employer to obtain information on all of their employees’ student loans, and how much they have repaid on those loans, and keep that information up-to-date each year. This is not normally information an employer would need to have, and payroll systems are unlikely to have a spot to enter this information, which means the employer would now need to calculate the matching contributions manually.

Furthermore, there is likely a disconnect between the matching contribution deposit and student loan repayment frequency. If matching contributions are made every two weeks, but the employee makes their loan payments once a month, what amount is used for the matching contribution calculation? 

Ultimately, adding this provision is an incentive to not contribute to the 401(k) plan, and therefore we feel that most employers would be better off not including it in their plans.

Military Spouse Credit

What is it?

This is a new tax credit available to small employers who cover military spouses in their retirement plans. The credit is up to $500 for each military spouse per year, for up to 3 years starting when the military spouse first becomes eligible to participate in the plan.

In order for the employer to be eligible for the credit, the military spouse must be eligible for the plan no later than 2 months after their date of hire. In addition, they must immediately be eligible for the same level of employer contributions that a similarly-situated employee who is not a military spouse would be eligible for after 2 years of service. The military spouse must also be immediately vested in the employer contributions.

Should you do it?

If your plan already meets the eligibility, vesting, and contribution requirements, then go ahead—it’s an easy tax credit to claim! You will just need the employee to certify the name, rank, and service branch of their spouse who is on active duty. However, if your plan does not already meet the requirements, it does not seem worthwhile to change those requirements just for the tax credit. However, that analysis may change if you have a large number of employees who are military spouses and you could be entitled to a substantial credit.

Emergency Expense Distributions

What is it?

Plans may permit participants to take a distribution of up to $1,000 per year in the event of unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. This distribution is exempt from the 10% penalty tax on early withdrawals. After taking an emergency expense distribution, the employee may not take another one for 3 years, unless they first repay the amount of the earlier distribution.

Should you do it?

We  recommend against allowing these distributions. Plans may already permit hardship distributions, which do not have the $1,000 limit or the once-every-3-years restriction. Allowing emergency expense distributions in addition to hardships is likely to lead to confusion and improper plan administration.

Pension-Linked Emergency Savings Accounts (PLESA)

What is it?

A PLESA is a sidecar account attached to an employee’s 401(k) account. This account may only receive employee contributions, and those contributions may only be Roth. There is a maximum account balance of $2,500; once the account goes over $2,500, no further contributions may be made until the account goes under that amount. The account must be invested in a vehicle designed to preserve principal and provide a reasonable rate of return.

The account is intended to be used for the participant’s emergency savings. To that end, the plan is required to allow the participant to withdraw from this account no less frequently than once per month, in any amount that the participant chooses. No fees may be charged for the first four withdrawals from this account each year.

Should you do it?

With all of the special requirements that apply to PLESAs, plus the prohibition on charging a fee for up to 4 distributions a year, we recommend that you do not allow PLESAs in your plan.

Unenrolled Participant Notice

What is it?

There are a number of notices that are required to be provided to all participants in a plan. The definition of “participant” usually includes everyone who has satisfied the plan’s requirements, regardless of whether they are actually contributing to the plan. SECURE 2.0 allows plans to provide a simplified notice to participants who have no balance in the plan, reminding them that the plan exists and of the benefits of contributing to the plan.

Should you do it?

While less paperwork sounds nice in theory, in this case we recommend against the simplified notice. From an employer’s perspective, this is actually more paperwork, since now they have another special notice that needs to go to a certain subset of their employees, in addition to the other notices that have to go to different employees. It is simpler for the employer to provide the same set of notices to everyone, and not have to worry about who needs which notice.

Qualified Disaster Distributions

What is it?

In recent years, Congress has regularly passed laws in the aftermath of a major disaster to allow affected individuals to access funds in their retirement plans. The rules added for each of these incidents were largely similar.

With SECURE 2.0, there is no longer any need for Congress to act on a case-by-case basis in the event of disasters; there is now a standing provision allowing plans to offer expanded distributions and loans in the event of a federally-declared disaster.

Participants who lived in the disaster area and who suffered an economic loss due to the disaster may now be able to take a distribution of $22,000 per disaster. This amount is not subject to the 10% penalty tax on early distributions, and the income tax on the distribution may be spread out over 3 years. The amount of the distribution may also be repaid to the plan over up to 3 years.

In addition, participants may be able to take a loan from the plan in an amount of up to $100,000, or 100% of their vested account balance—twice the normal limits. The loan payments are permitted to be delayed by up to 1 year, and the normal loan term of 5 years may also be extended by a year.

Should you do it?

We’ve seen these sorts of distributions work well for recent disasters when Congress stepped in to provide some relief. It can be good for participants to know that they will have access to their retirement savings in the event of a disaster, so sponsors may want to offer this option. It should also be possible for plans to only offer the special distributions or the increased loan limits, if one option is more palatable than the other.

One possible caution is that putting a blanket option in the plan allowing qualified disaster distributions or qualified disaster loans could create a right to those special distributions or loans as soon as the disaster happens; if a plan sponsor wanted to limit them to certain disasters, that could cause a problem. It might be better in that case for the sponsor to amend their plan to make qualified disaster distributions and loans available on a case-by-case basis, and limit their availability to certain disasters, identified by name.

Domestic Abuse Distributions

What is it?

Plans may allow a distribution, limited to the lesser of $10,000 (indexed to inflation) or 50% of the vested account balance, to a participant who is a victim of domestic abuse. The plan administrator may rely upon the participant’s certification that they have been affected by domestic abuse within the last year. The distribution is exempt from the 10% excise tax on early withdrawals, and it may be repaid within 3 years.

Plans which are subject to the qualified joint and survivor annuity requirements (including all defined benefit plans, money purchase plans, and certain 401(k) or profit sharing plans) may not offer domestic abuse distributions.

Should you do it?

Individuals who are affected by domestic abuse often have very limited access to financial resources that could help them escape their situation. Allowing access to a distribution from their retirement plan could be invaluable in certain circumstances.

However, since the distribution requires that the employee certify their status as a victim of domestic abuse, it necessarily entails employees disclosing this sensitive information to their employer. Some employees may not feel comfortable providing this information, and some employers may not feel comfortable receiving it. Ultimately, the choice to offer domestic abuse distributions in a plan is going to depend on whether the employer wants to be involved with their employees’ personal affairs at this level.

Self-Certification for Hardship Distributions

What is it?

401(k) plans may offer distributions in the event of financial hardships, defined as a heavy and immediate financial need. The regulations define seven safe harbor criteria which are deemed to meet the “immediate and heavy” standard. Because of their safe harbor status in the regulations, many plans will allow participants to take a hardship withdrawal only if the distribution is on account of one of those seven reasons.

SECURE 2.0 provides that an employee may self-certify that they have a financial need of one of the types specified in the regulations, and that the amount of the distribution is no more than the amount necessary to satisfy the need. The employer may rely on the employee’s self-certification and does not need to investigate the matter further, or request documentation, unless they have actual knowledge to the contrary of the employee’s certification.

Should you do it?

Self-certification has already been an accepted practice for a number of years, based on standards published in the IRS audit guidelines. Those are merely guidelines published by the IRS which do not have the force of law; what’s changed with SECURE 2.0 is that self-certification is now the law and the IRS can not overrule it.

Self-certification is not only easier for employees and employers, it relieves the employer of responsibility for determining the veracity of the information submitted. We recommend that employers which offer hardship distributions in their plans allow employees to self-certify their hardship distributions.

Increased Catch-up Limit

What is it?

Participants who will have reached at least age 50 by the end of the year can be allowed to exceed the normal 401(k) contribution limit by making catch-up contributions. Starting in 2025, SECURE 2.0 increases the catch-up limit—but only for participants who will be exactly age 60, 61, 62 or 63 at the end of the year. In other words, the catch-up limit will go up in the year when the participant reaches age 60, and then go down in the year when the participant reaches age 64.

Should you do it?

It’s easy to recommend catch-up contributions in general. As long as catch-up contributions are offered to all eligible participants, there are no testing or top-heavy requirements attached to catch-up contributions, so it’s free extra contributions for a segment of the plan population.

The analysis for this special increased catch-up limit is largely the same, but with the caveat that administration will become somewhat more difficult. Employers are going to have to make sure that their payroll systems are programmed to accommodate the fact that certain employees will have different limits at different ages, and unlike other plan limits, the catch-up limit will go down once the employee reaches a certain age. As long as the employer is comfortable administering the changing limits, this is a good thing to include in your plan.

Conclusion

While the information provided in this article is a good starting point for evaluating whether or not to add a certain provision to your plan, it is impossible to analyze every situation in this format. Even if we recommend against a provision in general, it could still be the right choice under certain circumstances. Contact us to review your needs and analyze any of these or other optional plan provisions with an eye towards your individual situation.