On July 21, 2016, the Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) published in the Federal Register a Notice of Proposed Forms Revisions to the Form 5500 Annual Return/Report Series. A Notice of Proposed Rulemaking to suggest updates to the DOL’s reporting regulations to implement the proposed forms revisions was also published on July 21, 2016. The changes are generally targeted to take effect with 2019 plan year filings, although some may be implemented earlier or later. These updates bring forth numerous issues and additional obligations for employers.
The Importance of Form 5500
The Form 5500 Annual Return/Report is the primary source of information about the operation, funding, assets, and investments of employee benefit plans. In addition to disclosing important information to plan participants and beneficiaries, the Form 5500 is regarded as an essential compliance and research tool for the DOL, IRS, and PBGC. These agencies assert that the Form 5500 is an important source of information for assessing employee benefit, tax, and economic trends and policies; therefore, it is important that the Form 5500 be modified and updated to keep pace with changes in the legal requirements governing employee benefit plans and market developments.
5 Goals for Form 5500 Reporting
1. All Group Health Plans Would Have to File a Form 5500 Regardless of Size. According to these agencies, this proposal would “remedy” the current failure to collect data about a large sector of the health plan market made up of ERISA group health plans. This proposal would eliminate for group health plans the current exemption from Form 5500 reporting for small insured and self-insured welfare benefit plans. This means every group health plan would now have to file a Form 5500 regardless of size. In addition to preparing the 5500, a comprehensive new Schedule J (Group Health Plan Information) would be added. Schedule J would indicate the types of health benefits offered and the funding method, including information about participant and employer contributions, and whether the plan is insured, uses a trust, or pays benefits from the employer’s general assets. Further, questions and information regarding COBRA, HRAs, FSAs, HIPAA, GINA, mental parity, health care reform, SPDs, claims information and other financial information would be required.
The argument for adopting this proposal is that this change would provide critical data for governmental agency oversight and allow them to collect information needed for congressionally-mandated reports on group health plans. In my opinion, this proposal simply allows these agencies to “find everyone” for purposes of compliance and audits in an attempt to generate more revenue for noncompliance reasons.
2. Modernize financial reporting. This proposal is to improve the reliability and transparency of information reported regarding employee benefit plan investments and other financial transactions. The main body of the Form 5500 would request additional data about participant accounts, contributions, and distributions. Filers would have to indicate whether their plans use safe harbor or SIMPLE designs, or include Roth, investment education, or investment advice features. Information would also be requested about other items such as default investments, rollovers used for business start-ups, leased employees, and pre-approved plans. A separate Schedule E would be reinstated for ESOP reporting. Schedule R would include new questions about participation rates, matching contributions, and nondiscrimination.
The argument for these changes besides improvement in reliability and transparency is that they are supposedly designed to foster ongoing monitoring of employee benefit plans by employers, plan fiduciaries, and participants and beneficiaries, and improve the ability of the government agencies to fulfill their statutory oversight roles. In other words and in my opinion, this data makes their jobs easier in the event of audits.
3. Additional Service Provider Fee Information. The argument for this proposal is that it would better “harmonize” reporting on Form 5500 Schedule C with the final disclosure requirements in DOL’s service provider disclosure regulation at 29 CFR 2550.408b-2. A separate Schedule C would be filed for each service provider and this filing requirement would be extended to some small plans currently exempt from filing it. Schedule H would be expanded to include many additional questions on such matters as fee disclosures, annual fair market valuations, designated investment alternatives, investment managers, plan terminations, asset transfers, administrative expenses, uncashed participant checks, etc. Schedule I would be eliminated; small plans that currently file Schedule I would generally need to file Schedule H instead. There are additional changes as well under this proposal. All of these changes will make your accountant or Form 5500 preparer(s) quite busy as of 2019.
4. Enhance Data Mineability. This proposal would convert more elements of the Form 5500 into data or information that is organized in a structured manner to make them computer-processable and identifiable for data-mining and analytic purposes. The purpose conveyed through the notice is that these changes would enable private sector data users to develop more individualized tools for employers to evaluate their retirement plans and for employees to manage their retirement savings.
5. Enhance Compliance with ERISA and the Code. The proposal would also enhance reporting on plan compliance to improve plan operations, protect participants and beneficiaries and their retirement benefits, and educate and provide annual discipline for plan fiduciaries. The proposal would add selected new questions intended to compel fiduciaries to evaluate plan compliance with important requirements under ERISA and the Code and to provide our government agencies with improved tools to focus oversight and enforcement resources.
In summary, the obligations and workloads of employers will only continue to increase with no relief in sight with all of these proposed Form 5500 changes. These proposals require all employers who have group health coverage to now have reporting obligations. Size no longer matters; the 100 participant threshold will become a thing of the past. In addition, the information disclosed is more in depth and detailed than previously, giving these agencies an abundance of information to review and examine prior to or during any type of compliance audit(s). HNI will keep you updated as these proposals wind through the commentary stage and to what extent, if any, they are modified before they become final.