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Form 5500 Filing: Regulatory Updates and Changes for 2021

Donna Nevolo, Partner and Employee Benefit Plan Services Market Leader, and Israel Tannenbaum, Partner and Form 5500 Filing Lead, cover the essentials that businesses should be aware of as the deadline approaches.

Top Questions Asked When Filing Form 5500

Topics Covered Include:

  • Form 5500 overview
  • Actions to take if your company’s audits are not completed by October 15
  • Updated late filing penalties, including those increased by the SECURE Act
  • IRS’ Employee Plans Compliance Resolution System (EPCRS) Revenue Procedure 2021-30
  • Common compliance issues and recent relief provided
  • General rules for determining a partial plan termination

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This podcast was transcribed through a third-party application. Please disregard any misrepresentations.

Donna Nevolo (00:19): Hi, I’m Donna Devolo. I am a partner with Withum and the market leader for Withum’s Employee Benefit Plan Services group. With me today is Israel Tannenbaum. Izzy is a partner in our tax department and leader of our Form 5500 filing practice area. Thanks for joining me today, Izzy. 

Israel Tannenbaum (00:42): My pleasure. Thanks so much, I’m excited to be doing this. 

Donna Nevolo (00:46): So we are in the last six weeks of our audit season, the auditors are pretty busy right now trying to wrap up all of our plan audits. We have sometimes run into issues with plan sponsors trying to get all the information to us or to their auditors in order to get the audits completedWe are still in a COVID environment, so sometimes documentation that the auditors are requesting isn’t really readily available to the plan sponsors. So I wanted to ask you, what would you recommend for companies to do if their audits are not completed by October 15 and their 5500s are due? 

Israel Tannenbaum (01:28): Absolutely. That’s a great question. And to your point, in this COVID environment there are so many challenges that we’re facing all over the place. So it’s really something that is coming up often as an issue. We always recommend filing a return timely with whatever information you have. This is absolutely better than not filing anything by the deadline, and really does help to avoid late filing penalties. Essentially, what you would do is file the 5500 with an attached statement, indicating that the audit is still in process. This will typically generate a notice from the DOL – a notice of incomplete filing in which you have 45 days to then respond to. Ultimately, during this time, you should be finalizing the audit, getting those financial statements, and you can file an amended 5500 with the audit report attached. And this should clear any issue with the notice from the DOL and ultimately get you compliant without having to deal with potential penalties assessed. So again, always recommend filing the return and then going back and fixing it up after. 

Donna Nevolo (02:30): That’s great. Because I know that the penalties for late filing have always been kind of steep, but now, with recent regulation, they’ve even been increased higher. And the IRS. Right. Can you tell us what those are? 

Israel Tannenbaum (02:47): Yes, absolutely. Both the IRS and DOL have updated the penalty amounts. From the DOL perspective, it’s $2,259 per day with no maximum penalty. And that’s as of January 15th, 2021, and again, per day… so really steep. The IRS, based on the SECURE Act, separately can assess penalties. And that is $250 per day, up to a maximum penalty of $150,000 per year and separately for the Form 8955-SSA, if that is needed, they can assess a penalty of $10 per day filed late per participant. And that used to be $1 prior to the SECURE Act. So as you can see, these penalties have both been increased a lot and are very significant to begin with. So certainly not a situation that anyone wants to find themselves in. 

Donna Nevolo (03:39): Those are high penalties and add up very quickly for late filings, for sure. One of the things that we run into when we’re concluding on our audits are compliance issues with regards to the plan operations. So plan sponsors have always been able to rely on the IRS’ Employee Plan Compliance Resolution System, the ECPRS. And there’s two programs in there that I would like to ask you about that plan sponsors can take advantage of. Could you explain those to us? 

Israel Tannenbaum (04:19): Yeah, absolutely. So like you said, essentially there are two programs that can be used to correct errors. This is typically based on the type and scope of error and these being the Self-Correction Program, or SCP, which allows you to correct certain failures without actually having to contact the IRS or pay any sort of fee. And then for failures that are maybe a little larger in scope or of a different type, Voluntary Correction Program, VCP, is the other self-correction program under EPCRS. And this allows you to correct failures not eligible under the SCP and requires approval from the IRS that the error is properly corrected, as well as a fee in terms of submitting this and submitting an application under the voluntary correction program. So those overall are the two higher level programs that you would undertake when you discover a plan error. 

Donna Nevolo (05:13): So some can be done under the self-correction program and some can only be done under a VCP program. I know that the IRS recently released some new rev proc with regards to an update to the EPCRS system. Do you want to tell us about a few of the main changes that you know of?  

Israel Tannenbaum (05:40): Absolutely. The IRS did recently issue Revenue Procedure 2021-30, which did update this program and actually provided some beneficial changes. A few of the main ones – it extended the self-correction period from two years to three years, very beneficial if you discover an issue in that third year. You can now still use self-correction. Another thing that the rev proc did is remove the requirement that retroactive amendments need to be beneficial for all the participants in the plan. This actually makes it easier to use retroactive plan amendments to correct operational failures under the self-correction program, because you don’t have to take in this extra aspect of it being a change that has been official for every participant under the plan. The rev proc also increases certain diminimous correction amounts. For example, previously, where a plan participant received an overpayment of $100 or less the plan sponsor really wasn’t responsible to go out and seek repayment. 

Israel Tannenbaum (06:40): However, under the new guidance, it increases this threshold from $100 to $250. So for anything under that $250 threshold, the plan sponsor is not required to reach out and try to seek repayment. And finally, in the rev proc in terms of auto-enrollment, the rev proc actually extends the sunset of the safe harbor method to correct missed Deferrals for auto enrollments for both 401k and 403B plans. And this actually extends it for three years. Originally, it was set to expire December 31st, 2020. However, it is now extended to December 31st, 2023. So as you can see, these are all really beneficial things that the IRS has done in terms of updating EPCRS to make it easier for plan sponsors to correct their plans and become compliant. 

Donna Nevolo (07:28): Yeah, that’s great. And a lot of planned sponsors would be relieved to have a little bit of leeway in getting a little bit more time, and make it a little bit easier for them to correct some issues with regards to their plans. There’s a couple of very common compliance issues that we know with plans. And, some of them that are very relevant right now, because so many plan sponsors have been affected by COVID. It definitely has disrupted the operations of their plan. So I know that there’s been some relief given with regards to correcting some of these issues, too. So I wanted to ask you about a couple of them. So one that comes to mind is the delinquent contributions, right? So if a plan sponsor doesn’t get the contributions into the plan in a timely manner, how would a plan sponsor fix a late deposit? 

Israel Tannenbaum (08:24): Yeah, that’s a great question. And to your point, it’s something that we do see occur quite often. And in order to correct this, you would basically, in short, need to fund the loss deposits and any lost earnings to make the participant accounts whole as if this had not been contributed on a delinquent basis. Now, there has been some recent relief related to this, and specifically if these lates or deposit are due to COVID in that they do not need to be reported on schedule H of the 5500 and no supplemental schedule is required. But ultimately it’s important to note that whether this is actually COVID related or not, the plan sponsor always has to ultimately correct the situation by remitting both the employee deferrals and funding the lost earnings to make the participant and the plan whole. 

Donna Nevolo (09:15): Okay. So they don’t need to report it if it’s due to COVID, but they still need to correct it. 

Israel Tannenbaum (09:24): So the correction is always the same, but you do get this extra level of relief regarding reporting if it’s COVID related. 

Donna Nevolo (09:31): Got it. So, another area that we’ve encountered a lot this year in our 2020 audits is partial plan termination. So a lot of plan sponsors laid people off and then retired people. And so there is a concern about partial plan terminations and actually calculating that. And I know that there was some relief given in this area as well. So can you give us the general rule about partial plan terminations and what the updated relief provides? 

Israel Tannenbaum (10:05): Yeah, absolutely. So, as you said, typically a decrease in participants of 20% or more due to a plan sponsor initiated layoffs or terminations during the year results in a partial plan termination, the effect being that all participants become a 100% vested in any employer contributions. And as you mentioned, due to COVID, this is something that a lot of plans are facing because of the environment and how there were layoffs, people rehired. However, there has been relief in terms of this partial plan termination in terms of the fact that there was an act issued that provides that a plan is not treated as having a partial termination during any plan year, which includes the period March 13th, 2020 through March 31st, 2021. This is the case if the number of active participants at March 31st, 2021 is at least 80% of the number of active participants covered by the plan on March 13th, 2020. 

Israel Tannenbaum (11:06): So essentially what they want to see similar to, if you think about the PPP, for example, where they wanted to see, even if you laid people off, you rehired them. This is essentially the same idea where you are bringing the plan back to where it was pre-COVID. And they’re kind of giving you a pass on the interim if there were effects of COVID. And this is actually really beneficial because if any part of the plan year falls within the period. So March 13th, 2020 to March 31st, 2021, the relief applies to any partial termination for that entire year. So for example, if a plan has a calendar year, 80% partial termination applies to both January 1st through December 31st, 2020, as well as January 1st through December 31st, 2021, because both plan years include a piece of that statutory determination period. So it really is a beneficial aspect of this relief act and should note as well, that this relief is not limited to COVID-19 related reductions. Really any reduction can be corrected under this relief and not be an issue for the plan. So very beneficial and something that plans experiencing this decrease during that timeframe should absolutely take advantage of. 

Donna Nevolo (12:20): And then the rehired participants don’t need to be this, the number of participants doesn’t need to be the same. The count doesn’t need to include only the same participants, correct? 

Israel Tannenbaum (12:35): Correct. As long as the count is 80% of the number covered by the plan on March 13th, 2020, then you’re good and have no worries. 

Donna Nevolo (12:44): So that’s really helpful. Okay, great. Thank you so much, Izzy for providing some detail for us. We hope that the listening audience has learned some some tips about their 5500 filing. And, if there, and some of the relief that’s been given recently in the regulations. If you have any questions, please don’t hesitate to reach out to me or to Izzy directly or to any member of Withum’s employee benefit plan services team. Thank you. 

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