Some small businesses are built to stay small. But for many entrepreneurs, the dream is to become the next great American success story.
Unfortunately, not everything about company growth is exciting. Hitting your 100th employee may be a milestone worth celebrating, but save a piece of cake for the Labor Department and the Internal Revenue Service, who will also be eager to hear about the new chapter in your company’s life cycle.
The Labor Department and the IRS are interested because they are obliged to be, at least if you offer a qualified retirement plan as a benefit to your employees. Such a plan brings you under the umbrella of the Employee Retirement Income Security Act, better known as ERISA. Once ERISA comes into play, a business owner needs to pay special attention to Form 5500, “Annual Return/Report of Employee Benefit Plan.”
What Is Form 5500?
Once you decide to offer a qualified retirement plan, no matter how many employees participate, you will need to follow ERISA’s reporting requirements. Form 5500 was developed jointly by the Labor Department, the IRS and the Pension Benefit Guaranty Corporation (or PBGC). Each of these agencies needed a way to track qualified plans, and a consolidated form solved the problem of overlap, at least in the majority of cases. Businesses submit Form 5500 to the Labor Department, simultaneously satisfying the IRS’ requirement for an annual information return for such plans. Some individual plans may need to satisfy additional IRS or PBGC reporting requirements, but in most cases, Form 5500 is a one-stop solution.
ERISA covers many mainstream retirement plan types, such as 401(k) plans, profit-sharing plans, traditional pension plans and certain employer-established IRA plans. Plans offered by government entities and churches usually do not need to follow ERISA reporting requirements, and certain kinds of SIMPLE and SEP IRA plans are also exempt from filing. Solo 401(k) plans, in which you (and your spouse, if you are married) are the only participants, generally have the option of filing a simplified 5500-EZ form as long as plan assets fall below a certain threshold, though if you are approaching 100 employees, those days are well behind you.
Plan administrators must file Form 5500 annually, and the Labor Department requires it to be filed electronically. If an employer offers multiple plans subject to ERISA reporting requirements, it must file a separate Form 5500 for each plan. The due date depends on the plan; the form is due on the last day of the seventh month after the plan year ends. So for plans that operate on a calendar year, the form is generally due July 31. Employers can also file Form 5558 with the IRS in order to secure an automatic 2½ month extension.
If you have offered a qualified plan for any length of time, your company should be familiar with the general requirements for filing Form 5500. But the Labor Department differentiates between “small plans” and “large plans,” and as you approach the 100-employee milestone, you can expect some new paperwork – and some new expenses – in order to stay compliant.
Small Plan Reporting vs. Large Plan Reporting
Small plans can file Form 5500-SF, known as the “short form.” They are also exempt, assuming they meet a few other eligibility requirements, from several of the requirements that apply to large plans. Large plans, for example, are required to submit an audited report from an independent CPA. This can be a significant cost burden. Not only does it increase the plan’s expenses, but it will also take time and internal resources to complete. The trustee or plan administrator will have to work with the independent auditor to provide reports, answer questions and reconcile any discrepancies. The difference between a small- and large-plan filing requirement, in both effort and expense, can be significant.
The simple answer to which sort of plan you have is based on the number of participants. If your plan has fewer than 100 participants on the first day of the plan year, it is a small plan. This number includes participating former employees.
Simple enough. But there is one other way to file Form 5500-SF: the “80-120” exception. As long as your plan is under 120 participants and was able to file as a small plan the year prior, it can still file as a small plan in the current year. This rule is meant to be helpful for plans that might frequently fluctuate between 80 and 120 participants. These plans could otherwise have to switch between being categorized as a small plan and a large plan from year to year, which would be inconvenient and disruptive.
For example, if you had 90 participants in your plan in 2016 and grew to 105 participants in 2017, you could still file as a small plan in 2017. The plan can continue to file as a small plan in future periods too, as long as it does not exceed 120 eligible participants on the first day of the plan year. Once you cross the 120-participant threshold, you are required to file as a large plan, regardless of your size the prior year.
On the other hand, if you had 105 participants in 2016 and filed as a large plan, but then your participant count dropped to 90 in 2017, you may still elect to file as a large plan in 2017 in order to avoid changing your plan’s classification. In this case, the audit requirement for a large plan is optional. While generally it is less burdensome to file as a small plan, if you believe the reduction in your participant count is only temporary and you already have systems and processes in place to file as a large plan, you may prefer to stay with your large-plan filing status. The 80-120 rule is meant to help plans maintain consistency in their filings in order to avoid confusion and inconvenience.
If you have previously reported using Form 5500-SF, you should already be aware of several of the schedules you may need to attach, depending on the particulars of your plan. These may include:
- Schedule A – If your plan has any insurance contracts, you will use this schedule to provide your insurance information.
- Schedule D – If your plan participated in one of several direct filing entities (DFEs), you will need to provide DFE information on this schedule. A DFE is any pooled investment arrangement which invests the assets of your qualified plan and is itself sometimes required to file its own Form 5500. Schedule D is filed separately by both your plan (which completes Part I of Schedule D) and the DFE (which completes Part II of Schedule D) so that the Labor Department can reconcile the information being reported.
- Schedule R – Use this form to provide pension information.
- Schedule SB or Schedule MB – If your plan is a single-employer or multiple-employer defined-benefit plan and subject to minimum funding standards, you will need to provide actuarial information.
Small plans that file Form 5500, rather than 5500-SF, must also file Schedule I, which details the plan’s financial information.
In addition to the information above and the audit requirement, large plans may need to complete a few more schedules and attachments. These include:
- Schedule C – This form has three parts. The first details service providers who were paid $5,000 or more; the second specifies if a service provider did not provide the information necessary to complete part one; and the third concerns the services of any accountant or actuary who was terminated.
- Schedule H – This form details financial information for a large plan. If you answer “yes” on certain lines of Schedule H, you will also need to complete Schedule G.
With so many different schedules and attachments, it is easy for plan administrators and trustees to get confused, especially as the plan approaches the 100-participant threshold and the looming change to a large plan as a result. Missing the switch to a large plan filing can be costly, as the penalties for failing to file correctly are steep: up to $2,063 per plan, per day of noncompliance. However, because the transitional period between filing as a small plan and a large plan has tripped up employers in the past, the Labor Department offers a Delinquent Filer Voluntary Compliance Program. If you realize your mistake before receiving a notice of a failure to file, you can electronically file your Form 5500 and check the DFVC box. You should also submit your penalty payment: $10 per day, with aggregate caps per filing and per plan.
A healthy business is apt to grow, and you should enjoy the fruits of your success. Just don’t forget to take the time along the way to make sure you keep up with your expanding regulatory obligations.