Retirement plans are subject to annual reporting and filing obligations under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. Plan administrators and employers generally satisfy these reporting obligations by filing a Form 5500 series return. Historically, Form 5500 has served primarily as an information return, but the DOL, IRS and PBGC are increasingly relying on information reported on Form 5500 as a key component of their compliance and enforcement initiatives.

As a result, the proposed revisions to Form 5500 would add a number of new reporting requirements designed to aid the DOL, IRS and PBGC in assessing whether a retirement plan is being operated and maintained in compliance with the Internal Revenue Code and ERISA. Specifically, the proposal explains that the changes to Form 5500 are designed to modernize annual financial reporting requirements, increase the mineability of reported data, simplify reporting for service provider fee and expense information, and improve plan compliance and agency oversight.

The proposed revisions to Form 5500 would result in a number of changes to existing reporting obligations for retirement plans. Most significantly, the revisions would update the financial information reporting requirements applicable to retirement plans, harmonize fee disclosure requirements on Schedule C (Service Provider Information) with the DOL’s service provider fee disclosure requirements under Section 408(b)(2) of ERISA, and expand existing compliance-related questions to compel plan fiduciaries to evaluate plan compliance with requirements under ERISA and the Code.

Proposed Changes to Financial Information Reporting Requirements

One of the stated objectives of the proposed revisions to Form 5500 is to modernize the collection of financial information so that information reported on Form 5500 more accurately reflects the assets held by retirement plans.

Reporting of Sophisticated Plan Investments and Hard-to-Value Plan Assets

Specifically, the proposal would modify the asset breakouts on the balance sheet component of Schedule H (Financial Information) to add more investment categories and subcategories. This would require more detailed reporting of sophisticated plan investments, including alternative investments, hard-to-value assets and collective investments. These sophisticated investments do not fit squarely into existing subcategories on Schedule H and, as a result, many of the investments are currently reported in catch-all “other” investment categories.

To improve the transparency of these “other” investments, the revised Schedule H would include a number of new categories and subcategories to facilitate more detailed reporting of complex plan investments. For example, the revised Schedule H would include new asset categories for “derivatives” and “foreign investments.”  Plans would also be required to separately account for certain interests held in partnerships and joint ventures (including, for example, investments in limited partnerships, venture capital operating companies and hedge funds) and for certain interests held through self-directed brokerage accounts.

The proposal would also require changes to the Schedules of Assets required to be included as attachments to Schedule H. The schedules identify individual plan investments and disclose important information about those investments, such as the issue and maturity date, rate of interest, cost and current value). According to the DOL, the schedules are the only part of Form 5500 that can be used to evaluate the year-to-year performance of a plan’s individual investments.

The proposed revisions would standardize the methods for identifying, describing and reporting plan investments and would require that the information be provided in a “data-capturable” format. The proposed changes would also allow the DOL to more easily identify hard-to-value assets, address concerns regarding inconsistent and incomplete disclosure of investments that involve a party-in-interest and require plans to provide information about all assets sold during the plan year.

Reporting of Administrative Expenses Charged to Plan Participants

The proposal would also require plan administrators to disclose more detailed information about the nature of plans’ administrative expenses. New reporting subcategories on Schedule H would be designed to capture amounts paid for salaries, audit, legal, recordkeeping and actuarial fees, and other plan expenses.

Plan administrators would be required to identify when participant accounts are charged directly for plan expenses. Under the proposal, plan administrators would be required to report expenses charged against participant accounts separately from expenses charged to other plan asset sources and to indicate how expenses were allocated among participants, e.g., pro rata or per capita. This information would provide the DOL with more detailed data regarding how and when participants are being charged for administrative expenses.

Reporting of Investments By and In Direct Filing Entities (DFE)

The proposal would also change DFE reporting requirements, including what information about DFEs and their underlying investments is required to be reported by the plan and the DFE. Most notably, plans participating in a DFE would no longer be required to complete Schedule D (DFE/Participating Plan Information); instead, plan administrators would report information about any DFEs in which a plan is invested on either Schedule H or the Schedule of Assets included as part of Schedule H. In addition, the reporting rules for master trusts would be modified to eliminate the concept of a master trust investment account to simplify master trust reporting.

Proposed Changes to Service Provider Fee Disclosure Requirements on Schedule C

The proposed revisions to Form 5500 also are aimed at harmonizing the disclosure requirements on Schedule C (Service Provider Information) with the DOL’s service provider fee disclosure requirements under Section 408(b)(2) of ERISA. Most of the proposed changes are expected to simplify the reporting requirements for indirect compensation.

For example, Schedule C would be changed to require reporting of indirect compensation only for “covered” service providers and for compensation that is required to be disclosed under Section 408(b)(2) of ERISA. The proposal also would eliminate the alternative reporting rules for “eligible indirect compensation”, such as finder’s fees, “soft dollar” revenue, float and brokerage commissions. This would more closely align the actual compensation required to be reported on Schedule C with the expected compensation included in the Section 408(b)(2) disclosures provided by plan service providers. As a result, the changes are expected to reduce the number of entities required to be reported on Schedule C, as well as the scope of information needed to complete Schedule C.

Some of the changes create new challenges. For example, the proposal would expand the Schedule C reporting requirement to small retirement plans whereas, currently, only large plans are required to complete Schedule C. In addition, the proposed Schedule C would require plan administrators to disclose recordkeeping services received either without explicit compensation, or for compensation offset or rebated based on other compensation received by the service provider, an affiliate or subcontractor. Plan administrators also would be required to provide an estimate of the cost of recordkeeping services. This information is similar to information already required to be provided under Section 408(b)(2) of ERISA, but will represent an added reporting requirement on Form 5500.

Revised Schedule C also would require indirect compensation to be reported as a specific dollar amount or estimate. Historically, many recordkeepers and other service providers have reported indirect compensation, such as revenue sharing payments from mutual funds, as a formula; this type of reporting would no longer be permitted.

Proposed Changes to Expand Disclosures of Compliance-Related Information

The proposed revisions to Form 5500 would add a number of new compliance-related questions to Form 5500 and expand other existing questions to facilitate agency oversight of retirement plans.

IRS-Only Questions

The 2015 Form 5500 included several new compliance questions that will be used solely by the IRS. These questions required plan administrators to disclose information about the plan’s trust, provide information about in-service distributions made during the plan year and report any unrelated business taxable income (UBTI) received by the plan. The questions also included requests for additional information about if and how a plan satisfied certain non-discrimination testing requirements under the Internal Revenue Code, whether the plan was timely amended for all required law changes and if the plan is covered by a favorable determination letter. Plan administrators were instructed to skip these questions for 2015, but will be required to complete them beginning with their 2016 plan year filings.

The IRS also proposed adding more compliance and oversight questions to Form 5500 for plan years after 2016. The questions would address, among other things, whether:

• Defined benefit plans have complied with the minimum participation requirements under the Internal Revenue Code.

• Required minimum distributions were properly made to 5 percent owners.

• Hardship distributions were made during the plan year.

According to the IRS, these are areas where it has found substantial noncompliance.

Other New Compliance Questions

As part of the comprehensive overhaul of Form 5500, the agencies have also added other new questions to Form 5500, designed to “compel fiduciaries to evaluate plan compliance with important requirements under ERISA and the Code.” 

These new questions highlight areas of particular interest to the DOL, IRS and PBGC. Of particular note, the revised Form 5500 requires plan administrators to disclose the number and value of uncashed checks held by the plan at the end of the plan year, and to describe plan procedures for verifying a participant’s address and monitoring uncashed checks. In addition, plan administrators will continue to be asked whether the plan “failed to provide any benefit when due.” 

Prior to 2015, most plan administrators believed this question addressed only a plan’s inability to pay benefits when due as a result of insufficient plan assets, as described in the PBGC’s reportable event rules. The 2015 Form 5500 instructions clarify that plan administrators are also expected to report failures to timely pay required minimum distributions under the plan. The proposed revisions to Form 5500 for 2019 plan year filings further clarify that unpaid benefits to missing participants who could not be located using the search methods set forth in DOL Field Assistance Bulletin 2014-01 (FAB 2014-01) will not be considered a failure to pay benefits when due. In other words, only plans that have used the required search methods outlined in FAB 2014-01 would be relieved of the obligation to report a failure to timely pay required minimum distributions. These changes come on the heels of the DOL’s initiative aimed at investigating the steps defined benefit plan fiduciaries take to ensure that terminated vested participants timely commence their plan benefits.

In addition, the proposed compliance questions reflect the agencies’ focus on obtaining better information on investments and related fees for defined contribution plans and identifying party-in-interest transactions. The proposed changes would require plan administrators to:

• Confirm that 401(k) plan participants were provided with required fee disclosures and attach a copy of the comparative chart of plan investments to Schedule H.

• Provide information regarding administrative expenses paid by the plan sponsor and any compensation received by the plan sponsor for services provided to the plan

• Report the number and type of investment funds offered under the plan and the plan’s default investment.

In addition, the PBGC has proposed adding a question regarding whether a defined benefit plan is covered by PBGC insurance. The PBGC believes that including this question will improve data collection and bring in new premiums.

Impact on Small Plan Filers

The proposed revisions to existing reporting requirements would impose a number of changes that would impact small retirement plans. Currently, a small retirement plan (a plan that covers fewer than 100 participants) is permitted to file a simplified version of the Form 5500 series return (the Form 5500-SF) if the plan meets certain requirements. Specifically, the plan must cover fewer than 100 participants at the beginning of the plan year, be exempt from the annual audit requirement, be invested in certain secure investments with a readily determinable fair market value, hold no employer securities, and not be a multiemployer plan.

Under the proposal, small plans eligible to file on Form 5500-SF would be required to provide certain additional information about the plans’ investments. Specifically, such plans would be required to categorize the plans’ investments into one of eight categories, which include cash/cash equivalents, money market funds and publicly traded stock. If a small plan is not invested in one of the eight listed categories, it would not be eligible to file on Form 5500-SF.

For small plans not eligible to file on Form 5500-SF, the proposal would eliminate Schedule I (Financial Information – Small Plan) and would require such plans to complete Schedule H (Financial Information). The proposal would also require a Schedule C to be filed by small retirement plans that are not eligible to file the Form 5500-SF; currently, only large plans are required to file Schedule C. In addition, whether a plan is exempt from the annual audit requirement would be based on the number of plan participants with account balances as of the beginning of the plan year, rather than the total number of participants at the beginning of the year.

Next Steps

The proposed revisions to Form 5500 are complex and will likely be subject to a number of changes in response to comments received by the DOL, IRS and PBGC. Future Form 5500 reporting obligations will require more data, more resources and be subject to increased scrutiny by Federal agencies. Though many of the proposed changes, if adopted, will not be effective for several years, plan sponsors should consider whether they currently have systems in place to capture the new data required by the proposed revisions. More immediately, plan sponsors should be prepared to answer the “IRS-only” questions described above when filing Forms 5500 for the 2016 plan year.