Commentary: The Department of Labor and IRS have announced that a series of compliance-related questions proposed for retirement plan returns in the 5500 series will be optional for 2015 plan years.

The news was delivered on December 4, 2015, in a DOL news release and in a set of IRS frequently asked questions (FAQs). The compliance questions were first proposed in drafts of 5500-related forms, and seek information on various dimensions of retirement plan design and administration — including plan features, specifics of coverage and nondiscrimination testing, amending history, custodian, trustee and preparer identity, operations, etc.

Also see:9 important tips for filing a Form 5500.”

The purpose of this information is to help the IRS assess the nature and degree of plan compliance, and potentially assist it in better targeting compliance and enforcement efforts.

A brief history

In March 2015, the IRS issued a draft of its new Form 5500-SUP, Annual Return of Employee Benefit Plan Supplemental Information. The compliance-type questions noted above were the chief purpose of this new form, intended to be used by retirement plans that are eligible to file Form 5500 in paper form.

The same compliance questions were to be added to the Form 5500 schedules H, (Financial Information), I (Financial Information – Small Plan), and R (Retirement Plan Information), and to Form 5500-SF, Annual Return/Report of Small Employee Benefit Planfor plans that file electronically.

In August 2015, the IRS issued a draft of the 2015 Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. Compliance questions similar to those on the other forms and schedules appeared on the draft Form 5500-EZ.

Industry reaction to IRS’ initiative

Beyond issues of privacy — Form 5500 submissions are, after all, part of the public record — there was substantial industry concern over the potential for plan misreporting and IRS misinterpretation, given the ambiguity of many of the questions on the aforementioned forms and schedules.

Liability was certainly a concern, because preparer identities were to be provided, even though the source of much of the data to be reported might be from service providers having no relationship to the preparer.

Also see:What employers need to know about Form 5500.”

Timing was another concern because the draft forms were released with the plan year already in progress, and most defined contribution retirement plans were, or still are, in the process of being restated for the Pension Protection Act of 2006.

Many of those within the retirement industry actively lobbied for a reversal, or at least a delay, in implementing these Form 5500 changes. In the end, these efforts succeeded.

Some FAQ clarifications helpful

The IRS FAQs respond to industry comments that had pointed out ambiguities or potential conflicts that employers and preparers might encounter. Some of the more important clarifications for those who choose to complete the questions on 2015 returns include the following:

  • Preparers for 401(k) plans that pass nondiscrimination testing using both design-based methods and actual ADP/ACP testing for different contribution types should indicate that the plan passes nondiscrimination testing using actual ADP/ACP testing.
  • Preparers for 401(k) plans that test both deferral and matching contributions for nondiscrimination where the current-year method is used for one and the prior-year method is used for the other should indicate the method used for ADP testing.
  • Preparers for plans that do not have to meet plan coverage requirements using the standard testing methods need not answer the question on how coverage testing is passed.
  • Preparers for plans on pre-approved documents that have not been restated for PPA by December 31, 2015, should report the date of the last interim amendment adopted, disregarding any discretionary amendments and any restatement occurring after December 31, 2015.
  • Multiple employer plans filing a single Form 5500 should answer compliance questions on a plan level, not the participating employer level.

While not all of the concerns raised by critics have been addressed, the IRS’ willingness to make the compliance questions optional for 2015 plan year reporting, and clarifying some of the ambiguities, are welcome.
Mike Rahn is an ERISA consultant for Ascensus, Inc. where he works on the team that monitors all legislation, regulatory pronouncements, and industry developments affecting retirement plans and ensures that these developments are reflected in the company’s products and services.

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