Next to an IRS or Dept of Labor audit, nothing frightens retirement plan sponsors more than a notification letter from the Dept of Labor regarding inadequacies in their responses on the Form 5500 or 5500-EZ filing. Inadequacies that, if not corrected within 30 days of the date of the letter,would subject the plan sponsor to substantial fines and penalties, not only from the Dept of Labor but from the IRS as well.
As an Investment Representative you’ve worked hard to build trust with your pension clients. Now, you can solidify that long term relationship with your expertise on one of the greatest fears of small business retirement plan sponsors. Next to an audit, nothing frightens retirement plan sponsors more than a notification letter from the Dept of Labor regarding inadequacies in their responses on the Form 5500 or 5500-EZ filing. Inadequacies that, if not corrected within 30 days of the date of the letter, would subject the plan sponsor to substantial fines and penalties, not only from the Dept of Labor but from the IRS as well. Following is a listing of the most common filing errors that will generate a letter from the Dept of Labor.
1. The Form 5500 Must Be Properly Signed And Dated Make sure that you have the proper signatures by the Employer and Plan Administrator and dates on the Form 5500, Form 5500-EZ, and any attached schedules that require a signature (Schedules B: Actuary; P: Trustee; and Schedule SSA; Plan Administrator).
2. The Form 5550 Must Have The Proper EIN And Plan Number (PN) It is critical that the Employer Identification Number (EIN) used to identify the “plan sponsor” be the same year to year when completing line 2b of the Form 5500 or Form 5500EZ.
3. The Form 5500 Filing May Not Be For A Period Greater Than 12 Months Be certain the time period entered in Part I of the Form 5500 is not greater than twelve months. If the plan is not reporting on a calendar year basis, then input the twelve-month fiscal year period in the spaces provided.
4. Use A Proper Business Code When Completing Line 2d Of The Form 5500 On Form 5500, Line 2d, be certain to enter a valid business code that best describes the nature of the plan sponsor's business. The only business codes that are valid for use in answering Line 2d are listed in the Form 5500 filing instructions section marked “Codes for Principal Business Activity”.
5 Use The Correct Plan Characteristics Codes On Line 8 Of The Form 5500. On Form 5500, Line 8, you must check box A to indicate if the plan is providing pension benefits. You must enter the Plan Characteristics Codes in the space provided beneath box A. These codes describe the type of pension benefits provided and other features of the plan. A list and description of the Plan Characteristics Codes is in Section 6 of the Instructions for Form 5500.
6. Properly Identify The Funding And Benefit Arrangements On Line 9 Of The Form 5500 Indicate all the proper Funding and Benefit Arrangements on Form 5500, Lines 9a and 9b. The “Funding Arrangement” is the method used for the receipt, holding, investment, and transmittal of plan assets prior to the time the plan actually provides benefits. The “Benefit Arrangement” is the method by which the plan provides benefits to participants. The responses on Lines 9a and 9b are cross-referenced against information on Schedules H, I, and/or A as appropriate. Be careful to attach the appropriate financial or insurance schedule (H, I, A) that corresponds to the Benefit and Funding Arrangements you indicate.
7. File All The Required Schedules And Attachments With Your Form 5500 Make sure you are filing all the required schedules and attachments with your Form 5500. If you check a box indicating that a schedule is attached, the schedule must be submitted with your Form 5500.
8. Schedule R And Distributions You must prepare Schedule R only if there are any distributions or rollovers from the plan. You must enter both the EIN of the distribution payer and the EIN of the pension plan. Part 3 is only for money purchase plans that have made single sum distributions.
9. File The Appropriate Financial Information Schedule (H or I) With Your Form 5500. Make sure you file the proper Financial Information Schedule with your Form 5500. The Schedule H is for “large plan” filers (generally plans with 100 or more participants at the beginning of the plan year). The Schedule I is for “small plan” filers (generally plans with fewer than 100 participants at the beginning of the plan year).
10. Complete the Participant Benefit Information on the Schedule SSA Make sure that you list all of the terminated participants with their vested balances from the prior year that still have not been paid. Starting with the 2004 filing year, sponsors are required to list participants, previously outstanding, who have been subsequently paid. When your client calls, anxious of a possible Dept of Labor fine, you can build long term credibility by taking charge of seeing the correction is made by the preparer. Better still, review or have an expert review, the Form 5500 before the client sends the forms into the Dept of Labor and save your client receiving any letter at all. Calendar year plans Form 5500 EZ and Form 5500 with related schedules are due by July 31, each year.
Making Every Penny Count….
On May 25, 2005 and retroactive back to January 1, 2005 the IRS has redefined section 415 Compensation for 401k retirement plans to include post severance compensation if it’s paid within 2-1/2 months after separation from service. But this is only for payments that would have been paid if the participant had continued in employment or if they are for bona fide sick, vacation and other leave.
Selling Truth as a Differentiator
It’s become vital to the success of insurance and financial advisors that they differentiate themselves with their exemplary ethics, that they operate by a higher moral code and that they communicate that higher standard to their clients. Why? Because research proves that ethics builds trust, and trust sells — in the long-term and - in the short-term, as well.
