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The Uncertain Future Of Form 5500

12/13/17 – Beth Vice

Will compliance burden increase?

The Form 5500 (Annual Return/Report of Employee Benefit Plans) provides data on hundreds of thousands of retirement plans, which include millions of participating individuals.  In July, 2016, as part of the Notice of Proposed Revision of Annual Information Return/Reports from the Department of Labor (DOL), the IRS, and the Pension Benefit Guaranty Corporation, several changes to the Form 5500 were proposed that are scheduled to go into effect for plan years beginning in 2019.   January 1, 2019 might seem like a long way off, but to critics of the proposed overhaul of Form 5500, it’s right around the corner. These proposed changes are expected to significantly increase the amount of time required to complete the form properly. Employers will have to work with their Plan service providers to gather the needed information if these revisions are put into place.  Industry commenters have asked the DOL to postpone the proposals until it reviews industry concerns and considers that the added compliance burdens may discourage small employers from setting up or maintaining employee benefit plans.

The unknown compliance costs

How significant would the proposed changes be? A member of The SPARK Institute (whose members include plan administrators and recordkeepers) estimated that compliance would double or triple plan sponsors’ current cost of dealing with Form 5500 requirements. “The [proposed changes] include more than 400 new or modified line items, each of which would require significant design and implementation efforts to gather, analyze and report all of the requested information,” according to SPARK.

However, given President Trump’s promises to reduce regulatory burdens on businesses, some of the proposals may be scaled back. How much so is unknown at this time; therefore, it’s important to remind yourself of the basic elements of key proposed changes — and the rationale behind them.

The proposals’ rationale

On unveiling the proposals, the Obama administration’s DOL laid out five goals that it believed would benefit plan sponsors, participants, beneficiaries, the public at large, and federal agencies. According to the DOL, the new regulations would:

  1. Improve the reliability and transparency of the information reported regarding employee benefit plan investments and other financial transactions,
  2. Remedy the current failure to collect data about a large sector of the health plan market, including currently exempted small-insured and self-insured welfare benefit plans,
  3. Convert more elements of Form 5500 into data that’s organized in a structured manner to make them computer-processable and identifiable for data-mining and analytical purposes,
  4. Better harmonize reporting on Form 5500 Schedule C with the DOL’s service provider disclosure regulation, and
  5. Enhance reporting on plan compliance to improve plan operations, protect participants and beneficiaries and their retirement benefits, and provide education for plan fiduciaries.

A proposed change is the elimination of the regulation that exempts employers with less than 100 employees from having to file Form 5500 for their insured or self-insured health plans. According to the DOL, dropping the exemption would bring small employers into compliance with the Affordable Care Act, “provide critical data for [government] oversight and collect information needed for Congressionally-mandated reports on group health plans.”

The expanded reporting requirements

Examples of the expanded reporting requirements for retirement plans include:

  • The number of participants making catch-up contributions and investing in default options, as well as the number of investment funds offered under the plan,
  • The number of participants with account balances as of the beginning of the plan year and the number of participants who terminated employment during the year who had their entire balance distributed,
  • Whether the plan uses a default investment alternative for participants who fail to direct assets in their accounts, and which type of investment alternative is used and
  • Addition of more detailed reporting of amounts paid for various types of fees, such as audit fees, recordkeeping fees, etc.

For small retirement plan sponsors, Form 5500 Schedule I would be replaced by a new, more detailed Schedule H. One of the DOL’s stated purposes for this change is to obtain “a meaningful picture of small plan investments in hard-to-value and other assets.”

The proposals feature a new Schedule J that seeks:

  • Information regarding rebates, refunds or reimbursements from service providers,
  • Detailed claims payment data regarding how many benefit claims were submitted, appealed, approved and denied broken out by claim type, and
  • Information on the plan’s paid and unpaid benefit claims during the plan year and any delinquent payments to insurers and whether the delinquencies resulted in a lapse of coverage.

The proposed changes reintroduce a revised Schedule E, which is a schedule that would be required for employee stock ownership plans (ESOPs).  Additionally, there are proposed changes to Schedule H that would modify the asset breakout to add more investment categories and subcategories. 

The future is unclear

While some of the new information that would have to be furnished with the proposed new Form 5500 may be readily available to most plan sponsors, the cumulative effect of so many additional data requests could prove onerous. The changes described above are just a sample.  There are several other significant changes proposed. Modification of the original proposals is probable, and the process of shaping the final version likely will take many months. It’s also possible the proposal will be withdrawn entirely. Nevertheless, paying attention to the fate of this regulatory initiative is prudent.