FORM 5500 FAQ
DWC Consultants - Benefits Update/Research Release – September 2009
Is the 2009 Form 5500 the year of the increased fee and revenue disclosures? What are the new questions related to compensation?
The Form 5500 is requesting additional information related to compensation received by service providers and the emphasis in on ‘indirect compensation’. This means any fees or expense reimbursements received by a service provider from an investment entity must be reported.
Since this fees/revenues are often undisclosed to the plan sponsor, these types of fees may be new to you. Please pick up a copy of the ‘Defined Contribution Handbook’ for an in-depth explanation of these types of fees. Examples include:
- Some mutual funds pay a sub-TA to the recordkeeping service provider/TPA from within the expense of the fund.
- Some mutual fund companies pay shareholder service fees to clearing entities/directed trustees from within the expense of the fund
- Some mutual fund pay a 12b-1’ (commission paid to broker) from within the expense of the fund
- Mutual fund companies have reported all of the above fees to shareholders; however your service providers may not have reported these revenues from the mutual funds.
To spare a long research paper, we will not address the components within an insurance arrangement. If you are part of an insurance arrangement, your insurance provider will most likely be providing the plan sponsor and TPA a detailed breakdown of the fees/revenues.
Getting specific, the Schedule C within the Form 5500 has been modified to break out the reported data for persons/entities receiving either direct or indirect compensation including those:
- Receiving only eligible indirect compensation
- Receiving direct and indirect compensation
Furthermore, those persons/entities identified as receiving direct and indirect compensation must be identified as a fiduciary to the plan or provides one or more of the following services to the plan and received:
- $1,000 or more in indirect compensation or
- The plan was given a formula or other description of the method used to determine the indirect compensation rather than the amount.
The Form 5500 requires the plan sponsor to report those services providers who refuse to provide the information necessary to complete above information!
Unfortunately we do not have final information as it relates to specifics to answer certain revenue questions. The downside of this discussion is the burden of reporting this information is on the plan sponsor (as you are signing the Form 5500).
If we do not receive final clarification by the end of this year, we are recommending that all plan sponsors receive a written report from all of their service providers that provide their direct and indirect compensation. As a fiduciary, this should be done every year to ensure your service providers are providing services as promised at fair prices.
What are the other changes/revisions to the 2009 Form 5500?
The Form 5500 now asks the following questions or requests the following information:
- Was there a blackout period? If yes, was a notice provided or was an exception to providing the notice applied?
- Is the plan using a QDIA?
- Is the plan using an automatic enrollment feature?
- Has the plan failed to provide any benefit when due under the plan? (we see this as defined benefit type question)
The Schedule SSA will no longer be part of the Form 5500 package!
Form 5500 Information Primer - An Important Fiduciary Task
Many plan sponsors outsource this important task and simply sign on the bottom line (in 2009 this is an electronic signature). We highly recommend you review your first draft of the Form 5500 with your preparer so you understand what you are signing. Questions related to the fidelity bond, contribution funding timing, and loans are important so make sure you understand what you are signing.
When is the Form 5500 due?
The Form 5500 is due 7 months after the end of the plan year and can be extened for an additional 2.5 months. For calendar year ends, the Form 5500 is due on July 31st (or extended until October 15th). Most large plan filers extend their Form 5500 so their Form 5500 preparer can include the audited financials (prepared by the independent plan auditor).
What accounting methodology should be used?
For large plan filers and Form 5500 EZ filers, accrual accounting must be used. For small plan filers, we recommend cash basis accounting, for ease of filing use (and Form 5500 will match the recordkeeping reports). Small plan filers should be consistent from year to year.
What is the definition of a large plan filer, hence requiring an audit?
A large plan filer is a plan with 100 participants or more as of the beginning of the year. However, if the participant count is between 80 and 120, the plan may continue to file with the same status as the prior year (another way of saying a small plan filer can remain as such until the plan exceeds 120 particpants for the first time on the first day of the plan year). The definition of a participant is an employee who has satisfied the plan's eligibility requirement and his/her entry date on or before the first day of the plan year. This includes participants with balances that are no longer active (this is true until the participant has received his/her benefits paid in entirety). For large plan filers that fall below 100 participants on the first day of the plan year, you have the option to file as a large plan filer. Note: The plan audit, under ERISA, is to be performed in compliance with generally accepted auditing standards (GASS), by an independent qualified public accountant, for purposes of their rendering of an opinion on whether the plan's financial statements are fairly presented in conformity with generally accepted accounting principles (GAAP).
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