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Filing Form 5500

Published by Summit Marketing Team on Aug 10, 2020 6:00:00 AM

The 401(k) Audit CPA Success Show: Episode 10

In this episode, Jamie Nau sits down with Kim Moore, the Summit CPA audit director, to talk about the Form 5500. The Form 5500 is going to be due soon. It’s a tax form that provides information to the IRS and the Department of Labor about your 401k plan.

Listen to learn everything you need to know about the procedures and requirements of filing it.

Jamie Nau: Hello everybody, and welcome to today's podcast. Once again, you have Jamie and Kim here from Summit CPA, and we are going to talk about the Form 5500. This is a really interesting topic, and I think something that anyone that has a benefit plan should be really interested in. We'll give you a lot of details as well as a lot of dates and all that good stuff. But let's just start with what is the Form 5500.

Kim Moore: Yeah, thanks Jamie, and welcome everyone. It's a timely topic because for most folks the Form 5500 is going to be coming up due here pretty soon. The Form 5500 is actually an IRS form, so it's a tax form, very similar to other tax forms that you may be familiar with. It looks very much like a tax form, has all the legalese and all the boxes that you fill out. It doesn't have any money to do with it. So that's one difference. If you're used to your personal tax return, or maybe a corporate tax return, you're going to figure out a whole bunch of numbers, and at the end you come down to a certain amount of taxes due that you've paid a certain amount already and either you owe the IRS some money or maybe they owe you some back if you've overpaid. In this case, there are a lot of numbers on the form, but there will be no tax due per say with the Form 5500. It's really just an informational return. It's providing information to both the IRS and the Department of Labor and other governmental agencies, but for 401(k) plans, primarily those two agencies regarding your plan, what happened with the plan during the year, and then there are some pieces of information on there that they will use to analyze plans across the country. And then also your particular plan, they're looking for certain things that you were supposed to have done, or not done, and depending on how you answer the questions, that may trigger them to follow up with you. Due dates for the Form 5500, they're pretty standard. The original due date for the Form 5500 is seven months after the end of your plan year, for most plans. Most plans are calendar year plans. So your plan is going to go from January 1st to the end of December for those plans. That means that the original Form 5500 date is the end of July. Now for most folks that have pretty simple plans, they don't require an audit and they're on top of everything. Getting that filed by the end of July there is usually no issue with that. Your service provider should actually be preparing the form for you. You just need to review it and then you have to actually file it. But getting it done by the end of July is no problem. If you need a little more time, and especially those folks that need an audit, especially a first year audit, getting it done by the end of July can be tough. So they do give you an extension period, this is true every year. It has nothing to do with any kind of emergency going on or anything. It's an automatic extension that will give you until October 15th for calendar year plans, or three and a half months after the last day of your plan year if it’s a non-calendar year plan. Again, those extensions, there's no money due with it. It doesn't cost you extra. There's no penalty or anything associated with it. Your service provider does need to fill out a form. It does need to get filed, does need to get accepted. You want to make sure all that happens. Otherwise it can provide a penalty for you. But in most cases, you're just going to file the extension, and then you've got an extra three months, and another half a month to get it filed. To get your audit done. To get everything done.

Jamie Nau: So if you do file for the extension, you don't plan on filing until October 15th, are there any fees that go with that? Or is it just getting it filed?

Kim Moore: Yeah, no, there's no fees. There's no penalties. You do want to make sure it does get filed, does get accepted. That's a pretty standard routine procedure. Nobody should be afraid of that. In fact, a lot of plans get the extension. Lot of service providers will file it automatically for you. Another thing that I like to point out is. I think it's a good idea to go ahead and do it if there's any doubt at all that you might not meet that date, regardless of whether you need an audit or not, because there's nothing wrong with filing for the extension, getting the extension, and then you can meet the July date anyways. There's no penalty there, it doesn't cause a system problem or anything.

Jamie Nau: Is there a timeline for when you need to file for the extension?

Kim Moore: Yeah, you just need to make sure it's filed before the due date. So the end of July. Obviously, you don't want to leave it to the last minute because it needs to get accepted. But as long as they have it and it's accepted before the end of July, you are good to go. The other thing I like to point out with these filings and the Form 5500, you really need to be careful who's filing the Form 5500 on your company's behalf. It needs to be something called a fiduciary. So that is usually the plan administrator, or the plan trustee. The plan trustee is the person that has the overall responsibility for the plans, usually a higher up level individual. Plan administrator is someone that works with the plan on a daily, regular basis. Either one is fine. You can have one fiduciary, you might have 20. It just depends on the size of your plan and how you're organized. But whoever does that filing automatically becomes a fiduciary. It's one of the duties that is defined as a fiduciary. So you want to make sure you don't just have, you know, oh Susie is available today, let's have her file it. You don't want to do that because number one, it's not good for Susie, it puts her at a little bit of risk that she's probably not aware she's taking on. But it's also not good for your company, because one of the things that you need to do is double check the Form 5500 before it's filed. We're going to get into this here in a little bit. But it needs to be somebody that is knowledgeable about the plan, and knowledgeable about some of this information. Otherwise you could file a Form 5500 that's incorrect. So you meet the deadline, you are good there. It looks all good on the surface, but then once the DOL, IRS or others start digging into it, they find out that there's errors, or they start questioning things that maybe are really correct, but they look incorrect because of what you filed with the Form 5500. So again, it needs to be somebody knowledgeable that's doing the filing.

Jamie Nau: Okay, that’s great. Sot it needs to be someone knowledgeable. Again, whoever does file it becomes a fiduciary. So obviously there's some responsibilities that go with that. You want to make sure that you have someone that understands the plan and is going to review it. Now, what are the steps? Where would we go to file our Form 5500?

Kim Moore: What I tell folks is talk to your service provider, because they all usually have some type of system that they use that connects between their system that created the Form 5500, and where it needs to end up when it's all said and done. The DOL will change the rules. Several years ago, you used to be able to file this as a paper form, just like you would, I mean even today, most folks don't do it this way, but you have a personal tax return you still could do it by hand, and get your little pencil out, put it on a piece of paper and mail it in. I know most folks don't do that, but you still could. You're not allowed to do that with these types of informational returns. You wouldn't want to anyways, because it's a lot of volume of information, but you're not allowed to. It needs to be an electronic filing. It needs to go through something called the e-fast system, which is a Department of Labor system. They have set requirements, set data needs for it to go through. You know, if you're familiar with working with IT systems, you know that they have set requirements. This one's no different. But your service provider will have systems that interface between their systems and the DOL e-fast system. So work with them. You can file directly on the system if you need to. You can do that. You need to get credentials and then follow the instructions. I have actually done it before. It's not that complicated, but it's better if you can use your service providers link between that because it has edits and it'll double check it. It'll let you know if for some reason it doesn't go through or there's an error or something. So I I would advise use that if you can, If that's not available, and sometimes maybe your service provider doesn't have that option, or maybe it’s not available, or something, you can file directly.

Jamie Nau: Okay, great. So you mentioned that all plans need to file a Form 5500, but you also mentioned that some plans need to be audited. What is the requirement to make a plan that needs to be audited?

Kim Moore: Yeah, and actually that's one of the things that the DOL is checking, when I say that they require certain information, they're going to double check things that are on there. One of the things is the participant count. So actually it's on the second page of the Form 5500. There's a whole series of numbers that you have to include regarding folks that are in the plan. So those people that are participating, and contributing, those folks that are in the plan maybe are no longer with your company, but they still have plan assets. So maybe they've been terminated, retired, and they still have plan assets. But it also includes those folks that are eligible to participate. So they've met whatever the requirements are to actually contribute to the plan. But they've chosen not to for whatever reason, which is all fine. But if you add all three of those numbers together and they're over one hundred and it's a 401(k) plan, then you will more than likely need an audit. There are some other kind of specific rules we won't go into today. We did another podcast covering that, but if you have questions around that you can check out our other podcast. But basically when you have more than one hundred eligible participants and regardless of whether they're participating or not. So the audit is driven by number of eligible participants at the beginning of the year. If it's over a hundred, then you're getting an audit. Some things that confuse people, get them tripped up is that eligible. It's not just the folks that are participating. You might have five hundred people eligible in early two in the plan, and you think, well, it's only two people that can't be. Well, no, it's driven by eligible. It's driven by the first day of the year. So if on January 2nd a whole bunch of people terminate, or they pull their assets out, doesn't matter. January 1st drives it. We always get questions from people saying well, yeah, I've got three hundred eligible people but the plan size, actual dollars in the plan is very small. It's some small number. So surely I don't need to have an audit. Unfortunately, yes, you do. It's not the dollar amount in there. The complexity of the assets, the complexity of the plan, the size of the company, none of those things make any difference. It really is very simply driven by a number of eligible participants.

Jamie Nau: We talked about this in a previous podcast but I just want to reiterate again. I think this just emphasizes why it's important to make sure you understand who's eligible for your plan, and you think through those requirements. You know, if you're a restaurant company and you have five hundred employees that all work ten hours a week, and you make your eligibility requirements super low, but none of them actually enroll in the plan, then obviously you're going to be audited. You might want to think through that, and some of the other stuff we talked about in a previous podcast.

Kim Moore: Absolutely. We see that all the time. Sometimes folks, they are not even aware that an audit is a possibility. No one's ever told them that. Their service provider doesn't tell them that. They've just never heard of it before. So they get a big surprise because the audits are expensive and they take a lot of time and effort. So if you don't need one, you don't want to have to have one if you can avoid it. So, yeah, they may be surprised. Don't understand. There are some easy things you can do in terms of your plan set up. Require people to have a certain number of hours. or a certain period of time. May be they have to be with your company for a year before they're even eligible. That will that will negate some folks. You can specify things like full time. So sometimes if you work in a restaurant type, retail type environment, or we see it a lot in, in health care as well, like home health care folks may not work a full time schedule week, after week, after week. So if you set the requirements, well if you're over age 21 you're automatically eligible, you know, those people are going to come into play. Where if you have more of an hours requirement, or a time requirement that they have to provide service with a company that that can help take the audit out of the out of the equation. But you have to be very careful, too, because sometimes you can set it in a certain way to try to avoid an audit and then you make your eligibility requirements so complicated that now you've got an administrative burden trying to figure that out. 

Jamie Nau: It’s a fine line for sure.

Kim Moore: It is. So again, I would double check with your service provider and just ask them if you're worried about this, or maybe you can see your numbers creeping up. Talk to them about things. Now you're going to have to do plan amendments. You'd have to change your plan requirements, but you may find that it's a lot cheaper to do that one time change versus getting into the audit cycle and now you've got to do two, three or four years of audits before you can get out of it. It's kind of hard to get out of the audit cycle once you're in it.

Jamie Nau: Yeah, for sure. So as you mentioned, prior to actually filing Form 5500 that you should do a review, do you have a list of some things that I as a reviewer should take a look at?

Kim Moore: I do, yeah. I do have a list. Actually we also have a booklet that we provide to our clients that talks about not only the Form 5500, but the audit report and things that they should look for as they've been given a draft. So what do I do with this? What should I look for? So I actually have a booklet, anyone who's listening to this if you'd like to get a copy of that by all means just reach out. I know Jamie, you're going to give them the email address. 

Jamie Nau: Yeah I will throw it out of you. So if you want the booklet or anything else, you definitely can email us at audit at: audit@summitcpa.net. Again we can send you the booklet that'll help you understand what to review when it comes to Form 5500. Also if you have topics for us, or anything else that you think would help our podcast we'd love to hear from you.

Kim Moore: Yeah, thanks Jamie. So things to look for on the Form 5500. Just some basic things, make sure the name of the plan is right. The name of the company is right. The address is right. Just basic things like that. The DOL is going to look for what's called the EIN number, which is your tax ID. number. It's usually the tax ID number of the company, unless for some reason you've set up a unique tax ID. number for your plan. But anyways, you want to make sure that that's right, because that's one of the things they double check. If this particular ID number filed a Form 5500 last year, they're expecting you're going to file one this year. If they don't see that, maybe there's just a typo or something, or transposition of a number, you can end up having problems with the DOL, or the IRS just simply over a typo in the form. So you want to double check that EIN number. You'll also have a plan number. It usually a number like 001 or 002. Double check that, because that identifies to both the IRS and DOL this particular filing for this particular plan. So you want to make sure that that's right. There's a lot of information towards the back, like the middle-back in the form, most of that, unless you see something that really stands out like, oh I don't understand why the name of this entity is here? I've never worked with them. A lot of that you probably wouldn't know necessarily if it's correct or not. But if you get back to what's called Schedule H, that's the financial statement for the plan. So it will talk about the assets, or investments that are in the plan. Comparing last year to this year, it will be a change obviously, if it went to up or down. It'll talk about what made up that difference. If there were contributions to the plan, people taking money out of the plan, et cetera. So you should have information from your service provider of your own financial statements. You want to just double check that, make sure it looks reasonable. There will also be behind that information about whether or not it's required or not. And you're going to fill that out if there is an audit that's needed. Then there's a section of compliance questions, you get it on the schedule page it is section four. There's a whole list of questions. You want to look at those questions and just make sure that they're reasonable. If something doesn't look quite right, you want to ask your service provider. If there's something you don't understand, there's a question like, I don't even know what this is asking. Again, I would talk to your service provider, or talk to your auditor. You know, if the plan is under an audit, ask the auditor, because we look at those things as well, and we could help explain them to you. If you don't have an auditor, go to your service provider. Again, don't be afraid to ask. You know, one of the questions is asking about a Fidelity bond and you think well, I don't know what that is, surely that's not important, I mark it no. That’s a red flag area for the DOL right now. So you may be getting a questionnaire from them saying, why do you not have a bond for your plan? When you very well may have one and everything may be fine. Again, the accuracy of that form is very important. So double check. If you have any questions make sure you ask.

Jamie Nau: So if my plan is getting audited, what is the auditors responsibility when it comes to the Form 5500? What does Summit normally do when it comes to the Form 5500 as well?

Kim Moore: So we're not responsible for the Form 5500 so we don't put it together, we are not ultimately responsible for the accuracy of the Form 5500. That is the plan sponsor. So the company sponsoring the for the 401(k) plan it is their responsibility. We do check it, we will not issue an audit report. That is a Summit policy. It is going to become an audit requirement in another year or two, just depending on when your firm adopts some upcoming guidance. So it is going to be a requirement that the firms have the Form 5500. But we have always required that we have a draft of the Form 5500 and we compare it to our audit report. We're required to put a reconciliation in the audit report if there are differences, and sometimes there are. That's not a problem. It's reasonable. We're working on a different type of accounting set of principles than the provider may be doing on the Form 5500. So like I said, it is okay, it's just that we would need to do the reconciliation. So that's one of the things we're doing. But we also take a look at the Form 5500 here at Summit ourselves. So some of those things that I talked about, we double check and make sure the name, the EIN number, all that stuff is correct. We'll take a look at the participant counts. We're not going to audit those per say, but we're going to look at them for reasonableness. If we know that the plan is five hundred people, and it's showing a thousand, or two hundred, we're going to say hey, this is clearly not correct. We're also going to heavily look at that financial information in the back. We're going to look at the compliance questions, anything that we believe is incorrect we will pass back to both the provider and also our client, which is the plan sponsor. Making sure that we have a good understanding if it needs be corrected, we make sure that we're getting that information to the right person to get it corrected. There also are things that may come up during the audit that could change, especially in the financial information, some of those compliance questions. Maybe the person thought it was correct at the time, but as we do the audit, we identify that no, that number isn't correct. Or one of those compliance questions needs changed. So, again, same thing. We will provide that information to both the provider and our client to make sure it gets updated throughout our process.

Jamie Nau: That's very helpful. I know in the day when I was doing audits I always reviewed the Form 5500, but the responsibility there was always a little confusing. I appreciate you clarifying that. I'm sure a lot of people out there that have plans, I know many auditors involved in this process, so this is great. So we are at the final section here. So what if I can't file by the deadline? So I extend it, and then here I am on October 10th, and I'm not going be able to finish this audit in five days. What are my next steps?

Kim Moore: Yeah we hope you don't get here because it can be a tricky handling of a situation, and it also can be very, very costly if you don't handle it correctly. There's a few different things that you can do. I like to point out, first of all, there are kind of two components. So filing the Form 5500 is one component, monitored primarily by the IRS. The DOL also will see it as primary responsible for the IRS to make sure that you file the Form 5500. If you need an audit, then that's under the review of the Department of Labor. Both organizations or agencies have of course fees. If you don't file at all, or you don't file on time, those fees can be extremely costly. If you don't, you know, you don't file on time and you just kind of ignore it. First thing I like to point out is try to be on time. If you can do everything, make it a priority. Do everything you can to file on time. If you absolutely cannot, for whatever reason, if the reason is because of some type of disaster. So we've seen over the last several years where there have been natural disasters like hurricanes, the wildfires that happened, some other types of natural disasters, the IRS will issue extensions for tax returns. And it doesn't apply just to these tax returns, but to any tax return for FEMA declared disaster areas. So one, check that out. If that applies to you, then you're going to get an extension of time. But in most cases, you're not going to be able to extend the deadline beyond October 15th. What happens if you miss the October 15th deadline, that extension that you got that we talked about at the beginning of the podcast goes away. So you go back to your original deadline in this case, for calendar year plan at the end of July. So any type of penalty then gets applied from August 1st through to whenever you correct the deficiency. So it's supposed to be filed by October 15th, the deadline, and you actually file November 20th, let's say they're going to calculate your penalty from August 1st to November 20th. It is a per day fine imposed by both the IRS and the DOL if an audit was required. There are minimums, maximums there, standard penalties, maximum penalties on everybody with all the dollar amounts. But they're not, you know, five, ten dollars. They're thousands of dollars a day. And remember, if you need an audit, that's two sets of those penalties. It's not uncommon. We have seen clients come to us in a panic that they missed the whole thing, they just weren't aware of it. Maybe their service provider didn't tell them. Who knows? But here comes a letter from the Department of Labor. You were supposed to have an audit. You didn't have one. They will send a certified letter to you and it will inform you that you need an audit. You didn't have one. You will have, in most cases, they'll give you 45 days to correct that. Now to get an audit done from scratch in 45 days when you don't even have an auditor, it can be done, but it's very difficult and is going to cost you a lot of money to get that completed. If you ignore the letter, or you don't get it done, that letter will tell you when you get past that 45 days. By the act of Congress, they are not allowed to give you any more extensions regardless. Doesn't matter why. I mean, you could have a very valid reason at that point why you can't get it done. It doesn't matter. They at that point are required to issue a penalty to you and those penalties can be thirty, forty fifty thousand dollars. They're very large.

Jamie Nau: I'm looking at what you laid out right here. I'm doing the math. My head, like you could double or triple the audit fee in no time.

Kim Moore: Yeah easily, right? And that's one set of fines, because usually if you need the audit you've missed the Form 5500 filing as well. So, you know, I just tell people don't ignore any notice that you get from a federal agency. Verify that it's truly coming from them, that it is not some kind of fraud, or if you get something in the mail and it comes certified, stop everything and pay attention because it's going to tell you exactly what you need to do when you get that notice. Call them, email them, do whatever you need to do to get a hold of them, and find out exactly what you need to do and get going. Don't waste any time. One day can make a huge difference as to whether you're going to be able to adhere to their requirements, and ultimately determine if you get a fine and how much it's going to be. The other thing that you can do, both the IRS and the DOL will have delinquent filer programs. They have slightly different acronyms, but they both have delinquent filer program in. So if you get into a situation, Google that and look for those. There are different steps. They both work slightly differently. They have some pretty clear guidance, there is one area where I think it is pretty clear on their website what exactly you need to do. So follow those steps again. Don't try to do your own thing, and don't try to say well, I'm sure what they want is something else. No, do exactly what they say. If you don't follow their guidance exactly they'll kick it out and then you're back to those fines. But if you follow those exact requirements, it will limit your penalty substantially. Still will be a fine. Still will be penalty, but it will not be nearly as large. And the IRS and DOL, they understand this is complicated. It's not your main business. People mess up. It just happens. So if you stand up and say hey look, I missed this, I didn't know about it, or I just missed it, or I was too busy or whatever, and you go and you submit under these filing programs, there's not going to be other repercussions. You'll have to pay the penalty associated with that, but that's not going to trigger an audit. The IRS or DOL isn’t going to show up on your doorstep. You know, they say okay, you realize you made a mistake, and they will just let it go through the process and it'll be fine. That will not work though, if you get a notice from either of those two agencies, and then you say okay, now I'm going to go hold up my hand and do the work. No, you have to do it before they do. But anyways, I guess bottom line, my guidance to people would be, number one, if you get a notice, don't ignore it. Get on it right away. If you think you can't file on time, get with your service provider, and try to take advantage of those delinquent filer programs. Whatever you do, don't ignore it and get on it ASAP, because the longer it goes, the more those fines, they just keep accumulating. They get bigger and bigger and bigger.

Jamie Nau: Especially because you mentioned early on, you know, the Form 5500 it is a tax or an IRS form, but it's not like you pay taxes on it. It's just a form that's being submitted for data purposes, but also to check the compliance of your plan so you don't want to have to incur charges on something we really don't have to pay outside of paying auditor fees. So I think that's really important. And again, really good tips there on raising your hand. It's a lot easier than waiting for the letter to come and then starting to incur those penalties because, like you said, the penalties are not cheap.

Kim Moore: They're getting bigger, too. The other thing I would say is that every year they inflation adjust them, so they get bigger every year and it's, a per day dollar amount. Congress does not have a lot of sympathy in this area. So every so often they'll just attach to another bill that we've just raised it again. So they're not going to go away. They're not going to get smaller. It's only going to get worse.

Jamie Nau: Great. Well, I think this was a really informative. Kim, I know I learned a lot, so I appreciate you coming on and hitting this topic. Hopefully our listeners appreciate it as well. Thank you.



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