Yesterday, in conjunction with the Internal Revenue Service, the U.S. Department of Labor (DOL) held a two-hour webinar on the proposed changes to the Form 5500. The proposed changes are intended to correspond with the IRS changes to the electronic filing of data and the new EFAST2 filing process scheduled to go live in January 2020. The DOL lumps the changes into one of five broad initiatives:
- Modernize the financial statements and investment information filed about employee benefit plans.
- Update reporting requirements for service provider fee and expense information.
- Enhance accessibility and usability of data reported on forms.
- Require reporting by all group health plans covered by Title I of ERISA.
- Improve compliance through new questions on plan operation and financial management of the plan.
If adopted, Form 5500 will be required of all ERISA group health plans regardless of size or funding method. Grandfather status, benefit managers, and claims data is among the information requested under the proposal. Expanding the filing requirement will provide the agencies with data on all 4.6 million employer sponsored health and welfare plans. Data requests are expanded to demonstrate compliance with the Mental Health Parity Act, the Affordable Care Act, HIPAA and COBRA. Where data is not requested, a plan fiduciary will be responsible for certifying a plan’s overall compliance to establish accountability for the integrity of the data used in the report.
As proposed, the forms will eliminate the use of attachments and require data to be reported with common identifiers and in a computer-readable format to assist in searching, data-mining and for analytic purposes. The level of fiduciary compliance can be more readily assessed from the data reported on investments and their performance, vendors and their fees, party-in-interest transactions, and other activities indicative of the effectiveness of a 401(k) plan’s investment and administrative policies. The DOL is clear that the proposed “form will provide the [DOL and IRS] with improved tools to focus oversight and enforcement resources” with more precision and effectiveness.
Under current rules, a plan administrator is permitted to instruct the financial auditor not to perform any auditing procedures with respect to investment information prepared and certified by a bank or similar institution or by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency. The election is available, however, only if the trustee or custodian certifies both the accuracy and completeness of the information submitted. The DOL has found enough incidents of limited-scope audits being certified by trustees and custodians that were ineligible to issue a certification, or being issued on insufficient certifications, or without any certification at all, to ask for changes to the certification process. The proposed changes are seeking to correct for these inadequate certifications with new certification requirements, reporting information on the peer review of the independent qualified public accountant that reviewed the financials, and the name of the audit partner to encourage more involvement and oversight of the audit process by the responsible person.
Federal Register Vol. 81 No. 140 page 47533 includes a Guide to Data Elements which sets out the proposed changes to the form in a very understandable format. Even if they are not adopted in their entirety, the proposed changes provide a peek into the future of agency investigation and enforcement. Relying on digital reports, the agencies see enforcement advantages and efficiencies of “arm chair” auditing. Let the computers compare reports filed by the same and different plans to locate high risks of compliance failures, prohibited transactions, and comparably and consistently weak investment performance and to decide whether to further investigate. The value to the agencies and participants from data mining is obvious and a critical component of the new EFAST2 process. While the final regulations will not be effective until 2019, plans now have an opportunity to self-audit their compliance, performance, processes, and procedures as it may be measured by the DOL and IRS in the very near future. Plans can measure their level of its compliance by merely accessing the data required of, and reviewing its responses to, the proposed Form 5500.
You can view yesterday’s webinar by clicking here. Meanwhile plan sponsors, auditors, actuaries, insurers, trustees, custodians, plan fiduciaries, and other stakeholders can read the proposed changes in the Federal Register found in the sites above and consider providing comments either individually or through a trade or professional association. Comments are being accepted through October 4, 2016.