Mistakes on your plan’s Form 5500 create a nice target for the Internal Revenue Service’s auditors. In its February 2, 2015 edition of Employee Plans News, the Internal Revenue Service explains that entering incorrect information or leaving a blank in a required field increases the likelihood you’re your plan will be selected for a compliance check.
The IRS provides a helpful list of common mistakes on the Form 5500:
- Number of Participants – Sponsors leave this field blank or enter zero when there are in fact assets and participants in the plan.
- Plan Terminations – Sponsors mark the 5500 to show they terminated the plan or adopted a resolution to terminate it, but the plan is still in existence. While the resolution starts the termination process, the plan is not terminated for 5500 purposes until the plan has a zero balance. Many plans that checked the box showing they were terminated did not reflect zero assets on the last day of the year of termination.
- Fraud – On the line requesting whether the plan lost money due to fraud, many plan sponsors enter the amount of the fidelity bond held by the plan, when this line should (hopefully) be blank.
- Frozen Plans – Sponsors listed pension code 1l, which applies to frozen defined benefit plans, when the plan wasn’t a defined benefit plan or frozen.
- Read each item and then read the instructions for that line. Don’t assume you know what information is being requested.
- Do not copy information from the prior year’s 5500 without first reviewing each item carefully to ensure you didn’t put information in the wrong box, leave an entry blank that should have information, or use an incorrect code.
- If you rely on a third party to prepare the 5500, carefully review it before submitting it.
- Consult with a benefits professional to institute sufficient administrative procedures to prevent mistakes on the 5500 and other informational returns.
If you find a mistake on your Form 5500, file an amended return as soon as possible. Digging into the issues presented in the Form 5500 can also help uncover operational errors, which should also be fixed in accordance with the IRS’ Employee Plans Compliance Resolution System (EPCRS) as soon as discovered.
While not covered in the IRS publication, employers should also note that 5500 errors are a source of Department of Labor investigations as well. In our experience, this is most often conducted as a “desk investigation” where the DOL sends a letter asking for clarification or correction of the Form 5500, but can sometimes result in a full-scale investigation.
The bottom line: do not to give the IRS or DOL “easy meat” by filling out your 5500s incorrectly.