The retirement plan community has anticipated changes to the Form 5500 series for the past several years, as the last two major revisions occurred in 1999 and 2009. The Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guarantee Corporation (PBGC) (collectively, the “Agencies”) have indicated revisions are necessary because the Form 5500 has not kept pace with market developments and changes in laws covering employee benefit plans, and there have been increasing problems with outdated and missing information being reported by plan sponsors. The Agencies also view this as an opportunity to satisfy certain Affordable Care Act (ACA) reporting requirements addressed in the proposal. The majority of the 800 pages of proposed revisions will take effect for plan years beginning on or after January 1, 2019, while, certain revisions may go into effect sooner. However, the sheer volume of the proposed regulations may draw many comments and potentially criticism that might affect the rollout of the proposed revisions.
Plan sponsors must get ready for the dramatically increased reporting requirements. To respond in a timely fashion, plan sponsors must carefully plan, coordinate, and review all provided or compiled information. Additionally, plan sponsors must recognize that there will be increased scrutiny and inquiries of the data they provide. The complexity of the proposed changes will likely increase the internal and external Form 5500 preparation time and cost.
The proposed regulations address five main goals:
- Modernizing financial and investment reporting by retirement plans
- Providing greater information regarding group health plans
- Enhancing data collection and usability
- Improving service provider fee and expense information
- Enhancing compliance with Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code)
Modernizing financial and investment reporting by retirement plans
The Agencies have recognized for some time that the Schedule H asset and liability statement and income and expense statement were in need of revisions as the asset categories have not significantly changed since 1975 when the Form 5500 series was first introduced; yet, the makeup of retirement plan assets has changed dramatically. Therefore, the Schedule H revisions have been designed to improve reporting of alternative investments, hard-to-value assets, and investment through collective investment vehicles and participant-directed brokerage accounts. The Agencies also hope the revisions will provide improved transparency of financial products and investments.
The reporting of the assets for Form 5500 purposes does not necessarily coincide with the reporting of assets for GAAP purposes. Increased coordination between the 5500 preparer, the trustee, and the auditor may be necessary to ensure compliance in this area.
To aid in the ongoing monitoring of retirement plans, the Schedule of Assets Held will also be streamlined with a prescribed format. The intent of the new format is to allow plan sponsors to use the Schedule of Assets Held to evaluate year-to-year performance, liquidity, and risk characteristics of a plan’s individual investments. The Agencies are also hopeful that the improved format will allow for better capturing of data making it easier and more efficient to monitor holdings and allow plan sponsors and investment managers to understand how the investment holdings compare to similarly situated plans. Service providers can, in theory, also use the Schedule of Assets Held to identify plans with underperforming investments.
Small, retirement plan filers are not immune to the changes either. Plans eligible to file a Form 5500-SF would be required to provide a modest but additional breakout of plan investments on the asset and liability portion of the Form 5500-SF.
For small plans not eligible to file the Form 5500-SF, the Schedule I is proposed to be eliminated. In most instances, a plan would be ineligible to file using the Form 5500-SF because it is invested in hard to value and alternative investments. The elimination of the Schedule I would mean plans would be required to file the Schedule H along with line 4i, Schedule of Assets Held.
Small plans (regardless of whether they file the Form 5500-SF or Form 5500 with Schedule H) would still be eligible for a waiver of an independent qualified plan audit as long as the number of participants with account balances as of the beginning of the plan year is below the audit threshold. This notes another change. Whereas previously the audit requirement was driven off of the beginning of year participant count number, including those eligible but not contributing, the proposed changes would look at those with account balances only, seemingly requiring fewer plan audits.
The definition of “eligible participant” for 5500 retirement plan audit purposes will prospectively include only those current and former participants with account balances. Otherwise, eligible participants who may be eligible to participate but who have no current account balances need not be counted when determining whether an audit is necessary.
Providing greater information regarding group health plans
Currently, unfunded welfare plans are only required to file a Form 5500 if there are 100 or more participants as of the beginning of the plan year. Under the proposed regulations, any group health plan, regardless of size, would be required to file a Form 5500 annually. The unfunded, small plan exemption remains for other small welfare plans (non-healthcare related benefit plans such as disability only, life only, etc.). The Agencies estimate that currently, 2.15 million welfare plans exist that provide group health benefits and are currently exempt from the reporting requirements. This is one of the most significant changes in the proposal.
Reporting of small group health plan benefits is a major proposed change for which most small employers are not ready. It is common for employers to provide for certain employer-sponsored benefits such as health, prescription, dental, vision, and life insurance. Based on size, some employers may have had a Form 5500 filing requirement on their life insurance benefits for several years but not for other plans if they hovered right around 100 participants for the life insurance benefit only. Requiring small group health plans to file regardless of size could mean multiple 5500 filings per year for such employers if benefits are not “wrapped” together through a legal document.
ACA requires non-grandfathered group health plans and health insurance issuers offering non-grandfathered group individual health insurance coverage to make available to the DOL a host of information on health plan enrollment and claims. These regulations propose conforming amendments to clarify that compliance with the Form 5500 reporting requirements by plans subject to ERISA would satisfy the reporting requirements of the Public Health Services Act. The goal is to streamline reporting under multiple reporting provisions and reduce unnecessary duplication.
A new Schedule J is also proposed which will provide information about benefits and plan design characteristics, funding, grandfathered plan status, rebates received by the plan, service provider information, information on stop-loss insurance, claims processing and payment information, wellness program information, and other compliance information.
Enhancing data collection and usability
As part of the 2019 proposed revisions, the Agencies would like the proposed changes to allow for better review and monitoring of the investment data related to retirement plans. Some companies are using the current Form 5500 series and attachments to analyze this information, but it is cumbersome in the current format. The Agencies are hopeful that standardizing the Schedule of Assets Held and Schedule of Reportable Transactions to create a searchable format will help in this endeavor. They also plan to replace some of the current attachments to the various schedules with text fields to eliminate non-standard schedules (including some attachments to the Schedules SB and MB).
Improving service provider fee and expense information
When the Schedule C was revised with the 2009 Form 5500 revisions, the other fee regulations (ERISA 408(b)(2) and 404(a)(5)) had not yet been finalized. This resulted in a disconnect between what is required for Form 5500, Schedule C purposes and what is required to be disclosed to plan sponsors and plan participants. The Agencies also recognize the Schedule C is not providing the intended detail as most service providers are listed as receiving eligible indirect compensation (EIC) where no fee detail is required.
The intent with the proposed revisions is to harmonize the Form 5500, Schedule C reporting requirements with the now final disclosure regulations, especially ERISA 408(b)(2). The Agencies’ hope is that the revisions will make it easier to understand the disclosure and reporting rules regarding indirect compensation, improve the quality of data by minimizing differences in the Schedule C and 408(b)(2) requirements, and make the information easier to understand.
The proposed revisions eliminate the concept of EIC and require filers to report all types of compensation for ERISA 408(b)(2) covered service providers. The threshold for covered service providers is reduced from $5,000 to $1,000 in total compensation (direct and indirect). The threshold for other persons (non-covered service providers) remains at $5,000.
Other revisions include a new requirement that small retirement plans that are not eligible to file the Form 5500-SF and welfare plans that are funded by a trust with fewer than 100 participants to file the Form 5500, Schedule C. Defined contribution plan Form 5500-SF filers, as well as defined contribution plan Schedule H filers would have to attach the comparison chart that is required to be furnished to participants under ERISA 404(a)(5).
Also, a separate Schedule C is proposed to be required for each service provider. Currently, one Schedule C is filed with a separate line for each provider. Requiring a separate Schedule C for each service provider required to be reported on the Schedule C could result in some larger plan filers filing hundreds of Schedule C’s. Formulas are also no longer allowed when indirect compensation is present. Service providers will be required to estimate actual dollar amounts.
Plan sponsors should modify and improve existing processes for monitoring plan service providers:
- Inventory all service providers; identify covered service providers
- Put a process in place to timely obtain and evaluate disclosures
- Review service provider agreements at regular intervals
Enhancing compliance with Employee Retirement Income Security Act and the Internal Revenue Code
Recent changes to the 2015 Form 5500 series made it obvious that the Agencies were attempting to gather more compliance information from the annual returns/reports. This theme continues with the proposed revisions to take effect between now and 2019.
New questions are proposed regarding plan operations, service provider relationships, and financial management of plans. The Agencies are hoping these compliance questions will compel fiduciaries to evaluate plan compliance. These new questions will also provide the Agencies with better information to effectively oversee and enforce existing rules and regulations.
The DOL is encouraging feedback from the retirement plan community. Written comments must be received by the DOL by October 4, 2016.