Form 5500 Filings Can Reveal Prohibited Transactions

Retirement plan sponsors should be on the lookout for prohibited transactions that may or should be revealed on the Form 5500 filing.

They are relatively easy to avoid, but could trigger an investigation if they slip through. Schedule H of the form asks the plan sponsor if there were there any nonexempt transactions with any party-in-interest. Leaving the answer to this question blank could be a red flag, according to Linda Fisher, principal of Linda T. Fisher Form 5500 Consulting in Chicago, and answering it (but leaving out a dollar amount) is also a potential red flag.

Small plans are more susceptible, Fisher says. “They might have money invested in the real estate of the business, which is not supposed to be part of a plan’s assets,” she tells PLANSPONSOR. Owning an apartment building or storefront is fine, but who manages the property is another issue. The key is to look beneath answers on the form and information about investments. Someone needs to ask probing questions, which can be a challenge for small, one-person plans—especially if they are creative with their investments.

For example, plan sponsors should consider who is managing those properties? If it’s the son of the plan sponsor, this is likely a prohibited transaction, Fisher points out. Small plans especially may not understand all the rules about what the plan can and cannot invest in legally, she says. Larger plans naturally have more resources and investment committees to perform due diligence to spot these issues.

Fisher says sometimes the plan sponsor doesn’t understand all the information the form asks for, and the smaller the plan, the larger the chance it can miss answering a question. She feels small-plan sponsors often legitimately have no idea how to navigate all parts of the form accurately, making guidance essential.

Fisher’s recommendation is for plan sponsors to find an Employee Retirement Income Security Act (ERISA) attorney who assists with setting up the plan correctly without getting into prohibited transaction issues— determining allowable and prohibited plan investments, and who can and cannot be involved in the investment.


Fisher notes that the preparer of the Form 5500 is usually not the plan sponsor, so the plan sponsor should spend more time on due diligence; for example, looking at trust statements for possible prohibited transactions. “Real estate is always a red flag,” she says. “Valuables other than cash that the plan may hold are often plan assets that should be looked into further.” Other investments to examine carefully in small plans could be jewelry or antiques. The auditor can spend hours digging deeper with the client to get as much information as possible about potential prohibited transactions.

Another situation to look out for is when money is not going into the plan the way it should, potentially signaling the misuse or stealing of plan assets. The plan sponsor should alert the auditor to this potential situation, Fisher says. The plan sponsor should consider any questionable transactions during the year to share with auditors when it’s time to fill out the form.

Fisher says plan sponsors should be aware of a new type of prohibited transaction related to providing service provider compensation. “If they refused to provide information about 12(b)1 fees or compensation, you’re supposed to report it on the Schedule G,” she says. It is used as a scare tactic for providers, and it seems to work quite well, according to Fisher. It’s possible that this scrutiny on fees could motivate more providers to use flat-fee arrangements or direct rather than indirect fees, she says, but there is no way to know how the industry will ultimately respond to this. For now, though, the fee information must be provided.

If a plan sponsor realizes it does in fact have a prohibited transaction, it must properly report the transaction on the proper form (Form 5330) and pay an excise tax. Fisher estimates the excise tax at 15% of the transaction. She says this should be done voluntarily by the plan sponsor; if found out by the government, the fees will be higher.

“The bottom line is, always have an ERISA attorney accessible to make sure your plan is in compliance, because you don’t want to risk those assets becoming disqualified,” Fisher says.