Finalized Form 5500 Changes Add Little to Plan Sponsors’ Responsibilities

While plan sponsors will need to ensure the form contains accurate data, many of the proposed changes to the 2021 Form 5500 were not finalized.

Each year, the Department of Labor (DOL) issues changes to the Form 5500, which contains information about a retirement plan’s financial condition, investments and operation. This year’s finalized changes focused on pooled employer plans (PEPs), multiple employer plans (MEPs) and additional responsibilities certain plan sponsors must satisfy, according to retirement industry experts.

Several of the changes to the Form 5500 recognize new rules that were implemented with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, including those dealing with PEPs, the latest evolution in the U.S. retirement marketplace. Changes to MEPs, meanwhile, will allow employers without a common nexus to group together more easily under a common retirement plan and shared governing document, the Form 5500.

More Information

Regulators have added to plan sponsor responsibilities with Form 5500 changes in successive years and this was no exception, says Ellen Goodwin, counsel at Groom Law Group.   

The Internal Revenue Service (IRS) and the DOL “keep adding more and more information to the Form 5500 in a piecemeal fashion and the plan sponsors have a duty to review the Form 5500 to certify that it’s completely accurate,” she says. “There’s just more and more information and more detailed information that gets added to the form, and it just increases the plan sponsor burden and liability for reviewing the form and making sure that the sponsor can certify that it’s complete and accurate to the best of the sponsor’s knowledge.”

Plan sponsors have had to increase the level of diligence that is required to ensure the form is complete and accurate because the amount of information they’re required to provide has increased, Goodwin notes.

“It’s becoming a harder and harder tool for plan sponsors to administer on an annual basis,” she says. “A lot of the burden of the form itself falls on service providers to fill out for the plan sponsor clients, but it all falls back on the plan administrator—which is usually the plan sponsor—to certify that it’s complete and accurate.”

All U.S. defined contribution (DC) and defined benefit (DB) plans covered by the Employee Retirement Security Income Act (ERISA) must file the form annually with the DOL and the IRS.  

Goodwin says, among the proposed but not yet finalized changes not connected to the SECURE Act, the DOL considered adding eight new categories of administrative expenses to the income and expense statement on Schedule H within the Form 5500. With the additional categories, there would be at least 10 different expense categories, she adds.

“That means plan sponsors, service providers and recordkeepers would have to do additional work,” Goodwin says. “Breakout expense categories on the Schedule H, that’s a very significant change.”

One proposed change helpful to plan sponsors was changing rules for them when counting the number of participants in a DC plan, Goodwin notes. “That is a hugely favorable change for plan sponsors and should help a lot of plan sponsors avoid getting a [financial] audit when they had to do so before,” she says.

Regulators proposed changing the method for how to count the number of participants to only include those with an account balance under the plan, from counting all those who are eligible to participate in the plan.

“It’s very favorable [to plan sponsors] because some plan sponsors have a plan where only 50 participants might actually participate in the plan, but another 100 participants were actually eligible to join the plan but refused to join,” Goodwin says. “In that circumstance, the plan would have to be audited by an independent auditor each year and the audit is a process that can take many months, and it’s very expensive.”

Down the Line

Additional changes the DOL proposed for plan sponsors but did not finalize include standardized electronic filing requirements that aimed to improve the usability of data collection, contained in the Schedule H, Line 4i Schedule of Assets.

Goodwin says she is particularly concerned for how the change to mandate standard electronic filing would affect DB and DC plan sponsors, and that this could be reassessed in the DOL’s spring regulatory agenda.

“The line 4i attachments is basically a list of all of the assets held by the plan at the end of the year,” she says. “Some plans have hundreds, if not thousands, of investments—the large defined benefit plans, for example, and large defined contribution plans—and I’m a little bit more worried about what kind of compliance will be required to translate the plan assets into this standardized electronic filing format that the DOL appears to want to require.”

Regulators also punted on proposed changes that would have allowed defined contribution group (DCG) plan sponsors that share a recordkeeper, trustee and other attributes to file a single Form 5500, says Michael Weddell, director of retirement at Willis Towers Watson.

SECURE Act Changes

The biggest changes to the Form 5500 are to operationalize PEPs and MEPs and put systems in place for these to be used for DC plans, says Bill Ryan, partner and head of defined contribution solutions at NEPC.

SECURE Act changes will allow employers without a common nexus to join a PEP and file a single Form 5500, meaning PEPs will allow two employers regardless of industry to band together in a retirement plan.  

While the PEP and MEP changes were expected in connection with the SECURE Act, having these in effect clarifies that plan sponsors can better manage limited resources by outsourcing administrative tasks, Ryan says. 

“As resources are strapped, so as businesses focus on the core business, employers will be able to actually outsource some things,” he says.