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Commentary

Answers to 401k 5500 IRS Tax Form Reporting

A Tip About 401K:

Employees rank 401(k) plans second only to health benefits when it comes to employer-offered benefits they desire. 401(k)s offer employees an unmatched long-term savings potential, primarily because neither 401(k) contributions nor their earnings are subject to income tax during all the years plan participants contribute before retirement. One example of a small company 401k with high participation rates is Target Labs (www.targetlab.com ).

 

Q: How and when is the accounting information for a 401(k) plan reported to the IRS?

A: A plan's accounting information must be reported to the IRS each year on the Form 5500, which includes an income statement and balance sheet. Plans with 100 or more participants must be audited by an independent accountant. 


 

Q: What information is reported on the Form 5500? -TOP

A: The Form 5500 must provide a statement of assets and liabilities, a statement of changes in net assets available for plan benefits and footnotes discussing changes in funding policy or plan benefits. Other information that must be reported includes: the number of participants in the plan; the names and addresses of the plan's fiduciaries; the names of  any people paid compensation from the plan, along with the amounts they received and the nature of the services they provided; and explanations for any changes in the plan's trustee, accountant, insurance carrier, administrator, custodian or investment manager. 


 

Q: Is there a penalty for failing to file the Form 5500? -TOP

A: Yes. Two separate penalties apply to the plan and to the plan administrator. For the plan, the Internal Revenue Code imposes a $25-a-day penalty for failing to file a Form 5500, up to a maximum of $15,000. Under ERISA, a plan administrator also may be subject to a penalty of up to $1,000 per day for failing or refusing to file the Form 5500. This penalty must be paid by the plan administrator, not by the plan. In April 1995, the Dept. of Labor put in place a Delinquent Filer Voluntary Compliance (DFVC) program for those who have failed to file Form 5500. Those delinquent filers who come forward will have their penalties greatly reduced. 


 

Q: Does an employer have to report an employee's 401(k) distribution to the IRS?-TOP

A: Yes. All distributions from a 401(k) plan must be reported to the IRS on Form 1099-R, "Statement for Recipients of Total Distributions From Profit-Sharing, Retirement Plans, Individual Retirement Accounts, Etc." The employee must be provided with a copy of the 1099-R form as well. 


 

  Q: What must be included in a SAR? -TOP

A: 1. name of the plan and employer ID number
2. the period covered by the annual report
3. a basic financial statement of the plan
4. a notice advising the participant that a copy of the full annual report is available on request, that the individual may obtain add'l info regarding the annual report, and that the individual may inspect the annual report at a designated location of the employer or at the DOL.


 

  Q: What are the audit requirements for small 401(k) plans? -TOP

A: The audit being referred to here is not the typical one done by an IRS agent. It's the audit required to be performed each year by an independent public accountant of a qualified retirement plan, which must be attached to the annual return filed with the Department of Labor (form 5500).

Up to now plans with less than 100 participants ("small plans") were automatically exempt from this audit requirement. Under final regulations issued last year by the Department of Labor, such plans may still be exempt from having the accountant's audit done. However, to have this requirement waived, small plans will now have to take four additional steps. 

1) At least 95% of the assets of the plan constitute "qualifying plan assets" (defined below), or any person who handles plan assets that do not constitute qualifying plan assets is bonded in accordance with section 412 of ERISA for the amount of such non-qualifying assets. All 401(k) Pro, Inc. clients use only qualifying assets (mutual funds, self-directed brokerage accounts, etc.)

2) The plan administrator is required to file an annual report (form 5500) each year with the Department of Labor. A summary of form 5500, called the Summary Annual Report, must be provided to each plan participant and beneficiary. Small plans will now have to include the following additional information in the Summary Annual Report in order to be exempt from the audit rules:

The name of each regulated financial institution holding or issuing qualifying plan assets and the amount of such assets reported by the institution as of the end of the plan year. However, this does not include employer securities, participant loans that satisfy ERISA section 408(b)(1) and participant-directed individual accounts. For 401(k) Pro, Inc. users the only financial institutions that need to be identified are the mutual fund companies.

3) The name of the surety company issuing the bond, if more than 5% of plan assets are non-qualifying assets. This requirement is moot for 401(k) Pro, Inc. plans.

4) A notice stating that participants and beneficiaries should contact the Regional Office of the U.S. Department of Labor's Pension and Welfare Benefits Administration if they are unable to examine or obtain copies of the regulated financial institution statements or evidence of the required bond, if applicable.


 

  Q: What is a "limited scope" audit? -TOP

A: A "limited scope" audit can be performed by a CPA firm when the pension plan assets are held by a bank, trust company or other such institution. It includes a review of the investment statements, the trustee's internal controls, employee eligibility, participant data and plan distributions. In 401(k) plans, confirmation of participant data typically includes deferral elections and individual account investment elections. This type of audit is rarely done by our clients because the auditors must be very involved with the investment companies housing plan assets.


 

  Q: What are the audit requirements for a large 401(k) plan? -TOP

A: Any plan that has 100 or more participants at the beginning of the plan year is considered a large plan, and must file a certified accountant's audit report with form 5500. In a 401(k) plan, the term "participant" includes any employee who is eligible to defer a portion of his compensation into the plan, whether or not he actually does defer or otherwise receives a contribution allocation.<

Where the number of participants is between 80 and 120 and an annual report was filed last year, the plan administrator may elect to treat the plan in the same manner as the previous year, even though the current participant count would otherwise put it in a different category.

Example: The annual report filed for 1999 reflected a total participant count as of the beginning of the year of 90. The plan was thus considered a "small plan" exempt from the audit requirement. In 2003, the plan had 105 total participants as of January 1. The plan would normally be considered a large plan for 2003, but the administrator may elect small plan status since the participant count does not exceed 120 and it had small plan status last year.

In the same manner, an administrator could elect large plan status if the participant count dropped from 110 last year to 95 this year, although there isn't much incentive to make that election.


 

QUICK REFERENCE CHARTS

The agencies developed two reference guides regarding the new Form 5500: Profile of Form 5500 Components and Quick Reference Chart for Filing the New Form 5500. Both are printed below.

PROFILE OF FORM 5500 COMPONENTS

Form
Component
Type of Information Collection Description
Form 5500 Overview information on type of annual return/report, type of plan, and schedules attached. Basic information identifying the filer with checklist for attached schedules.
Schedule A Information on contracts with insurance companies for plans and certain DFEs. Revised by adding questions to collect better data on type and value of insurance contracts.
Schedule B Actuarial information on defined benefit pension plans. Minor revisions to update for 1999 requirements.
Schedule C Information on service providers for large plans and certain DFEs. Limited to 40 highest paid service providers, eliminated list of trustees, and limited termination notice to accountants and enrolled actuaries.
Schedule D Information on participation in certain pooled investment/insurance arrangements (CCTs, PSAs, MTIAs, 103-12 IEs and GIAs). New standardized form for reporting information about Direct Filing Entities (DFEs) and participating plans.

 

Schedule E Information on ESOP plans.

 

No material revisions.
Schedule F Information on fringe benefit plans.

 

No material revisions.
Schedule G Information on nonexempt transactions and loans, leases and fixed income investments in default/uncollectible for large plans and certain DFEs. Streamlining current schedules of loans, leases, fixed income obligations in default/uncollectible and nonexempt transactions. (Note: Schedules of assets and reportable (5%) transactions are required to be filed, but not on computer scannable forms.)
Schedule H Financial statements and related information for large plans and DFEs. New schedule streamlining large plan financial questions on current Form 5500 and consolidating them into a separate schedule.
Schedule I Financial statements and related information for small plans. New schedule streamlining small plan financial questions on current Form 5500-C/R and consolidating them into a separate schedule.
Schedule P Tax exempt pension trust files to start IRS statute of limitations. No material revisions.
Schedule R Information on pension plans including plan distributions and funding requirements. New schedule revising pension plan questions on current Form 5500 and Form 5500-C/R and consolidating them into a separate schedule.
Schedule T Information on pension plan tax qualification requirements. New schedule revising tax qualification questions on current Form 5500 and Form 5500-C/R and consolidating them into a separate schedule that can be filed in accordance with the 3-year testing cycle under Rev. Proc. 93-42.
Schedule SSA Information required by Social Security Administration for pension plans on separated participants with rights to future benefits. No material revisions.


QUICK REFERENCE CHART FOR FILING THE NEW FORM 5500

 

 

 

 

Large Pension
Plan

 

Small Pension
Plan
Large Welfare
Plan
Small Welfare
Plan
DFE2 Fringe Benefit Plan
Schedule A (Insurance Information) Must complete if plan has insurance contracts. Must complete if plan has insurance contracts. Must complete if plan has insurance contracts. Must complete if plan has insurance contracts. Must complete if MTIA, 103-12 IE or GIA has insurance contracts. Not required.
Schedule B (Actuarial Information) Must complete if defined benefit plan and subject to minimum funding standards. Must complete if defined benefit plan and subject to minimum funding standards. Not required. Not required. Not required. Not required.
Schedule C (Service Provider Information) Must complete if service provider was paid $5,000 or more and/or an accountant or actuary was terminated. Not required. Must complete if service provider was paid $5,000 or more and/or an accountant or actuary was terminated. Not required. MTIAs, GIAs and 103-12 IEs must complete Part I if service provider paid $5,000 or more. GIAs and 103-12 IEs must complete Part II if accountant was terminated. Not required.
Schedule D (DFE/Participating Plan Information) Must complete Part I if plan participates in a CCT, PSA, MTIA, or 103-12 IE. Must complete Part I if plan participates in a CCT, PSA, MTIA, or 103-12 IE. Must complete Part I if plan participates in a CCT, PSA, MTIA, or 103-12 IE. Must complete Part I if plan participates in a CCT, PSA, MTIA, or 103-12 IE. All DFEs must complete Part II, and DFEs that invest in CCT, PSA, or 103-12 IE must also complete Part I. Not required.
Schedule E (ESOP Information) Must complete if ESOP. Must complete if ESOP. Not required. Not required. Not required. Not required.
Schedule F (Fringe Benefit Plan Information) Not required. Not required. Not required. Not required. Not required. Must complete.
Schedule G (Financial Schedules) Must complete if Schedule H, lines 4b, 4c, or 4d are "Yes."3 Not required. Must complete if Schedule H, lines 4b, 4c, or 4d are "Yes."3,4 Not required. MTIAs, GIAs and 103-12 IEs must complete if Schedule H, lines 4b, 4c, or 4d are "Yes."3 Not required.
 

Schedule H (Large Plan and DFE Financial Information)

Must complete. Not required. Must complete.4 Not required. All DFEs must complete Parts I, II & III. MTIAs, 103-12 IEs, and GIAs must also complete Part IV. Not required.
Schedule I (Small Plan Financial Information) Must complete. Not required. Not required. Must complete.4 Not required. Not required.
Schedule P (Annual Return of Fiduciary) Must file to start running of statute of limitations under Code section 6501(a). Must file to start running of statute of limitations under Code section 6501(a). Not required. Not required. Not required. Not required.
Schedule R (Retirement Plan Information) Must complete unless plan is neither a defined benefit plan nor subject to Code section 412 or ERISA section 302 and no benefits were distributed during the plan year. Must complete unless plan is neither a defined benefit plan nor subject to Code section 412 or ERISA section 302 and no benefits were distributed during the plan year. Not required. Not required. Not required. Not required.
Schedule SSA (Statement Identifying Separated Participants With Deferred Vested Benefits) Must complete if plan had separated participants with deferred vested benefits to report. Must complete if plan had separated participants with deferred vested benefits to report. Not required. Not required. Not required. Not required.
Schedule T (Qualified Pension Plan Information) Must complete if qualified plan unless permitted to rely on coverage testing information for prior year. Must complete if qualified plan unless permitted to rely on coverage testing information for prior year. Not required. Not required. Not required. Not required.
Accountant's Report

 

Must attach Not required. Must attach Not required. Must attach for a GIA or 103-12 IE. Not required.
1. This chart provides only general guidance. Not all rules and requirements are reflected. Refer to specific Form 5500 instructions and regulations for complete information.

2. DFE (Direct Filing Entitly) includes: bank common or collective trusts (CCTs) and insurance company pooled separate accounts (PSAs)(29 CFR 2520.103-3 and 103-4) that choose to file information on behalf of their participating plans; master trust investment accounts (MTIAs)(29 CFR 2520.103-1(e); investment entities filing under 29 CFR 2520.103-12 (103-12 IEs); and group insurance arrangements (GIAs) filing under 29 CFR 2520.103-2 and 104-43.

3. Schedules of assets and reportable (5%) transactions also must be filed with the Form 5500 if Schedule H, lines 4i or 4j are "Yes," but use of scannable form not required.

4. Unfunded, fully insured and combination unfunded/insured welfare plans covering fewer than 100 participants at the beginning of the plan year that meet the requirements of 29 CFR 2520.104-20 are exempt from filing an annual report. Such a plan with 100 or more participants must file an annual report, but is exempt under 29 CFR 2520.104-44 from the accountant's report requirement and completing Schedule H, but MUST complete Schedule G, Part III, to report any nonexempt transactions.


 

  Q: If an employee terminates employment in 2003 and leaves his 401(k)account with a balance, is he still considered a "participant" on the 5500 in 2004? -TOP

A: Yes, an employee who terminates employment but leaves behind his/her 401(k) balance is still considered a "participant" for the IRS 5500. If an account balance remains then the participant is included in the number of participants entered on line 6 of the 5500. The participant count is based in line 6 of the 5500. "Participant" means any individual who is included in one of the following categories: 

From the 2003 5500 Instructions: 

1. Active participants include any individuals who are currently in employment covered by a plan and who are earning or retaining credited service under a plan. This category includes any individuals who are eligible to elect to have the employer make payments to a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under a plan. This category does not include 


(a) nonvested former employees who have incurred the break in service period specified in the plan or 
(b) former employees who have received a "cash-out" distribution or deemed distribution of their entire nonforfeitable accrued benefit.

2. Retired or separated participants receiving benefits are any individuals who are retired or separated from employment covered by the plan and who are receiving benefits under the plan. This includes former employees who are receiving group health continuation coverage benefits pursuant to Part 6 of ERISA and who are covered by the employee welfare benefit plan. This category does not include any individual to whom an insurance company has made an irrevocable commitment to pay all the benefits to which the individual is entitled under the plan. 

3. Other retired or separated participants entitled to future benefits are any individuals who are retired or separated from employment covered by the plan and who are entitled to begin receiving benefits under the plan in the future. This category does not include any individual to whom an insurance company has made an irrevocable commitment to pay all the benefits to which the individual is entitled under the plan. 

4. Deceased individuals who had one or more beneficiaries who are receiving or are entitled to receive benefits under the plan. This category does not include an individual if an insurance company has made an irrevocable commitment to pay all the benefits to which the beneficiaries of that individual are entitled under the plan.


 

  Q: When a participant takes a 401(k) loan, how is it reported in the IRS 5500? -TOP

A: Loan withdrawals are reported on line 1(a) of the IRS 5500 because participant loans are considered plan assets that have not been removed from the plan, but merely moved from one " asset catergoy" within the plan to another. No plan assets have been distributed as such, and thus the loan is not reported as a distribution in the IRS 5500. [From Tagdata.com 5/9/01].


 

  Q: What is required for IRS 5500 reporting for 403(b) plans? -TOP

A: 403(b) plans are eligible for limited annual reporting. They need to only complete form 5500 part I and part II, lines 1 through 5, and 8 (enter pension code 2L or 2M or both).


 

  Q: When a company's plan is top heavy and makes the 3% corrective contribution, when must it be made by? Also, if the corrective contribution is made after the plan year, how is it included in the 5500?? -TOP

A: IRS has not stated a deadline for top heavy contributions. Generally, the due date of the employer's return is considered the limit. TAG's opinion is that the top heavy minimum must be made within 12 months after the end of the plan year. This is the same 12 month rule that applies to deferrals and matching contributions in a 401(k) plan. It will be classified as a employer contribution for 5500 purposes. (TAG)


 

  Q: Is it true that there is no longer a 20% back-up withholding requirement required for 401(k) hardship withdrawals?- TOP

A: Yes. (TAG 8/01)


 

  Q: Does the 20% back-up withholding still apply to all lump-sum distributions from a 401(k) plan?- TOP

A: Yes. (TAG 8/01)


 

  Q: Instructions for handling Plan Administrator's nine-digit EIN (Employee Identification Number).- TOP

A:

1. If new client does not mention the need for an EIN you are instructed NOT to say anything about it during the entire sales cycle. The need for an EIN will surface around the time 5500s are submitted. If a 5500 is submitted by a company that does not have a Plan Administrator EIN there is a chance the IRS will return it (no penalty will be assesses) with an application for the employer to process. We stay out of it, except to confirm AFTER THE FACT that EIN is required.

2. If new client mentions the need for EIN, you are to direct them to the IRS website (www.irs.gov) where they will find application and instructions. Again, we are not to get involved in the application process.

Our official position is that the company's EIN can be used in place of a Plan Administrator's EIN because after the plan administrator role is moved around within a company, and we think it is unnecessary for multiple people to apply for EINs over time.

I am taking this hard line because ANY unnecessary mention if IRS requirements or regulations can easily have a chilling effect on a new client, and may actually kill a new sale. It is just not worth the risk to us, and there is no problem for the client downstream in getting an EIN at a later date. Our standard excuse for not mentioning EIN earlier is that it was a simple oversight, with no negative consequences to the employer.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.jamesagilbert.com and www.profit-sharing.com.


 

  Q: When an employee terminates employment and takes a lump sum distribution, what form is used to send with the 20% backup withholding which is sent to the IRS? How soon after the distribution is made must this payment be made? - TOP

A: Federal Tax Deposit Form (Form 8109-B). Generally, income tax withheld from plan payments must be deposited with an authorized financial institution or a Federal Reserve bank or branch. A Federal tax deposit form must be included with each deposit. The timing requirement follows payroll withholding deposit rules.


 

  Q: Which states allow participants in a 401(k) plan to defer the state income tax on their 401(k) deferrals? - TOP

A: Those states (in 2000) following federal law on the treatment of Code Sec. 401(k) contributions are:

Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Rhode Island
South Carolina
Utah
Vermont
Virginia
West Virginia
Wisconsin

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