Penalties for IRS Forms 5500 and 8955-SSA
You may be familiar with the SECURE Act, but chances are you may not be familiar with revenue provisions that affect employers, employees, and retirement funds. A lesser discussed section of the SECURE Act is the Revenue Provision which increases the penalties for late and incorrect filing of IRS Forms 5500 and 8955-SSA by tenfold. The substantial increase reiterates timely and correct filings.
New SECURE Act Provision Deadlines and Penalties
Many of the provisions in the SECURE Act are effective for plan years beginning January 1, 2020 but the Revenue Provisions are effective for any return or Schedule due after December 31, 2019.
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What is the penalty for late filing for IRS Form 5500?
The IRS has taken the position that a materially incomplete Form 5500 is not considered filed and is subject to late penalties. An inaccurate Form 5500 that underreports the number of participants on the first day of the plan year would be materially incomplete if the required Auditor’s Opinion is not submitted with the filing.
It’s common for plan sponsors to rely on their service providers to assist them in operating their plan, but it’s the plan sponsor’s responsibility. It is prudent to review internal operational policies, procedures and controls to ensure compliance. The Revenue Provisions focus on three areas providing insight into the what’s important to regulators and areas of broad concern.
- The penalty for late filing or materially incomplete Form 5500 increases from $25 to $250 per day with a maximum penalty of $150,000.
- The penalty for incorrect Annual Registration Statement and Notification of Changes reported on Form 8955-SSA increases to $10 per day per participant with a cap of $5,000 per year. The penalty is cumulative until resolved.
- Failure to provide notice to participants who are entitled to pension distributions results in a penalty of $100 per participant with an annual maximum of $50,000.
What is the Security Act (ERISA)?
Enacted in 1974, the Employee Retirement Income Security Act (ERISA) establishes reporting requirements of employee benefit plans. IRS Form 5500 serves as the plan’s annual return and filed with the Department of Labor (DOL). Multiple government agencies, including the IRS, DOL and PBGC (Pension Benefit Guaranty Corporation), receive the information covering a broad range of compliance issues.
What is the purpose of IRS Form 8955-SSA?
IRS Form 8955-SSA, also known as the “annual registration statement,” notifies the Social Security Administration of participants who have separated from service with a vested balance in the plan. The initial reporting must be no later than the plan year following the year in which they separated from service. If the participant’s balance is distributed later, the participant must be listed again showing they no longer have a vested balance in the plan.
What is the purpose of IRS Form 5500?
A key checkpoint on IRS Form 5500 is Part II, 5a, labelled “Total number of participants at the beginning of the plan year.” The significance here is the number 120. Plans with more than 120 participants on the first day of the plan year must have an audit by an independent CPA.
What if the number of retirement plan participants does not exceed 120?
If the number of participants does not exceed 120, then the plan is not subject to the annual audit requirement. Payroll inaccuracies can lead to substantial costs the plan or plan sponsor would have otherwise not been subject to.
The IRS has been known to use other components of Part II, 5 of the Form 5500 to extrapolate a partial plan termination. Under a partial-plan termination vesting accelerates to 100% for the affected participants, impacting the number of participants to report on Form 8955-SSA.
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Payroll and Forms 5500 and 8955-SSA
The starting point for a well-operated plan is the payroll. Inadequate controls and procedures will materially impact the downstream data used to compile the Form 5500 and Form 8955-SSA. Compliance failures occur when the plan sponsor’s payroll system cannot track and provide key data-points needed for the proper administration of the plan. Best practice then becomes either enhancing the payroll system or adopting a plan with simplified inputs the plan sponsor’s payroll system can trace.
Best Practice Checklist
A best-practice checklist reviews personnel, payroll and accounting systems, and plan operations. The internal controls for personnel, payroll and accounting systems should answer the following questions, explicit guidance and show personnel how the systems should provide data needed to operate the plan.
Personnel / Payroll / Accounting Systems
- Is there a Human Resources department? If so, identify the individual in charge.
- Are payroll functions performed in-house or by a third-party payroll administrator?
- Identify the responsible individual or organization.
- If there is a third-party payroll administrator, how is the information communicated?
- Who is responsible for collecting and transmitting payroll information?
- Who is responsible for maintaining accurate employee data (date of birth, date of hire, date of termination date of rehire)?
- Who is responsible for tracking hours worked?
- Who prepares the payroll checks? What levels of authorization are required for disbursement?
- Who prepares the payroll related returns such as the Forms 940 and 941?
- How many people are involved in the personnel function?
- Is there a separate accounting department? If so, identify the individual in charge.
- Who handles the day-to-day administration of the plan?
- How many people are involved in the retirement plan accounting? Identify those involved.
- Are any of the same people involved in both the retirement plan administration and the personnel function?
- How are newly hired employees informed of the company’s retirement plan or changes to the plan?
- Who makes the determination of when an employee is eligible for participation in the plan?
- How is employee data transmitted to the plan’s record keeper?
- Who is responsible for reviewing and reconciling payroll data with plan census data?
- What is the frequency of review and reconciliation?
Pension plans are less prevalent, but the reporting and notice requirements are as important as ever. Participants who have separated from service may not be aware of their benefits under their previous employer’s pension plan. When the participant satisfies the requirements to receive distributions from the plan it requires the plan sponsor to provide a notice of the distributable benefits. The penalty for failure to provide notice increases to $100 per participant with an annual maximum of $50,000.
Note: You must notify participants under the SECURE Act.
A common theme in the Revenue Provisions of the SECURE Act is that we must notify participants who have separated from service of benefits they are entitled to under the plan. The plan sponsor is charged with showing compliance with the notice and reporting requirements.
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Corporate Financial Planning Assistance from ERISA
Any qualified retirement plan, 401(k), profit-sharing plan, a cash balance plan or traditional pension plan is a trust that is set up for the benefit of beneficiaries of the trust. The beneficiaries are current participants or terminated participants with a vested interest in the trust. For a plan to keep its preferential tax treatment, the plan must satisfy the annual reporting requirements imposed by ERISA.
Failure to do so can jeopardize the qualification status of the plan or result in significant penalties. Besides the annual reporting requirements, the IRS, DOL and PBGC want to ensure participants have knowledge of their vested benefits in all plans sponsored by their previous employer. Reviewing best practices and internal controls should facilitate compliance.
Find 401K Solutions with ERISA.
If you’re looking for a partner to provide answers to your questions about employee retirement funds, ERISA can help. Our goal is to make planning for retirement as easy as possible for both employers and employees. Contact us to learn more about our tailored investment services.