Tips for Filing Form 5500 - July Business Services

1 Date falls on a weekend or federal holiday,the plan can file on the next regular busi-ness day. You can extend your Form 5500filing date by up to two and a half monthsby sending the IRS a completed Form5558 (Application for Extension of Timeto File Certain Employee Plan Returns)on or before the normal due on the Dotted LineFailing to sign the form is the number oneerror filers make. Make sure that you havethe proper signatures and dates on theForm 5500 or 5500-EZ and the attachedschedules that need a signature (SchedulesB, P, and SSA). The plan administratormust keep a copy of the completed annualreport with all required signatures as partof the plan s records, even if the forms arefiled CountEntering incorrect employer identifica-tion numbers (EINs) or plan numbers on forms, schedules, and attachments isanother common error. EINs may beobtained by completing IRS Form SS-4(Application for Employer IdentificationNumber).

2 The employer/sponsor or planadministrator assigns the plan IRS cautions not to include SocialSecurity numbers on Form 5500 schedulesThe Ends Don tJustify the Means34 All About RBDsSatisfying Top-heavyRequirements: It s All in the DesignInside2005 Issue: 2 Tips for Filing Form 5500It s that time again. To give employers ahand with this year s Form 5500 (AnnualReturn/Report of Employee Benefit Plan) Filing , the Department of Labor, the Pension Benefit Guaranty Corporation,and the IRS have come up with some tips for avoiding the most common Form5500 Filing Must File and WhenMost employee benefit plans must file a Form 5500 or Form 5500-EZ. Theseplans include 401(k) plans, 403(b) tax-sheltered annuities, profit sharing plans,defined benefit pension plans, moneypurchase pension plans, stock bonusplans, and certain welfare benefit of Form 5500-EZ is limited to one-participant few types of plans SIMPLE IRAs,most simplified employee pension plans(SEPs), governmental pension plans, andunfunded and/or insured welfare benefitplans with fewer than 100 participants, forexample are excepted from Filing .

3 Wecan tell you if your plan doesn t have to plan administrator or sponsor must file the required forms and schedules,statements, and attachments by the last day of the seventh calendar month afterthe end of the plan year generally July31, for calendar-year plans. If the filingor other attachments unless the form,schedule, or instructions specificallyrequire one. Form 5500 and most of the schedules and attachments areopen to public inspection. Because ofprivacy concerns, the IRS may reject aForm 5500 Filing if a Social Securitynumber is improperly included.(continued on page 2)WACO/MAIN OFFICE: (800) 691-4015 DALLAS: (877) 361-8377 HOUSTON: (888) 425-4989 AUSTIN: (888) 370-4015 CHICAGO: (888) 390-4015PO Box 220815950 N. Dallas Parkway, Suite 40012 Greenway Plaza, Suite 1100100 Congress Avenue, Suite 2000 The Mercantile ExchangeWaco, Texas 76703 Dallas, Texas 75248 Houston, Texas 77046 Austin, Texas 7870130 S.

4 Wacker Dr., 22nd FloorChicago, Illinois 60606 Most employee benefit plans mustfile a Form 5500 or Form 5500-EZ. Audit RequirementsLarger plans are required to be auditedannually by an independent qualifiedpublic accountant. They must attach acopy of the accountant s opinion toSchedule H (Financial Information).Generally, small plans those with fewerthan 100 participants as of the beginning22 The Ends Don t Justify the Meansinterest. He signed both the loan checksfrom the plan and the promissory notesthe companies gave to the plan. All of theloans were repaid with 12% loans didn t pass muster with theIRS, which assessed excise taxes andpenalties against Joe for participating inprohibited transactions. Under the taxlaw, a prohibited transaction occurs whena disqualified person deals with planincome or assets in his or her own inter-est or for his or her own plan s ArgumentJoe readily acknowledged that he was adisqualified person.

5 In addition to beinga fiduciary, Joe owned 100% of the com-pany sponsoring the plan. What Joe didargue to the IRS and the Tax Court wasthat (1) the loans weren t transactionsbetween him and the plan, (2) the loansweren t made to a disqualified person,and (3) he didn t benefit from the loans,either in the way of income or in thesense that his own plan account wasenhanced. He also pointed out that the loans interest rates were all above-market, the principal was repaid, and the plan s assets were Tax Court didn t buy Joe s argumentany more than the IRS did. The courtsaid that Joe was a disqualified personand noted his involvement in setting up the loans. Joe both made the decision to lend the plan assets and signed thepromissory notes on behalf of the borrowers. The Court also said that,even though no income or assets werereceived by his plan account, he had usedthe loan proceeds for his own benefitbecause of his interests in the borrowercompanies.

6 None of the evidence Joeprovided persuaded the court , the court held that Joehad to pay prohibited transaction excisetaxes and additions to tax for failure tofile excise tax returns.*Joseph R. Rollins, TC Memo the plan year can file the simplerSchedule I (Financial Information Small Plans) and elect a waiver from theaudit rule. A plan that has between 80 and120 participants and filed a small annualreport with a Schedule I for the previousyear may elect to continue as a small addition to being a small plan filingSchedule I, a plan has to meet other basic requirements to be eligible for the audit waiver: At least 95% of the plan s assets must be qualifying plan assets (mutual fund shares, investment and annuityTips for Filing Form 5500(continued from page 1)contracts issued by an insurancecompany, qualifying employer securi-ties, and certain other assets spelled out in the regulations), or Any person handling plan assets thataren t qualifying plan assets must bebonded if more than 5% of plan assetsare not qualifying assets.

7 (The bondmust equal or exceed the nonqualifyingasset s face value.)Also: The plan s summary annual report mustdisclose certain additional informationto participants and beneficiaries. The plan administrator must furnish,without charge, copies of statements theplan receives from financial institutionsholding or issuing the plan s qualifyingplan assets to any participant whorequests them. Similarly, upon request, the administra-tor must provide participants with evidence of any required 5500 is a complicated feel free to contact us to checkwhether your plan needs to be auditedand for help completing the form and its IRS doesn t smile kindly on prohib-ited transactions between a plan sponsorand a retirement plan. As a recent case*shows, this is true even if the sponsordoesn t directly profit from the transac-tion and it seems to benefit the plan andits in PointAs sole trustee and administrator of hiscompany s 401(k) plan, Joe was responsi-ble for investing, managing, and control-ling the plan s assets.

8 Between 1996 and1999, Joe made a series of loans totaling$700,000 from the plan to three othercompanies in which he owned a minorityWho Is a Disqualified Person? Any plan fiduciary, such as a plan sponsor or administrator A person providing Services to the plan An employer, any of whose employ-ees are covered by the plan An employee organization, any of whose members are covered by the plan A person who directly or indirectlyowns 50% or more of the employersponsoring the planAll About RBDs3 RBD stands for required beginningdate. It is the deadline for receiving thefirst required minimum distribution(RMD) from a tax-advantaged retirementplan. For a traditional individual retire-ment account (IRA), the rule is simple:The required beginning date is April 1 of the year following the year the IRAowner reaches age 70 . For a qualifiedretirement plan, such as a 401(k) plan,profit sharing plan, or money purchaseplan, the RBD rule is a bit more RBD for these qualified plans dependson whether or not an individual is a 5%owner and on his or her retirement 1 of the year following the year an individual reaches age 70 for thosewho are: Owners of more than 5% of a businessentity.

9 (See the definition of 5% owner.) Individuals who are not 5% owners,but who retire before or during the year in which they reach age 70 .April 1 of the year following the year an individual retiresfor those who are: Not owners of more than 5% of a busi-ness and who continue to work for theemployer beyond the year they reachage 70 .How is retirement defined for RBDpurposes?An employee is considered to be retired from an employer if his orher employment has been severed. Theperson s employment status with otheremployers is not considered. Thus, anindividual may be retired from one joband be subject to required distributionrules, even though he or she is workingfor another change in job status with the sameemployer is notconsidered to be a sever-ance from employment. For example, anemployee who transitions from full-timeto 800 hours of service a year is notcon-sidered to be retired and may continue to participate in the plan or make 401(k)contributions.

10 Thus, this person has notyet reached his or her happens when a 5% owner sells his or her interest?It depends. If theindividual was a 5% owner at his or herRBD, then the participant will alwaysbe considered a 5% owner, even if his or her interest is later sold. Conversely,if an individual becomesa 5% owner after RBD, he or she is notconsidered a 5% owner for RBD about RBD and plan documents?A retirement plan may define the , if a plan document sets theRBD at April 1 of the year following theyear participants reach age 70 , it doesnot need to adopt the broader regulatorydefinition of RBD. And the administra-tion of RMDs is if the plan document selects anRBD of April 1 after retirement ? Theprincipal argument for starting RBDs at age 70 is that non-5% owner partici-pants who work beyond 70 oftencount on RMDs to supplementtheir income. So, if a plan delaysthe RBD for non-5% ownersuntil retirementafter age 70 , it must reflect whetherdistributions are permittedfor active participants atand after age 70.