It is 2010 and that means you can no longer file a Form 5500 through the mail. Instead the filer and the form’s preparer will need to use the DOL’s program, EFAST2 (ERISA Filing Acceptance System). As is the case with any new system, many plan sponsors will be upset, surprised and confused on the mechanics of this new filing system.

Note that there are few exceptions to the electronic filing. Certain non-ERISA forms such as Form SSA (Annual Registration Statements for Deferred Vested Participants) and Schedule E (for ESOPS) are only filed via a paper form. In addition, filers of Form 5500 for a 2008 plan year (plan years beginning in 2008) can still use paper, at least until October 15, 2010. These 2008 plans can still file using EFAST1, but only through June 30, 2010. And finally, filers of Form 5500-EZ can choose to file via paper or electronically using EFAST2. Note that the EFAST2 filing of the Form EZ then makes that information subject to public disclosure. For other filings EFAST2 is now your only option.

Corrective filings under DFVC as well as amended and delinquent filings are all filed via EFAST2. For amended filings for 2009 and later plan years, you would start with the original filing, make corrections on that form and then you refile the form, all within the EFAST2 system. Only filers of Form EZ can file an amended form via paper, that is unless the original filing was electronic under EFAST2, then those amended forms must also be filed under EFAST2.

There are basically two software options under EFAST2 options. You can use the DOL’s internet option, called IFILE, or software from a third-party vendor. IFILE has limitations and is really only intended for small-volume filers such as a plan sponsor who prepares its own Form 5500. IFILE also does not provide instructions on completing the form, nor does it permit batch processing of several forms. Those are among the key features being touted with most third-party options.
The DOL is doing a good job of keeping plan sponsors and service providers up to date on the new filing process. It has posted FAQs about EFAST2 on its Web site. The Department is updating on a regular basis in response to inquiries from the public.

For those of you following this process, here is something you might have missed. While you must file electronically, you are still required to maintain a fully executed and signed copy of the form with all schedules, and attachments. The DOL holds that these are part of the plan’s records. Copies of that form would be available to participants, beneficiaries, and the DOL upon request. Apparently you may maintain this copy in an electronic format (e.g., a PDF format) as long as all signatures are visible.

Special rules apply to the “wet” signature of the plan’s actuary on Schedule SB or MB and the plan’s auditor on the audit report. The actuary and auditor provide the completed and signed documents that are submitted electronically with the rest of the filing.

There seems to be consensus that the greatest problem with navigating the EFAST2 process will be credentialing those involved and then getting the plan sponsor to apply those credentials at the time of the actual filing. In the past, the plan sponsor and plan administrator merely signed the form that was sent to them by their accountant or TPA and dropped the form into the mail. With EFAST2, the plan administrator, the plan sponsor, the transmitter and certain other parties associated with the creation of the form must first register using the EFAST2 website (www.efast.dol.gov). Incidentally, if you registered to use EFAST1, your credentials are no good on EFAST2, and you will need to register again.

There are five user types under EFAST2. You can register for all that apply to you if you will be performing multiple functions. The user types are as follows:

Filing Author: Filing authors can complete Form 5500/5500-SF and the accompanying schedules, submit the filing, and check on the status of the filing. Filing Authors cannot sign filings unless they are also the plan administrator and have the “filing signer” role.

Filing Signer: Filing signers are the individuals who will sign Form 5500. The signer’s signature indicates that to the best of the signer's knowledge and belief the filing is true, correct, and complete. Signers include Plan Administrators and Plan Sponsors. No other filing-related work may be done by the filing signer if they have only registered under this user type. In the great scheme of things, the plan administrator remains legally responsible for the timeliness of the submission of the form.

Schedule Author: Schedule authors can complete one or more of the schedules that accompany the form. Schedules created by a schedule author are not associated with a filing until the schedule is exported to the filing author who will include the schedule in the correct filing. Schedule authors cannot initiate, sign, or submit a filing.

Transmitter: Transmitters are the parties who transmit the completed filings to the EFAST2 system for processing on behalf of others. Transmitters are responsible for the security of all filing information prior to and during its transmission. A transmitter can be a company, trade, business, or individual.

Third-Party Software Developer: These are the organizations that create the software that is approved to comply with the requirements of the EFAST2 system. A Third-Party Software Developer can be a company, trade, business, or individual.

Obtaining these credentials must be by the individual and cannot be obtained by the service provider or the accountant. The DOL states that “…your client may come to your office, use a personal computer at home, or go to a public library or copying center with a computer, and register for credentials using free email accounts or an email account provided by your company (e.g., tpafirm.com)… PINs must be protected and not shared…”

Updated Form 5500 SF

The 2009 Form 5500 comes in two flavors: a regular form 5500 and form 5500-SF (simplified filing). The SF filing, as its name implies, is a simplified filing requiring less information than the normal Form 5500. This option to filing is available to plans meeting all of the following criteria:

• The plan is eligible for the small plan audit waiver;
• The plan holds no employer securities;
• The plan is not a multiemployer plan; and
• During the entire plan year, the plan only held assets that had a readily ascertainable fair market value.

This last criteria as to assets held includes participant loans; investment products issued by banks and licensed insurance companies that are valued at least once a year and investments in pooled separate accounts and common/collective trust vehicles.

Thus, most employer plans filing under the 80/120 participant threshold for a plan audit will file Form 5500-SF. Under the 80/120 rule, plans fewer than 121 participants at the beginning of the 2009 plan year may file under the form requirements that controlled their filing last year. Filers of this form do not file Schedules A, D, I, or R, but are required to attach Schedules MB or SB, if appropriate. And like other Form 5500 filing rules, the Form SF for 2009 and later will need to follow the requirements of electronic filing under EFAST2. Essentially, only filers of Form 5500 EZ are permitted to continue filing on paper after 2009.

Changing economic conditions have forced a number of plan sponsors who promised their employees a 401(k) match to revise that promise before the close of the year. Those employers need to wrestle with the impact of communicating bad news to their employees and determining whether not making a promised contribution would violate a Tax Code or ERISA requirement. 

Some 401(k) plans have a fixed match under a formula written into the plan that becomes an obligation. Assuming this match isn’t a safe-harbor match, there’s nothing that would prevent an employer from modifying a plan document during the year to eliminate the fixed match. Proper notice to participants must be given and that match is required up to the date that the change is effective.

Most 401(k) plans provide for only a discretionary match that can be modified each year. In such a case, the employer needs to do nothing to implement its decision to reduce or eliminate the match for the year.  However, many plan sponsors with a discretionary match tell their participants early in the year, through some form of written communication, what they expect to match at the end of the year. If they are careful, those plan sponsors probably include some caveat that the expected match is not guaranteed. However, what the employer sees as only a tentative promise may be viewed by participants as a set-in-concrete promise. Additionally, where there is no caveat, the promised discretionary match may appear to become fixed. Then, not making the announced match can become a problem. So the question becomes, “When does a statement of an intent to make the match cause that match to become a fixed obligation, that if not made, can lead to an operational failure or a claim of a fiduciary breach?”

As to a promised discretionary match, there is no simple answer. You must look at what the employer actually communicated to evaluate whether it became an obligation. Without some sort of caveat that the intended match would only be made if some threshold – say a profit is met -- it is likely that the employer would be obligated to make the match through the date the change is effective and communicated in writing to employees. Remember, a failure to make any promised match could expose the company to an employee lawsuit, including a possible class action.   Whether that action could result in a DOL or IRS investigation is likely dependent on if employees voice their complaint to those agencies.  In any case, not making a discretionary match probably wouldn’t result in an operational failure unless a prior communication made the contribution an unconditional promise.

Note: A Tax Code operational failure may not be as important as the fact that the plan fiduciary could be charged with an ERISA violation. This could occur when the plan sponsor made a promise that certainly some of the participants acted upon and, as a result, made a deferral for which they expect a match. Then, not making a match could lead to such a complaint.

Special rules apply to the termination of a match in 401(k) safe harbor plans.  An employer may freeze or amend mid-year a safe harbor 401(k) plan which provides a safe harbor matching contribution (basic or enhanced) formula, in order to reduce or eliminate future safe harbor matching contributions. However, an employer may not freeze or amend mid-year a 3% employer nonelective contribution safe harbor 401(k) unless a severe hardship exists. The only way to eliminate the safe harbor nonelective contribution mid-year is to terminate the plan. However, terminating the match to such a plan would be subject to the rules described below.

To freeze or amend mid-year a safe harbor 401(k) plan that provides the safe harbor matching contribution, the plan must:

• Provide a notice of the plan change to the employees at least 30 days before the effective date of the amendment to reduce or eliminate the match;
• Provide the employees a reasonable opportunity to change their deferral election;
• Adopt an amendment to reduce or eliminate the matching contribution formula, effective at least 30 days after the amendment’s adoption date;
• Fund the match through the date of the amendment; and
• Apply current year testing for the entire year for both the ADP and ACP tests

The IRS has issued its 2010 “dirty dozen” list of tax scams, and once again, one item references certain operations of retirement plans.  Under the heading “Abusive Retirement Plans,” the list states:  “The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs).”

The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisors who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.”  Unfortunately, the IRS did not include any additional explanation, so we are left to speculate on the type of activities regarding LLCs that the IRS finds objectionable.  You can see the other eleven entries at: http://www.irs.gov/newsroom/article/0,,id=136337,00.html.

According to an EBSA press release, a DOL administrative law judge ordered a plan administrator to pay a civil penalty of $86,500 for failing to file a complete and accurate Form 5500 for the 2004 plan year. The plan administrator was responsible for the Airport Hospitality, LTD 401(k) Plan located in King of Prussia, Pennsylvania. EBSA determined that the Form 5500 lacked an acceptable independent qualified accountant’s opinion and a schedule of assets held for investments. The plan could not be audited because the plan administrator claimed that sufficient records could not be found following the bankruptcy of the employer.

The plan administrator had appealed the EBSA civil penalty assessment for not providing the plan audit and the schedule of assets, but had made no attempt to try to rectify the problem. That indifference, no doubt, did not help the appeal, which was denied. The message here should be if you want to succeed in such an appeal, first get the violations corrected.

The judge concluded that the plan administrator's bankruptcy did not relieve the fiduciary of its duties and that the fiduciary had deliberately elected to sell its business locations without preserving necessary plan records, as required by ERISA. The press release quotes the chief accountant of EBSA as saying: “Hotel workers are among the most vulnerable participants we protect. This case sends a strong message to employers that they must keep personnel and payroll documents for a sufficient time period so they can be checked for accuracy and completeness.”

This decision highlights a tendency of employers to ignore duties related to plan sponsorship when the business is winding down. In January 2010 alone, EBSA press releases detail its enforcement efforts against four defunct sponsors of 401(k) plans.