Newly proposed changes to benefit plan reporting on Form 5500 would have a significant impact not only on employers, but also on participants, fiduciaries and third-party service providers.
The changes to the Form 5500 Annual Return/Report Series were proposed on July 21, 2016, as part of Notice of Proposed Revision of Annual Information Return/Reports
from the Department of Labor (DOL), the IRS and the Pension Benefit Guaranty Corporation (PBGC) (collectively referred to as the “Agencies”). A Notice of Proposed Rulemaking for Annual Reporting and Disclosure
to propose updates to the DOL’s reporting regulations to implement the proposed forms was issued the same day. The package includes substantive changes intended to modernize and improve the information reported in the annual filings.
The proposed rules would make major changes across the various annual reporting schedules for employee benefit plans. Employers will be affected differently based on their current benefit plan structure, and smaller employers would be required to file for any plan regardless of size.
The changes would also affect service providers with employer relationships. Because most benefit plans are administered on a day-to-day basis by third-party administrators, employers will have to verify that service providers’ systems and software can track the required information, can compile that information appropriately and can report the information accurately on the updated forms. Employers will also have to work closely with their recordkeeper, trustee, actuary, auditor, other fiduciaries and other plan providers to gather all the information the revised return will require.
While the proposed rules are not scheduled to go into effect until the plan years beginning in 2019 (filed in 2020), the Agencies noted that certain provisions could be implemented sooner or delayed depending on various factors including feedback received during the public comment period. The following provides a summary of the major changes to help you determine how the proposed rules may impact your organization.
Overview of proposed changes
The latest major revision to the Form 5500 format and related schedules occurred in 2009 and coincided with the implementation of e-filing requirements for all returns under the EFAST2 system. The electronic filing system facilitated more timely filings and allowed the Agencies and other interested parties to review information online and analyze benefit plan data.
According to a DOL webcast, the Agencies have five major goals for this next series of revisions to the annual reporting requirements. Below is a discussion of each goal and some key points employers should consider as they determine how this proposal would impact their current benefit plan administration and reporting compliance needs.
Modernizing financial statement and investment information
The proposed changes are meant to improve transparency and increase reliability in financial reporting for benefit plans. As more benefit plans invest in harder-to-value assets, alternative investments, collective funds and direct filing entities (DFEs), it has become more difficult to accurately reflect these assets in the current categories on the Schedule H. The proposed changes provide more line-item classes of investments for plan sponsors to use.
The Agencies have also proposed the elimination of Schedule I (Financial Information – Small Plan), forcing smaller plans to file either a Form 5500-SF (Short-Form Annual Return/Report of Small Employee Benefit Plan), if eligible, or the revised Schedule H (Financial Information). Additional changes to Schedule G (Financial Transaction Schedules) are intended to show more uniform information as it relates to loans, fixed income obligations and leases in default.
Most reporting systems are set up to compile information in the current format of the Form 5500. With more classes of investments, plan sponsors will need to evaluate whether their investments are categorized appropriately for Form 5500 reporting purposes and how that compares with their financial statement disclosures. For plan sponsors that previously completed either Schedule I or Schedule H, additional information will be necessary and it will be important to understand in advance how well a third-party administrator’s system is capturing the required data.
One benefit to plan administrators and sponsors is that the proposed changes should provide much greater detail about other plans’ investments, which will then enable plan sponsors and others to better benchmark their plans’ investments against investments disclosed in other plans’ Form 5500 returns.
There are also changes and additional requirements proposed for Independent Qualified Public Accountants’ reports, including the disclosure of the name of the audit partner who signs off on the plan’s financial statements.
Improving service provider fee and expense information
The Agencies have noted that form preparers have been inconsistently reporting service provider information on Schedule C (Service Provider Information), which makes it difficult to understand what is being reported. The new structure of Schedule C harmonizes service provider fee information with the disclosure regulations under 29 CFR 2550.408b-2, which should create some economies of scale for plan sponsors. (For example, the disclosures on Schedule C will mirror the required plan expense disclosures for plan participants.)
However, additional work will be involved for plan sponsors that are not eligible to file a Form 5500-SF for their pension plan and will now have to include a Schedule C with their annual filing.
Under the current Schedule C format, all service providers required to be reported are disclosed on a single Schedule C. Under the proposed changes, a Schedule C would be prepared for each separate service provider similar to how Schedule A (Insurance Information) is used for insurance contracts.
While the change will create additional reporting, Form 5500 readers will have more information on individual service providers, which may be useful in determining how the readers’ plan expenses compare with those of other plans.
Enhancing accessibility and usefulness of the data
When electronic filing became required for the 2009 plan year, various stakeholders were able to access this data for a variety of purposes. The most prevalent uses for Form 5500 information included Agencies using the data to identify trends and assist with regulatory audit initiatives, plan sponsors comparing their plan attributes with similar benefit plans and individuals accessing filings electronically through the DOL rather than subscribing to a commercial service provider.
Under the current system, certain detailed information is included in the return by attaching a PDF document. The proposed changes would convert more elements of the Form 5500 into electronic data that can be searched and used for data-mining purposes, which would enable readers to develop individualized tools to compare their plans with the market. For example, the supplemental schedules attached to the Form 5500 will be required to disclose additional information not previously required such as Committee on Uniform Securities Identification Procedures (CUSIP), Central Index Key (CIK), Legal Entity Identifier (LEI) and National Association of Insurance Commissioners (NAIC) numbers. While the benefits of this detail are apparent, such detailed information will require plan sponsors to work even closer with trustees and other service providers to capture this data.
In addition, the Agencies have revised how they ask for certain types of information. For example, the process for reporting related to DFEs has been simplified and detail has been added to gather additional information on plan terminations and mergers.
Requiring reporting for all ERISA Title I group health plans
The proposed changes eliminate the 100-participant threshold for reporting for health plans not funded through a separate trust. The removal of this threshold will enable the Agencies to remedy the current failure to collect data from a large sector of group health plans (GHPs). By requiring all sizes of GHPs to file a Form 5500, the Agencies will create greater compliance awareness, provide critical data for agency oversight, facilitate collection of information for congressionally mandated reports and satisfy certain reporting requirements under the Affordable Care Act.
Much of this information will be reported on the newly created Schedule J. Plan sponsors of any GHP should review this form in detail to determine if they have this information to report and, more importantly, if they are in compliance. With the reporting requirements going into effect for the 2019 plan year, employers have some time to analyze their current GHP in light of these new changes.
Improving compliance with new questions on plan operations and financial management
The Agencies have proposed a variety of new questions, drop-down menus and check boxes throughout the various schedules to disclose more fully the operations and compliance of benefit plans. These questions will increase transparency and force plan sponsors to be more diligent in the operations of their plans, including increased ongoing monitoring and enhanced focus when selecting service providers, to avoid having to report noncompliance. The changes are intended not only to improve plan compliance with the law but also to protect benefits for participants and beneficiaries and to provide education and discipline to plan fiduciaries.
In addition to details regarding Employee Retirement Income Security Act and Internal Revenue Code compliance, plan sponsors will have to report much more information on fee disclosure related to insurance products, employee stock ownership plans, actuarial information and plan audits.
Specific to the plans’ audits, rather than just including the audited financial statements, plan sponsors will also have to include certifications related to limited scope audits, the name of the audit partner, information regarding any material control issues/operational errors noted during the audit, and information regarding the opinion on the independent qualified public accountant report.
Under the current format, plan sponsors are not required to report such detailed information regarding the operations of their plans. Monitoring, identifying and reporting these events properly will be a large undertaking, especially for those plan sponsors who have multiple benefit plans.
As with any major change, you should familiarize yourself with the proposal and determine how it impacts your reporting obligations. In addition to merely understanding the new reporting requirements and how they apply to your organization’s benefit plans, you will also have to work closely with your recordkeeper, trustee, actuary, auditor, other fiduciaries and other plan providers to gather all the information the revised return will require.
If your plan is administered on a day-to-day basis by a third party, you should verify that service providers’ systems and software can track the required information, can compile that information appropriately and can report the information accurately on the updated forms.
The Agencies have made the proposed changes available to the public for a comment period that ended on Dec. 5, 2016. All comments will be made public and will be posted without change.
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