Form 5500 Basics: What Every 401(k) Sponsor Should Know

Once a year, your 401(k) plan reports to the federal government on its finances, operations, and compliance. That report is Form 5500. In many small businesses, a third-party administrator prepares it, an owner signs it, and nobody thinks about it again until next year.

That is a reasonable division of labor, as long as the person signing understands what the form says. The plan administrator, usually the company, remains responsible for the filing even when someone else prepares it.

What Form 5500 is

Form 5500 is an annual return and report developed jointly by the Department of Labor, the IRS, and the Pension Benefit Guaranty Corporation. It covers the plan's assets, income, expenses, contributions, participant counts, service providers, and a series of compliance questions. Filings are submitted electronically through the DOL's EFAST2 system.

Which version your plan files

Form 5500-SF (short form). Available to many small plans, generally those with fewer than 100 participants at the start of the plan year, that meet additional conditions, such as holding assets with a readily determinable value and qualifying for the small plan audit waiver. Beginning with 2023 plan years, defined contribution plans count only participants with account balances when determining plan size.

Form 5500 with Schedule I. For small plans that do not qualify for the short form.

Form 5500 with Schedule H. For large plans, generally those with 100 or more participants with account balances. Large plans must also include an audit by an independent qualified public accountant.

Form 5500-EZ. For one-participant plans covering only the owner, or the owner and spouse. A filing is generally required only when plan assets exceed $250,000 at the end of the plan year, or for the plan's final year.

A transition rule, often called the 80-120 rule, lets a plan with between 80 and 120 participants at the start of the year file in the same category it used the prior year. That can help a plan near the line avoid moving back and forth into the audit requirement.

When it is due

Form 5500 is due by the last day of the seventh month after the plan year ends. For calendar-year plans, that is July 31. Filing Form 5558 extends the deadline by two and a half months, to October 15 for calendar-year plans. An automatic extension may also apply when the plan year matches the company's tax year and the company's tax return is on extension.

What the form asks

Beyond the financial information, the form includes yes-or-no compliance questions that deserve careful attention, including whether:

• Participant contributions were deposited late at any point during the year
• The plan was covered by a fidelity bond, and for how much
• The plan suffered losses from fraud or dishonesty
• The plan engaged in prohibited transactions with parties in interest
• Benefits were paid when due

A "yes" answer is not automatically a disaster, but it should be accurate, explained if necessary, and backed by a correction where one is needed.

It is public

Form 5500 filings are publicly searchable on the Department of Labor's website. Advisors, recordkeepers, competitors, and attorneys use the data to evaluate plans, compare fees, and identify issues. Assume anything on the form can be read by someone outside your company.

Large plan audits

When a plan crosses into large plan status, the audit requirement adds cost and preparation time. Choose an auditor with employee benefit plan experience, plan ahead for the documentation the auditor will request, and expect the first audit to take longer than later ones.

Penalties and how to fix a late filing

Penalties for late or missing filings can be significant. Department of Labor civil penalties can exceed $2,000 per day, and the IRS can assess $250 per day, up to $150,000 per return.

The DOL's Delinquent Filer Voluntary Compliance Program (DFVCP) allows plans to file late returns with substantially reduced penalties, provided the plan comes forward before the DOL notifies it of the failure. If a filing was missed, acting quickly preserves that option.

A checklist before you sign

Before signing, review:

• Participant counts and whether the plan's size category is correct
• Contributions reported compared with payroll records
• The late deposit answer compared with your deposit records
• The fidelity bond amount compared with current plan assets
• Service provider information compared with your 408(b)(2) disclosures
• Whether an extension was filed if the original deadline has passed

Want a second look at your plan's Form 5500 before it is filed? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review plan compliance and operations. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.

Frequently asked questions

Who signs Form 5500?

The plan administrator, usually an owner or officer of the sponsoring company, signs electronically through EFAST2. A service provider may prepare the filing, but responsibility for its accuracy stays with the plan administrator.

Does a new plan file in its first year?

Generally yes. A plan files for its first plan year, even if that year is short.

Does a terminated plan still file?

Yes. A plan files until all assets have been distributed, and the last filing is marked as the final return.

This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.