Memo #
33783

Agencies Propose Changes to Form 5500 Annual Return/Report for Employee Benefit Plans
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[33783]

September 22, 2021

TO: ICI Members
Bank, Trust and Retirement Advisory Committee
Pension Committee
Pension Operations Advisory Committee SUBJECTS: Pension RE: Agencies Propose Changes to Form 5500 Annual Return/Report for Employee Benefit Plans

 

On September 14, 2021, the federal agencies with authority over employer-sponsored benefit plans—the Department of Labor (DOL), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation (PBGC)—jointly released proposed revisions to the Form 5500 Annual Return/Report forms required for employee pension and welfare benefit plans.[1] In connection with the proposed form revisions, DOL proposed conforming changes to its corresponding reporting regulations under sections 103 and 104 of ERISA.[2]

For the most part, the proposed changes are intended to implement provisions under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).[3] In addition, the proposal includes changes to the Schedule H financial reporting of investment assets (including making the data collected more usable), changes to the rules for counting participants for purposes of eligibility for small plan simplified reporting, changes to improve reporting on defined benefit pension plan funding, and changes to improve tax compliance reporting for tax-qualified plans. This memorandum describes the proposed changes affecting defined contribution retirement plans.

Background

Section 101 of the SECURE Act allows otherwise unrelated employers (of any size) to band together and participate in open multiple employer plan (MEP) arrangements referred to as "pooled employer plans" or "PEPs". Only individual account plans that are qualified under section 401(a) of the Internal Revenue Code ("Code") or IRA-based could qualify as a PEP. The DOL established registration requirements for providers of PEPs in November 2020, including creating new Form PR (Pooled Plan Provider Registration).[4] The SECURE Act requires PEPs and other MEPs to report certain information beyond that which was already required for MEPs, including the aggregate account balance of each participating employer.

Section 202 of the SECURE Act directs the IRS and DOL to work together to modify Form 5500 so that all members of a group of defined contribution plans meeting certain requirements (including having the same trustee, named fiduciary, and plan administrator) may file a single consolidated Form 5500. The new law requires implementation of the consolidated Form 5500 framework not later than January 1, 2022, to be effective for returns and reports for plan years beginning after December 31, 2021.

Summary of Major Proposed Changes

  • Consolidated Form 5500 for Groups of Similar Defined Contribution Plans. With respect to SECURE Act section 202, the proposal would add a new type of direct filing entity (DFE) called a defined contribution group (DCG) reporting arrangement and establish a new Schedule DCG (Individual Plan Information)[5] for such filing arrangements, in addition to the more generally applicable Form 5500 requirements. The DCG would file a Form 5500 under rules and conditions that apply generally to large defined contribution pension plans, and would not be permitted to file a Form 5500-SF.
    • The proposal would require a separate Schedule DCG (Individual Plan Information) for each participating plan to provide individual plan-level information. The proposal states that Schedule DCG generally would report less individual plan information than if an individual plan filed its own Form 5500. Information on the various other schedules to the Form 5500 would be reported in the aggregate.[6]
    • The proposal specifies that all plans participating in the DCG must be defined contribution pension plans and (1) have the same plan administrator; (2) have the same named fiduciaries; (3) have the same trustee(s) and same trust holding the assets of the participating plans; (4) have the same plan year; (5) provide the same investments or investment options to all participants and beneficiaries, (6) have investment assets held in a single trust of the DCG; (7) not hold any employer securities; (8) be 100 percent invested in certain secure, easy to value assets that meet the definition of "eligible plan assets" under the instructions for the simplified Form 5500-SF (such as mutual fund shares, investment contracts with insurance companies and banks valued at least annually, publicly traded securities held by a registered broker dealer, cash and cash equivalents, and plan loans to participants); (9) be audited by an independent qualified public accountant (IQPA) or be eligible for the small plan waiver of the audit; and (10) not be a multiemployer plan or a MEP.
    • As mentioned above, the investment assets of the plans participating in the DCG would have to be held in a single trust of the DCG reporting arrangement. The consolidated Form 5500 filed by the DCG would include an audit of the DCG's trust financial statements by an IQPA. Under the proposal, there must be only one trustee for all the plans participating in a DCG reporting arrangement and the common trustee must be either named in the trust instrument or in the plan instrument or appointed by a person who is a named fiduciary of the participating plan.[7]
    • In contrast to the single trust audit, any large plans participating in the DCG would continue to be subject to a separate plan-level IQPA audit and the audit report for the plan would have to be filed with the consolidated Form 5500 of the DCG.[8] The proposal indicates that "DOL understands that under GAAS [Generally Accepted Auditing Standards], it would not be possible to have a consolidated audit of all the participating plans in the DCG reporting arrangement. . . [r]ather, under GAAS, each large plan in the DCG reporting arrangement would have to be subject to its own separate audit."[9] The proposal also notes that, because it would require the plans to be fully invested in "eligible plan assets" as defined in the Form 5500-SF instructions (i.e., assets held by regulated financial institutions), the plan assets in the DCG may qualify for limited scope audit treatment under section 103 of ERISA.[10]
    • With respect to the requirement for participating plans to have the same named fiduciaries, the proposal explains that the employer/plan sponsor can be a named fiduciary of that employer's own plan, provided that the other named fiduciaries under the plans are the same and common to all plans.[11]
    • With respect to the requirement for participating plans to have the same plan administrator, the proposal specifies that there must be a designated common plan administrator and that the administrator be the same for all the plans relying on the DCG consolidated Form 5500.[12]
    • With respect to the requirement that all participating plans provide the same investments or investment options to all participants and beneficiaries, the proposal notes that this effectively prevents plans with brokerage windows and plans holding employer securities from participating in a DCG reporting arrangement, although comments are requested on this issue.[13]
    • The proposal would require that the plan administrator common to all of the plans must file the consolidated DCG Form 5500 covering all the participating plans, including all required schedules. In regard to extensions of the due date for the annual report, the preamble to the proposed form changes indicates that each participating plan would have to submit its own IRS Form 5558 to extend the plan's due date (and thereby extend the due date for the DCG filing as a whole), though comments are requested on how the filing extension process should be structured for DCGs, including whether DCG reporting arrangements should be able to file a single Form 5558 to obtain an extension for filing the consolidated report on behalf of all the participating plans.[14]
  • Reporting by Pooled Employer Plans (PEPs) and other MEPs. The proposal would require all MEPs (including PEPs) to file the Form 5500 regardless of size, with no option to file the Form 5500-SF. A new Schedule MEP (Multiple-Employer Retirement Plan Information)[15] would require filers to:
    • Identify the type of MEP, e.g., PEP, professional employer organization, etc.;
    • For PEPs, confirm that the sponsoring pooled plan provider has filed the Form PR (Pooled Plan Provider Information) and provide certain other information, including whether services to the plan have been provided by affiliates, and if so, whether a prohibited transaction exemption is being relied on (including identification of any such exemption);
    • Provide the MEP's participating employer information, currently collected as a nonstandard attachment to the Form 5500 and Form 5500-SF, and the new aggregate account balance information required by the SECURE Act. For the 2021 plan year, MEPs would continue to provide this information (including the new information) as a nonstandard attachment to the Form 5500. The proposed new Schedule MEP would become available for the 2022 plan year.
  • Changes to Financial Reporting for Investment Assets. With the stated intention of improving the usability of reported data for purposes of enforcement and analysis (e.g., by regulators and third-party data aggregators), the proposal would:
    • Update the Schedule H and instructions to standardize the electronic filing format for the schedules of assets required to be included in the annual return/report (Schedule H, line 4i requires a schedule of assets held at the end of the year and a schedule of assets held and disposed of within the year);
    • Add disclosures to the schedules of assets regarding the characteristics of investments that plans hold (such as providing a designated investment alternative's total annual operating expenses and identifying any qualified default investment alternatives);
    • Increase the level of detail for direct expenses reported on the Schedule H; and
    • Add new trust questions to the Form 5500, Form 5500-SF, and Form 5500- EZ, regarding the name of the plan's trust, the trust's employer identification number (EIN), the name of the trustee or custodian, and the trustee's or custodian's telephone number.
  • Change in Eligibility for Simplified Reporting Options. The proposal would change the method of calculating the number of participants in a defined contribution plan for purposes of being able to file as a "small plan" for simplified reporting, including waiver of the annual audit. Instead of counting all those eligible to participate, only those participants and beneficiaries with account balances as of the beginning of the plan year would be counted (the first plan year would use an end of year measure). This change would help reduce costs and burdens for smaller plans affected by the new eligibility rules for long-term part-time workers enacted under the SECURE Act.[16]
  • Additional tax compliance questions. The proposal would add compliance questions for tax-qualified retirement plans, including:
    • On Form 5500, Form 5500-SF, and proposed Schedule DCG, a question asking if the employer aggregated plans in testing whether the plan satisfied the nondiscrimination and coverage tests of Code sections 401(a)(4) and 410(b).[17]
    • On Form 5500, Form 5500-SF, and proposed Schedule DCG, a question for 401(k) plans asking whether, if applicable, the plan sponsor used the design-based safe harbor rules or the "prior year" or "current year" ADP test.
    • On Form 5500, Form 5500-SF, Form 5500-EZ, and proposed Schedule DCG, a question asking whether the employer is an adopter of a pre-approved plan that received a favorable IRS Opinion Letter, the date of the favorable Opinion Letter, and the Opinion Letter serial number.
  • Other proposed changes. The proposal also includes changes that would apply to defined benefit pension plans and multiple employer welfare arrangements (MEWAs).

The changes generally are proposed to be effective for plan years beginning on or after January 1, 2022. However, certain changes for MEPs (reporting of participating employer information) and new information for PEPs would apply for plan years beginning on or after January 1, 2021, by using an interim nonstandard attachment (in place of the new Schedule MEP that would apply beginning with the 2022 plan year).

Request for Comment

Comments on the proposed changes are due November 1, 2021, which is 45 days after publication in the Federal Register. The proposal invites comments on all facets of the proposed form and instruction changes and raises several specific questions, including (but not limited to):

  • Whether the final rule should provide a consolidated reporting option for 403(b) plans that use the same custodial account or insurance policy rather than a trust as the funding vehicle, and if so, whether additional conditions should apply due to the absence of a trustee.
  • Whether or not large plans participating in a DCG should be required to be separately audited and have an IQPA attached to the Schedule DCG.
  • Whether the final rule should allow brokerage windows in plans participating in DCG and, if so, what reporting requirements should be included regarding the brokerage window, the participants using the brokerage windows, and the individual assets held by the plans as a result of investments made through brokerage windows.
  • Whether the requirements for filing the consolidated Form 5500 report by a DCG are sufficient or whether different or additional conditions should be included in the final rule and forms revisions.
  • Whether the proposed changes require any recordkeeping beyond that which is usual and customary to complete the Form 5500.
  • Whether it is feasible to include both plans covered by Title I of ERISA and those not covered by Title I of ERISA (i.e., one-participant plans required to file the IRS Form 5500-EZ) in a single DCG filing, including with respect to the application of the audit requirement under Title I.

With respect to DOL's authority to prescribe simplified reporting for certain MEPs with fewer than 1,000 participants, as provided under the SECURE Act,[18] DOL indicates that it is not currently proposing to establish a "simplified report" for such plans. Instead, the DOL asks for "comments on why MEPs subject to ERISA section 210(a) should be subject to different reporting requirements than single employer plans that cover fewer than 1,000 participants, and on appropriate conditions and limitations for such a simplified report that would ensure transparency and financial accountability comparable to that for other large retirement plans."[19]

As discussed above, the DOL simultaneously issued proposed amendments to its regulations on annual reporting to conform the regulations to the proposed form changes. The proposals indicate that comments submitted in response to the joint agency proposed Form 5500 revisions will be treated as public comments on the DOL regulatory amendments, to the extent relevant.

Finally, the DOL indicates in the proposal that it has a separate project on its semi-annual regulatory agenda that would focus on a broader range of improvements to the Form 5500 annual reporting requirements.[20] It describes that regulatory action as "part of a strategic project with the IRS and PBGC to improve the Form 5500" by "[m]odernizing the financial and other annual reporting requirements" and "continuing to make the investment and other information on the Form 5500 more data mineable," while also focusing on "enhancing the agencies' ability to collect employee benefit plan data that best meets the needs of changing compliance projects, programs, and activities."[21]

 

Elena Barone Chism
Associate General Counsel - Retirement Policy

 

endnotes

[1] The proposal is available here https://www.govinfo.gov/content/pkg/FR-2021-09-15/pdf/2021-19714.pdf and a fact sheet is available here https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/secure-act-and-related-revisions-to-employee-benefit-plan-annual-reporting-on-the-form-5500.pdf.

[2] The proposed regulation is available here https://www.govinfo.gov/content/pkg/FR-2021-09-15/pdf/2021-19713.pdf.

[3] For a description of the SECURE Act, see ICI Memorandum No. 32118, dated December 20, 2019. Available here: https://www.ici.org/memo32118.

[4] See ICI Memorandum No. 32921, dated November 18, 2020. Available here: https://www.ici.org/memo32921.

[5] The proposal includes as Appendix B, a facsimile of proposed Schedule DCG and instructions. See 86 Fed. Reg. 51519 (Sept. 15, 2021).

[6] The proposal notes that: "[A] service provider to the trust and to each of the plans would be reported on Schedule C, even if the service provider did not actually provide services or charge fees to a particular plan because, for example, the service provider provided investment management services with respect to a particular investment option that was not selected by any of the participants in a particular plan. The $5,000 threshold would be based on the total amount received by the service provider. Reporting on Schedule C would still be required if the total amount was $5,000 or more, even if the amount paid by or charged against the assets of each the participating plans was less than $5,000 per plan." 86 Fed. Reg. 51496.

[7] Under the proposal, the ''same trust'' requirement for the consolidated report would be satisfied by the same trust structure historically used by employers using ''master'' plans (under past IRS preapproved plan rules). Use of sub-trusts of the DCG trust would be permitted, but the proposal would not cover arrangements that allow separate plans to have a separate trust for investments. See 86 Fed. Reg. 51493.

[8] The ICI and several other trades have strongly urged DOL and the other agencies to permit a consolidated audit for all plans participating in the group of plans that would otherwise be subject to an audit requirement. Generally, pension plans and funded welfare plans with 100 or more participants are required to have an audit of the plan's financial statements performed by an IQPA.

[9] See 86 Fed. Reg. 51495.

[10] See 86 Fed. Reg. 51496.

[11] See 86 Fed. Reg. 51494.

[12] See id.

[13] See id.

[14] See 86 Fed. Reg. 51493 (footnote 20).

[15] The proposal includes as, Appendix A, a facsimile of proposed Schedule MEP and instructions. See 86 Fed. Reg. 51508.

[16] Section 112 of the SECURE Act generally requires 401(k) plans (except for collectively-bargained plans) to permit participation by workers who complete at least three consecutive years of service with at least 500 hours of service each year.

[17] This question previously appeared on the Form 5500 Schedule T before that schedule was eliminated.

[18] Section 101 of the SECURE Act permits DOL to prescribe by regulation simplified reporting for MEPs subject to ERISA section 210(a) with fewer than 1,000 participants in total, as long as each participating employer has fewer than 100 participants.

[19] 86 Fed. Reg. 51491.

[20] The most recent agenda includes this project as a long-term agenda item and indicates that DOL expects to issue a proposal in May 2022. For more information on the regulatory agenda, see ICI Memorandum No. 33589, dated June 15, 2021. Available here: https://www.ici.org/memo33589. In 2016, DOL issued a proposal with a similar modernization goal, which would have imposed a significant burden on plan sponsors and their service providers tasked with completion of the Form 5500. For a summary of ICI's comments on this proposal see ICI Memorandum No. 30458, dated December 6, 2016. Available here: https://www.ici.org/memo30458.

[21] 86 Fed. Reg. 51492.