The Uncertain Future of Form 5500
Will the Compliance Burden Increase?
For critics of the Department of Labor’s (“DOL’s”) proposed overhaul of Form 5500, January 1, 2019, is right around the corner. The current proposals will require setting up systems to collect and report detailed data. Industry commenters have asked the DOL to (1) postpone the proposals until it reviews industry concerns, and (2) consider that the added compliance burdens may discourage small employers from setting up or maintaining employee benefit plans.
The Unknown Compliance Costs
According to a member of The SPARK Institute (“SPARK”) (whose members include plan administrators and recordkeepers), the proposed changes would double or triple plan sponsors’ current cost of dealing with complying with Form 5500 requirements. “The [proposed changes] include more than 400 new or modified line items, each of which would require significant design and implementation efforts to gather, analyze and report all of the requested information,” according to SPARK.
Our only hope is that given President Trump’s promises to reduce regulatory burdens on businesses, some of the proposals may be scaled back. Therefore, it’s important to learn the basic elements of key proposed changes — and the rationale behind them.
The Proposals’ Rationale
On unveiling the proposals, the Obama administration’s DOL laid out five goals that it believed would benefit plan sponsors, participants, beneficiaries, the public at large and federal agencies. According to the DOL, the new regulations would:
- Improve the reliability and transparency of the information reported regarding employee benefit plan investments and other financial transactions,
- Remedy the current failure to collect data about a large sector of the health plan market, including currently exempted small-insured and self-insured welfare benefit plans,
- Convert more elements of Form 5500 into data that’s organized in a structured manner to make them computer-processable and identifiable for data-mining and analytical purposes,
- Better harmonize reporting on Form 5500 Schedule C with DOL’s service provider disclosure regulation, and
- Enhance reporting on plan compliance to improve plan operations, protect participants and beneficiaries and their retirement benefits, and provide education for plan fiduciaries.
In addition to the above, the DOL is proposing the elimination of the regulation that exempts employers with less than 100 employees from having to file Form 5500 for their insured or self-insured health plans. According to the DOL, dropping the exemption would bring small employers into compliance with the Affordable Care Act, “provide critical data for [government] oversight and collect information needed for Congressionally-mandated reports on group health plans.”
The Expanded Reporting Requirements
Retirement plans reporting would now include:
- The number of participants making catch-up contributions, investing in default options, maximizing the employer match and deferring compensation,
- The number of participants with account balances as of the beginning of the plan year, and the number of participants who terminated employment during the year who had their entire balance distributed, and
- Whether the plan uses a default investment alternative for participants who fail to direct assets in their accounts, and which type of investment alternative is used.
For small retirement plan sponsors, a new, more detailed Schedule H would replace the current Schedule I. One of the DOL’s stated purposes for this change is to obtain “a meaningful picture of small plan investments in hard-to-value and other assets.”
The proposals feature a new Schedule J that seeks:
- Information regarding rebates, refunds or reimbursements from service providers,
- Detailed claims payment data regarding how many benefit claims were submitted, appealed, approved and denied, broken out by claim type, and
- Information on the plan’s paid and unpaid benefit claims during the plan year, and any delinquent payments to insurers and whether the delinquencies resulted in a lapse of coverage.
The proposed changes also feature detailed questions concerning compensation of plan service providers. Under current rules, employers that fail to furnish all requested information could be subject to penalties of as much as $2,063.00 per day.
The Future is Unclear
Most plan sponsors will find the cumulative effect of so many additional data requests to be onerous. Modification of the original proposals is probable, and the process of shaping the final version likely will take many months. It’s also possible the proposal will be withdrawn entirely. Look for more information in our future newsletters.
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