In this Edition

May 2024

Form 5500: Significant Changes for 2023 and Beyond

IRS Extends Relief for Inherited IRAs

How to Use the IRS Self-Correction Program: A Plan Sponsor’s Guide

3 Common Audit Findings and How to Avoid Them

Who is Considered a Fiduciary Under ERISA? The Role and Impact of an Employee Retirement Plan Fiduciary

The Form 5500, Annual Return/Report of Employee Benefit Plan, is an informational return used to report on employee benefit plans and Direct Filing Entities (DFEs). Some changes were implemented to the form for plan years beginning on or after January 1, 2023. The following is a summary of the most significant changes to the Form.

Section 202 of the SECURE Act directed the Internal Revenue Service (IRS) and Department of Labor (DOL) to modify the Form 5500 to allow certain groups of defined contribution retirement plans to file a single consolidated annual return/report. For 2023, a revision has been made to have a Defined Contribution Group (DCG) Reporting Arrangements filing option. A new schedule DCG was also added. This schedule includes individual plan information for plans reporting within a DCG. There are eligibility requirements that must be met for plans to be able to use this filing option.  

Another change that was made for 2023 impacts both Form 5500 and Form 5500-SF. There was a change in the methodology for counting the number of participants used to determine when a plan may file as a small plan (less than 100 participants). Small plans are not required to have an annual audit. Starting in 2023, defined contribution pension plans count participants with account balances at the beginning of the plan year, and new plans will use the number of participants with account balances at the end of the plan year. Previously, the count of participants included all individuals who were eligible to participate even if they didn’t have a balance in the plan.

Schedule H will also include new breakout categories within the “Administrative Expenses” category to provide additional fee and expense transparency. Fee categories such as contract administration, recordkeeping, audit fees, investment advisory and management, trustee and custodial, actuarial, legal, valuation/appraisal and other expenses are now included on the form as separate lines.

Another new schedule, Schedule MEP, has been added in 2023 to consolidate SECURE Act related and other multiple-employer plan reporting into one schedule. Certain reporting requirements for pooled employer plans (PEPs), a new type of plan established by the SECURE Act, are included on this schedule in addition to previously required information for other multiple-employer plans.

Finally, Schedule R has been updated for 2023 plan year reports. Several tax compliance questions have been added to the schedule. These include changes to the non-discrimination testing, ADP testing, and pre-approved plan letter areas. In addition, line 19 of Schedule R has multiple modifications. Line 19a now has seven category choices of plan assets compared to five categories in prior years and line 19b has a decreased number of options for the average duration of the investment-grade debt and interest rate hedging assets. Line 19c was eliminated.  

In addition to the more significant changes noted above, there were a number of other small changes to Form 5500 and its instructions. If you have specific questions on how these changes impact your plan, reach out to your Hawkins Ash representative.

The self-Correction Program (SCP) is one of three correction programs that the Internal Revenue Service (IRS) authorizes through the Employee Plans Compliance Resolution Program under Revenue Procedure 2021-30. The SCP allows the plan sponsor to correct the failure while maintaining the plan’s tax-exempt filing status. The SCP does not require the plan sponsor to file any forms, reports, or fees with the IRS; however, the plan sponsor should maintain adequate records of the operational plan failure, how the correction was calculated, and when the correction was remitted. Section 305 of the Secure Act 2.0 has expanded the SCP further to allow plan sponsors under the SCP to self-correct most inadvertent failures.

This article focuses on SCP. There are two additional correction programs available to plan sponsors: the Voluntary Correction Program and the Audit Closing Agreement Program. Learn more about these programs in this article.

Before making a correction, the plan sponsor must determine if the inadvertent failure is either insignificant or significant for eligibility. Eligible inadvertent failures are errors that are not egregious in nature and have occurred even though the plan sponsor has practices and procedures in place to encourage and implement compliance with the Internal Revenue Code. 

The IRS explains that significant failures are based on facts and circumstances. The following factors should be considered in determining if an inadvertent failure is significant: the number of participants that were affected, the materiality of the failure to the plan assets, the duration of the failure, the number of related failures in a plan year, the length of time between the discovery of the failure and the correction of that failure, and why the failure occurred. The IRS does note that just because a failure occurs in multiple years does not automatically classify the failure as significant. 

Section 305 of Secure Act 2.0 states that insignificant inadvertent failures are allowed to be self-corrected at any time, however, significant inadvertent failures must be substantially corrected in a reasonable time or before the end of the third plan year after the error occurred. To be substantially corrected, one of the following should occur: the plan sponsor takes prompt action to identify failures, calculates a correction, and submits a correction to the plan within the first two plan years after the year the failure has occurred, or the plan sponsor corrected at least sixty-five percent of participants affected within the two years following the year the error occurred and the remaining participants are corrected in a diligent manner. 

All significant inadvertent failures that are not corrected within a timely manner are not eligible for the SCP and the plan sponsors would have to use the Voluntary Correction Program.

Section 305 of the Secure Act 2.0 has also expanded the eligibility of the SCP to allow inadvertent failures related to plan loans to be self-corrected. Under the Secure Act 2.0 plan sponsors who are self-correcting inadvertent failures on plan loans are not required to report corrected deemed distributions on form 1099-R and requires the Department of Labor (DOL) to treat this self-correction as compliant with the DOL’s Voluntary Fiduciary Correction Program. 

It is important to remember that if the plan sponsor has demonstrated plan compliance through practices and procedures most inadvertent failures of the plan can be corrected through the SCP. As always, Hawkins Ash is here to help answer any questions you may have and provide any guidance you may need. 

Even though it has a direct impact on the lives of the majority of Americans, relatively few of us are familiar with the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). It governs employer-provided benefits including pensions and retirement plans, as well as other fringe benefits such as health, life, and disability insurance. It’s been the law of the land since it was enacted on Labor Day, September 2nd, 1974. 

If you’ve done the math, that means ERISA turns 50 this year, a milestone birthday; and yet it seems that the waters have only gotten muddier for plan sponsors. Throughout the last 50 years, and amid the myriad of Department of Labor (DOL) rule changes, evolving technology, and tens of thousands of lawsuits, it can be difficult for plan sponsors, and others involved in the administration of employee benefit plans to know exactly what their responsibilities are. 

Are You a Fiduciary Under ERISA?

Benefit plans must have at least one named fiduciary (a person or entity) having control over the plan’s operation. For some plans, it may be an administrative committee or a company’s board of directors. It seems obvious then that the named fiduciaries of the plan are, in fact, fiduciaries. But what about everybody else? 

ERISA defines three other broad categories of fiduciaries based on the function they perform for the plan. So, regardless of title, plan fiduciaries include anyone who:

(i) Exercises any discretionary authority or discretionary control over the management of a plan, or exercises any authority or control over the management or disposition of plan assets;

(ii) Renders investment advice to a plan for a fee, or has any authority or responsibility to do so; or

(iii) Has any discretionary authority or discretionary responsibility over the administration of a plan.

Common fiduciaries include the plan sponsor, the trustee, investment advisors, third-party administrators, and any other individuals exercising discretion in the administration of the plan. If the plan has an administrative committee, all members of the committee are fiduciaries, as well as those who select committee officials. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan. If the answer is yes, they are a fiduciary. 

The Role of Plan Fiduciary Should not be Taken Lightly 

Plan fiduciaries have, by definition, a fiduciary duty to the plan. The consequences of breaching fiduciary duties can be harsh, and the liability is personal and joint and several. The number of ERISA lawsuits filed continues to grow, not to mention potential penalties related to DOL enforcement actions. In 2023 alone, the Employee Benefit Security Administration (EBSA) reported recovering over $1.4 billion in plan assets, $844 million of which came from direct enforcement action. 

It’s important to remember that serving as a fiduciary for your company’s retirement plan is a responsibility that can affect the lives of current, past, and future employees. It is key to understand your role as a fiduciary and act prudently and with due care. Also, keep in mind that outsourcing plan administration doesn’t absolve you of your fiduciary duty. Keep good records and document the rationale for decisions made on behalf of the plan. The DOL and IRS have extensive resources available for plan sponsors and administrators. And you can always reach out to your contact at Hawkins Ash CPAs with any questions you have. 

Hawkins Ash CPAs

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