Going for Gold: Keeping Your 401(k)’s 5500 Reports Both Timely and Error-Free

Unlike the Olympics, the Form 5500 filing for your company’s 401(k) plan takes place every year and generally must be filed no later than July 31 for calendar year plans, or by October 15 if a timely extension was filed. For any whose filing deadline still approaches, or for any filings in subsequent years, plan sponsors should follow the counsel below to better position themselves for the gold medal standard: an accepted return without penalties of any kind.

Filing Timely and Timely Responding – Run Strong and Sprint When Needed

As we detailed earlier this year, Form 5500 must be filed by the last day of the seventh calendar month after the plan year ends. If needed, plan sponsors can obtain a one-time extension, of up to an additional two and a half months, by filing IRS Form 5558 on or before the normal due date. For calendar year plans, this generally means the 5500 must be filed on or before July 31, or October 15, if a timely extension was filed.

But what happens if you file late, are the consequences really that bad? Legally, the Department of Labor (DOL) has long had statutory and regulatory authority to impose significant penalties. For example, twelve years ago the DOL had the authority to impose a penalty of up to $1,100 per day, meaning a report filed 100 days late could incur a penalty exceeding $100,000. Nevertheless, in actual operations, the DOL capped the penalty amount at $50,000 per filing. While still significant, this long-established practice was understandable and easily quantifiable.

During at least the past year, however, the DOL changed course drastically. With per-day penalties now up to $2,670 per day, the DOL made the decision at some point to jettison its $50,000 maximum penalty. Instead, the DOL now regularly imposes late filing penalties approaching or sometimes exceeding $200,000 per filing for reports filed as little as eight months late. While the DOL may argue leniency in such cases, with an effective penalty of $700-$800 per day, it is technically imposing less than a third of what it could, the gloves are off for those making DOL enforcement decisions.

So, What Should You Do to Avoid Penalties Altogether or Mitigate Them If Imposed?

First and foremost, avoid waiting until the last minute. This could mean filing well before the deadline but also means working backwards to determine what needs to be in place for you to file early or on time. That generally includes having your plan’s audit report ready, and because auditors usually get busy later in the year, especially during the last quarter, you should work with your auditor early, preferably in the first or second quarter, to ensure a timely audit report. Not having that report ready by your filing deadline puts you between a rock and a hard place – either filing timely but without the audit report or waiting to file until the audit is done and you can attach the report. Opinions differ on what you should do in that situation, with some auditors recommending you file sans report if you think that report will or could be coming shortly, such as one to two months. Regardless of what you decide, you will need to move quickly if the DOL starts asking questions, and they have shown little to no sympathy for companies who say they are waiting for their auditors. In short, the better course is to avoid such a conundrum to begin with and have everything ready on time.

In addition, questions, rejections, or any other dubious action by the DOL should be treated like a runner’s starting gun – you need to get moving immediately. If the DOL says you filed late and you disagree, then respond quickly. If the DOL imposes penalties but gives you a chance to show reasonable cause to avoid or mitigate those penalties, then respond quickly. If the DOL says your Form 5500 contains errors and needs to be updated, then respond quickly. Any such inquiries typically come with deadlines – 30 to 45 calendar days is standard – and that may be your only opportunity to explain or eliminate or reduce a penalty. Also consider how you respond. Responding in writing is good for the record, but unless you know your response is going directly to the DOL agent via email, consider placing a call directly to the agent as well. Multiple lines of contact will better ensure that your voice is heard and show you take the inquiry seriously.

Audit Opinion Letters – Get Them Done and Box Them Up Right

Those who have worked on or completed Form 5500 before will often start with or use the prior year’s filing as a model or starting point for this or next year’s filing. Doing so makes sense, especially if little has changed for plan operations or the Form 5500 itself. Unfortunately, how you complete Form 5500 sometimes changes, so you or the appropriate persons should review the instructions to check for anything new and work closely with your recordkeeper and auditor and ask them if they know of any updates to the Form or underlying instructions, even indirectly.

For instance, be sure to select the correct type of Accountant’s Opinion on Schedule H, Part III, Line 3(a), because the rules for checking “Unmodified” or “Disclaimer” changed several years ago. Prior to the issuance of Statement on Auditing Standards 136 (SAS 136), auditors for 401(k) and similar plans often checked “Disclaimer” because, for example, the audit did not cover certain assets that were effectively audited and certified by another qualified organization. Effective for plan years ending on or after December 15, 2021, however, SAS 136 changed the foregoing situation, which absent other facts, means you should check the “Unmodified” box for such situations. While you should review the foregoing selection with your auditor (and any other parties) who may be assisting you complete the Form 5500, the DOL is cross-checking the Accountant’s Opinion selection against the actual opinion itself (attached to the Form 5500) and will reject the filing outright or ask questions if they see discrepancies between the two.

You’ve Got Mail – Pass the Baton Quickly with the Right Address

While Form 5500 must be filed electronically, questions from the DOL often come through the mail, at least initially, sent to the address listed on the Form itself (Line 2a), so that simple and seemingly innocuous piece of information becomes critical once questions are asked. In addition to verifying its accuracy, because headquarters, locations, and offices sometimes change, be sure to investigate how quickly it takes a piece of mail sent to that location to reach the key person at your company. For companies with offices and locations throughout the country, slowly processed mail can wreak havoc. Questions from the DOL almost always come with deadlines, 30 to 45 calendar days being typical, so if it takes several weeks for something to be routed your way, you need to overhaul that process or update the address on the Form 5500, so it reaches you faster. Running a mail test is one way to check on the timing and delay to see how much time you may have to respond to questions and is well worth the cost of a stamp (or two).