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June 7, 2011

Our Concerns About the New DOL Position
The Department of Labor has launched an aggressive program to determine whether companies are complying with the Form 5500 and associated audit report requirements in a timely way. The DOL is authorized to impose a penalty of up to $1,100 per day for noncompliance — which includes failure to timely file all or any part of the Form 5500. The recent electronic filing requirement has enabled the DOL to issue delinquency notices and assess penalties more efficiently than in the past.

Form 5500 Background
The DOL, Internal Revenue Service and the Pension Benefit Guaranty Corporation jointly developed the Form 5500 series so plan sponsors could satisfy annual reporting requirements under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The Form 5500 series is offered in two flavors:

  1. Form 5500, Annual Return/Report of Employee Benefit Plan (generally required to be filed for most benefit plans with more than 100 participants); and
  2. Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan (generally must be filed for certain benefit plans with fewer than 100 participants).

Most Common Plans Required to File Form 5500:

  • Retirement plans including 401(k), profit-sharing, stock bonus, money purchase, employee stock ownership plans (ESOPs) and 403(b) plans; and
  • Welfare benefit plans with more than 100 participants including medical, dental, life insurance, disability, severance and vision plans.

When Is the Form 5500 Due?
The Form 5500 must be filed on or before the last day of the seventh month after the end of the plan year. A plan sponsor can file Form 5558, Application for Extension of Time to File Certain Employee Plan Returns, to receive an automatic 2½ month extension.

How Are Late Filed or Incomplete Form 5500s Handled by the DOL?

Previous DOL Procedures
Back in the day (when technology wasn’t as advanced and integrated into our and the DOL’s world, and when paper rather than electronic returns were the rule of the day), the time required by the DOL to process, evaluate and validate newly filed returns was extensive. It was not uncommon for the DOL to take three months to finish processing a return. If the return being processed was timely filed but deficient, the DOL generally sent a notice giving the plan sponsor 30 days to correct the deficiency.

If the deficiency was corrected within 30 days, the DOL would treat the perfected return as timely filed, thus allowing the plan sponsor to avoid late filing penalties. If the deficiency was not cured within 30 days, the DOL could reject the return as incomplete. More often, the DOL would send out a second 30-day letter giving the plan sponsor 30 more days to correct the deficiency (and avoid penalties). If the plan sponsor failed to correct the deficiency despite the notices, the DOL would reject the return as incomplete and would impose late filing penalties.

This lengthy process provided plan sponsors with an informal time “buffer” to perfect a timely filed but deficient Form 5500 without the imposition of late filing penalties. This process was fairly forgiving and enabled plan sponsors who were trying to “do the right thing” avoid costly late filing penalties.

For example, it was not uncommon for a plan sponsor to fail to attach a required independent auditor’s report to a Form 5500 filing. This problem usually arose because of some administrative or operational failure within the plan that caused the auditor to delay the completion of the audit beyond the due date for filing the Form 5500. In the past, if the required auditor’s report was unavailable by the Form 5500 filing due date, the plan sponsor would utilize one of two filing options:

  1. The plan sponsor could submit the Form 5500 without the auditor’s report by the due date (timely file an incomplete return). The plan sponsor would then file the perfected return once the independent audit was completed or would wait for the DOL’s 30-day letter and then would send in the corrected filing. Thus, the plan sponsor would enjoy the “buffer” and avoid late filing penalties; or
  2. The plan sponsor could delay submitting the Form 5500 until the auditor’s report was completed. Once the auditor’s report was finished, the return would be filed using the relief provided under the DOL’s Delinquent Filer Voluntary Compliance Program. This option worked best if there was an expectation that the completion of the independent audit might take longer than the time necessary to timely respond to a DOL 30-day letter.

New DOL Procedure
Now with the electronic filing technology fully integrated into the DOL’s 2010 Form 5500 filing system (EFAST2), all filings are immediately screened electronically. Therefore, the informal time “buffer” has been eliminated, and late filed or incomplete returns will generate rejection or penalty notices immediately. In addition, although the DOL will send out a 45-day letter asking the plan sponsor to correct deficiencies (for example, asking the plan sponsor to attach the independent auditor’s report), representatives of the DOL stated at the recent AICPA benefits conference that, depending on the type of deficiency, the DOL will impose some or all of the late filing penalties even if the incomplete return is perfected within the 45-day period. Specifically, if the DOL receives a timely filed Form 5500 without the required independent auditor’s report, the DOL will impose some or all of the late filing penalties even if the independent auditor’s report is provided within the 45-day period. In other words, the “buffer” time has been eliminated for some deficiencies.

Summary of New DOL Penalty Procedures Regarding Late Filed or Incomplete Forms 5500

Notice/communication Description
DOL Notice of RejectionNotifies filer that return was deficient and gives the filer 45 days to perfect the filing. If perfected within the 45 days, return is not treated as late filed. 45 day response cannot be extended.
DOL Notice of Intent to Assess a PenaltyFiler has 35 days to respond to this notice. If no response, then proposed penalty is assessed. Filder can respond and request abatement of proposed penalty.
Filer Response - Statement of Reasonable CauseFiler makes statement subject to penalties for perjury. Filer requests abatement of penalty due to reasonable cause, which should be described in the statement. However, DOL will not consider statement if return remains deficient.
DOL Notice of DeterminationFinal Penalty amount is assessed.
Filer Response - Request for AppealFiler has 35 days to appeal assessment. If timely filed, appeal is heard by Administrative Law Judge.









Late Filed Returns — Where We See Problems Arise

  • Small, growing companies — Generally, a Form 5500 filing is not required for a welfare benefit plan with fewer than 100 participants. However, once the number of plan participants increases to more than 100, a Form 5500 must be filed. We have seen a number of small companies exceed the 100-plan-participant threshold but fail to realize that the company is now subject to filing Forms 5500. This situation frequently arises as a result of normal growth or as a result of an acquisition of another company. Often, the individuals responsible for preparing the Form 5500 are not aware that they now have a filing requirement (because the organization has not had to file this return in the past). This type of failure typically involves multiple years. This can expose the company to significant penalties.
  • Mergers & acquisitions — Another area of frequent filing non-compliance occurs during and after mergers and acquisitions. Often, employee benefit plans, especially welfare benefit plans but sometimes retirement plans, acquired through an acquisition are not well understood by the acquirer. In addition, many acquisitions result in the elimination of personnel most familiar with the filing requirements for those plans. With so many various shifting responsibilities occurring during a merger or acquisition, it is common for the Form 5500s to get lost in the shuffle. As a result, a required filing may go missing for a number of years and then pop up as a delinquent filing.
  • Finally, we often witness miscommunications between human resources and the tax department during the implementation of a new benefit plan. It is common for one or both departments to fail to realize that Form 5500s are required to be filed. For example, a company may establish a new long-term care plan or an employee assistance plan and not realize that a Form 5500 filing is required. It is not uncommon to discover that multiple delinquent years are involved.

How to Remedy Delinquent Filings
In most cases, the best and most common solution to fixing a delinquent Form 5500 filing is via the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP). The DFVCP is designed to encourage voluntary compliance with DOL’s annual reporting requirements. The DFVCP gives delinquent plan sponsors a way to avoid potentially higher civil penalty assessments by satisfying the program’s requirements and voluntarily paying a reduced penalty amount. The following chart summarizes the DOL’s general penalty assessment for filing failures:

General DOL Penalty Structure (not pursuant to DFVCP)

ViolationDaily PenaltyAnnual Maximum
Non Filer$300up to $30,000 for each filing
Missing Audit Report$150up to $50,000 for each filing
Missing Schedules$100up to $36,500 for each filing
Late Filers$50Unlimited


The penalties begin to accrue from the original due date for the filing and not the extension date (if Form 5558). Additionally, the penalties are cumulative, so if you experience multiple violations for multiple years, the penalties can be extensive.

If penalties are assessed to a plan sponsor that is in good standing with the DOL (e.g., the plan sponsor has not received violations in the past), the DOL will typically limit the daily penalty to no more than $300 per day with an annual maximum of $50,000. However, as discussed earlier, the DOL has the statutory authority to charge up to $1,100 per day without an annual maximum.

If the plan sponsor elects to fix a delinquent Form 5500 using the DOL’s DFVCP, the penalty structure is reduced dramatically. The basic penalty under the DFVCP is $10 per day and implements penalty maximums on a “per filing” and “per plan” basis:

  • “Per filing” cap — The maximum penalty for a single late annual report is $750 for a small plan (generally fewer than 100 participants) and $2,000 for a large plan.
  • “Per plan” cap — The maximum penalty that can be assessed per plan (i.e., if a plan sponsor has failed to file Form 5500s for a plan for multiple years) is $1,500 for a small plan and $4,000 for a large plan.

Alvarez & Marsal Taxand Says:

  • We recommend open communications between your human resource department and tax department, so that an employee benefit plan does not slip through the cracks of the Form 5500 filing requirements.
  • We highly recommend a review of outstanding employee benefit plans be performed — especially if your company is experiencing either fast growth or high turnover.
  • To avoid being caught in a duel with the DOL and/or IRS, we recommend taking advantage of the DOL’s DFVCP upon the discovery of a late filed or incomplete Form 5500 filing.
  • Finally, if your company does receive a DOL notice of any kind, it is extremely important that you begin immediate communications with the DOL.

We would like to hear from you.

As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

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