The Department of Labor (DOL) recently announced the publication of proposed revisions to the Form 5500 Annual Return/Report series and proposed updates to the reporting and disclosure regulations affected by the revisions to the forms.

The proposed rules would significantly change the amount and type of information that must be reported on the Form 5500, which was last updated in 2006. The proposed changes to the Form 5500, if adopted, would generally apply to plan years beginning on or after January 1, 2019.

Background

Employers and other sponsors of ERISA pension plans, including Section 401(k), profit sharing and defined benefit plans and sponsors of ERISA welfare benefit plans, must annually report detailed information on the Form 5500 series. The Form 5500 was developed jointly by the DOL, the Pension Benefit Guaranty Corporation (PBGC) and the IRS. The Form 5500 is filed with the DOL but is also a tax return for purposes of the application of certain taxes and assessments under the Internal Revenue Code (IRC).

The Form 5500 series is used by the DOL, PBGC and IRS as an enforcement tool to ensure compliance the ERISA and IRC requirements applicable to tax-qualified retirement plans and group health plans. The Form 5500 series also generates a significant database of information that is used by the DOL and other government agencies to assess employee benefits, tax, and economic trends and policies.

Several important pieces of legislation have been enacted since the Form 5500 series was last revised in 2006 (e.g., the Dodd-Frank Wall Street Reform, the Consumer Protection Act and the Affordable Care Act), that affect the amount and type of information to be reported regarding retirement plans and group health plans. The proposed rules reflect changes made by this legislation, in addition to providing for updates that are consistent with market standards.

Proposed regulations and revised Form 5500 series

The DOL's primary objectives are to enhance employee benefit plan reporting for employee plan sponsors, plan participants and the public and to provide more relevant information about plan investments and fees. The proposed revisions seek to accomplish the following broad goals:

— Modernize financial reporting: The proposed revisions to the Form 5500 will require more detailed reporting of plan investments, with specific focus on alternative and hard-to-value investments.

— Provide greater information regarding group health plans: Currently, small (fewer than 100 participants) health and welfare benefit plans that are either self-funded or fully insured are exempt from filing Form 5500. The DOL proposes to eliminate this exemption, so that all health plans, regardless of size, would be required to file. This change would give the DOL the ability to collect and analyze data related to Affordable Care Act requirements.

— Enhance data mineability: Currently, much of the investment-related information in the Form 5500 is provided via unstructured financial statement attachments, such as PDF documents. The DOL proposes to incorporate the elements of these attachments into the form itself, so the forms can be computer-processable for analytic purposes.

— Improve service provider fee information: The DOL's proposal would harmonize fee reporting on Form 5500, Schedule C with the service provider disclosure regulations under 29 CFR 2550.408b(2). The proposed Schedule C would require additional details regarding fees included in the value of a plan's investments (i.e., indirect compensation).

— Enhance compliance with ERISA and the IRC: The proposed revisions would add new questions regarding plan operations, service provider relationships and financial management of the plans. These questions would enable the DOL and the IRS to identify potential operational errors and determine where to focus enforcement and oversight efforts.

Implications

Although the revisions to the Form 5500 are not yet final, plan sponsors should begin planning now for these changes. The Form 5500 and its schedules will require much more detail than the current form and will create filing requirements for many health plan sponsors that have not been required to file Form 5500. The proposed changes will require expanded audited financial statement disclosures and additional testing of investments, and will significantly affect the information that plan service providers will need to retain for plan sponsors. Plan sponsors and fiduciaries will need to closely monitor plan operations against plan provisions and have a clear understanding of the sources and types of fees charged against plan investments.

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