What 5500 Information Can Trigger a DOL Audit?

The ability to efficiently review the Form 5500, related schedules and IQPA (Independent Qualified Plan Auditor’s) Report has increased dramatically since the introduction of electronic filing in 2009 and EFAST2.  With this increase in efficiency, the IRS and DOL have been more aggressive in using this information to identify plans for audits and investigations.  In 2012 alone, the DOL contacted thousands of plan sponsors requesting amendments or further explanations of previously reported information on the form or schedules.  With improved techniques and technology, the IRS and DOL can performed more targeted audits.

First, it is important to understand what authority and responsibility each agency has jurisdiction over:

  • The IRS has primary jurisdiction over the qualified status of ERISA governed plans, with includes examining plans and processing requests for determination letters.
  • The DOL has primary jurisdiction over the fiduciary standards, reporting and disclosure requirements and other rules that do not affect the qualified status of the plan.

So why do plans get selected for an IRS or DOL audit?

  • Random Selection;
  • A Participant Complaint; and
  • A Form 5500 Issue

With calendar year Retirement Plans and Health and Welfare Plans covered by ERISA gearing up for their 5500 reporting season, now seemed like an appropriate time to review what responses on your return are likely to trigger an audit or investigation.  Even though there is no official list published by the the DOL or the IRS, based on years of experience and attending multiple 5500 workshops and seminars as well as publications by reputable professionals in the industry, the situations identified below, albeit not all-inclusive, will give you a good reference point of what to be cognizant of while completing the filing:

    1. Failure to answer a required question. Incompleteness and leaving questions blank that should be answered with result in a “filing error” status.  At this juncture, the plan sponsor is required to amend the filing and respond to the question.  If the plan sponsor does not amend, eventually, the DOL will reject the filing and the DOL and IRS can impose substantial late filing penalties.  If the filing is ultimately rejected, the chances for an audit or investigation is dramatically increased.
    2. A large drop in the number of participants. When comparing multiple years, if there is a large drop in the number of participants from one year to the next the question of a possible partial plan termination is raised.  If a plan has a partial termination, it must vest the affected participants 100%.  The IRS and DOL monitor this issue with information completed in lines 5 and 6 of the Form 5500.  They will compare the end of the year plan participants to the subsequent year beginning of the year participants to see if they are reasonably similar.
    3. Inconsistencies in the data disclosed on the Form 5500 schedules. The DOL has clearly stated that it compares information on the Form and the schedules.  The inconsistencies in certain questions will generate DOL correspondence that generally requires amending the filing.
    4. Auditor’s Opinion on the Schedule H. Generally, an Adverse Accountants Opinion can trigger a DOL conducted by the Office of the Chief Accountant (OCA) for the Employee Benefits Security Administration (EBSA) of the DOL.
    5. Reporting of Late Deposits on Deferrals. Employers with 401(k) Plans are responsible for depositing their employees’ salary deferrals to the plan’s trust on the earliest date that the deferrals can reasonably be segregated for the employer’s general assets.  Failing to timely deposit is a plan error and the consequences and correction programs available are beyond the scope of this article.
    6. No Fidelity Bond. ERISA requires that every fiduciary of an employee benefit plan and every person who handles plan funds be bonded.  These bonds cover the plan from loss of assets due to fraud or dishonesty.  The ERISA bond is required to protect the participants and beneficiaries from dishonest acts of a fiduciary who handles the plan assets. In an IRS Employee Plans Learn, Educate, Self-Correct, Enforce Project, the two most common issues were (1) not timely amending the plan to comply with current law, or (2) not having adequate fidelity bonding.
    7. A large dollar amount in the “Other” asset line on the Schedule H. Large amounts on line (15) Other may indicate that the plan has assets in unique or unusual investments that generally raise questions of valuation and prohibited transactions, not to mention a possible breach of the fiduciary requirement of prudence.
      • Hard to Value Investments. It is left to a Plan Fiduciary to make a good faith determination of the fair or current value of assets where there is no readily ascertainable value.
      • Non-Marketable Investments. The DOL holds plan management responsible for the proper reporting of plan investments.

The IRS may also inquire on the following items:

      1. Large Change in Assets.  When comparing multiple years, an inquiry may be made about the reason for the fluctuation
      2. Large Amounts Spent on Administrative Expenses.  There may be an inquiry to assure that all expenses are valid plan expenses.
      3. Large Amount of Liabilities.  There may be an inquiry about the reason for the plan liabilities.

Although the list is does not cover every reason your plan may be selected for audit, Plan Sponsors and Practitioners should recognize that the Form 5500 does have enforcement significance and is not just for gathering information.  The responses on these filings often have legal significance. Consequently, care must be taken in completing the Form 5500 and schedules.  If you have questions on how the Form 5500 or any schedule should be completed, contact a qualified professional.

The information contained in this article should not be considered tax or legal advice.  Plan Sponsors should always consult with their advisors for the application of the ERISA rules related to their specific situation.

1 reply
  1. Ghora
    Ghora says:

    , Ary. But as you are well aware, you’ve only touched on the isuses [of 408(b)(2) compliance and ERISA fiduciary responsibility]. Practitioners are having to expend a lot of client time and newsletter effort in an effort to drive the important points home. Such as liability attorneys getting wind of a Plan Sponsor’s lack of compliance; they know that many small plan sponsors will settle readily to even a single participant’s claim of impropriety, rather than run up their attorney bills or suffer nasty press. But then, another participant can pick up that same issue, etc. [You don’t normally expect “class action” until the plan’s census grows to a certain size.] We even have a highway billboard, in our area, announcing free legal consultation if any employee in a 401(k) plan has concerns about proper handling of matters in the company’s plan. The DOL needs to publish some audit assessments in the small plan arena. There’s just no real fear of getting caught, yet.Dale


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