The July 31 due date for filing Form 5500 with the Department of Labor (DOL) for calendar year retirement plans is rolling around very quickly unless extended. But what about those welfare benefit plans? Do they also have to file Form 5500?
As with all ERISA matters, it depends. Here are the basics in Q&A format.
What exactly is a Welfare Benefit Plan?
Title I of ERISA covers most private sector employee benefit plans with respect to reporting, disclosure, and fiduciary requirement. ERISA also covers “welfare benefit plans”. These are plans that provide medical, sickness, accident, disability, death, unemployment, vacation, and other similar benefits to employees or former employees and their dependents and beneficiaries.
What are the general filing requirements?
In brief, here they are:
The 100 Participant Threshold
Generally, “small” unfunded plans and fully insured plans (those with less than 100 participants on the first day of the Plan Year) are exempt. On the other hand, “large” welfare benefit plans (those with more than 100 participants on the first day of the plan year) must file Form 5500 each year whether funded or unfunded. Funded plans must file regardless of the number of participants.
We’ll get into the difference between funded and unfunded plans shortly, but it’s important to note that a “participant” in a welfare benefit plan is not necessarily the same as a “participant” in a 401(k) plan.
That is, a participant in a 401(k) plan is anyone eligible regardless of whether he or she contributes. Counting just account balances has sometimes resulted in the surprise that an audit is required. On the other hand, a participant in a welfare benefit plans are only those actually covered.
Funded vs. Unfunded Welfare Benefit Plans
Now let’s put “funded” vs. unfunded” into the context of those general requirements discussed above.
Unfunded plans and fully insured plans with less than 100 participants on the first day of the Plan Year are exempt. Plans with more than 100 participants on the first day of the plan year must file Form 5500 each year whether funded or unfunded. Funded plans must file regardless of the number of participants.
Here’s the difference between the two.
An unfunded plan is one in which benefits are paid solely from the general assets of the employer. That would include, for instance, a self-insured plan where benefits are paid directly from the assets of the plan sponsor.
A funded plan, on the other hand, is a plan that receives contributions from active or former employees and/or uses a trust to pay benefits. A funded plan also includes one that uses insurance to pay benefits. However, the DOL provides an exemption from the filing requirements for most small plans (under 100 participants) funded solely through insurance contracts.
But that may not be case in the future. Employers not currently required to file Form 5500 may not be getting a pass beyond 2018. The DOL recently announced proposed changes to Form 5500 that would require reporting by all group health plans covered by Title I of ERISA.
What about cafeteria plans?
Cafeteria plans are generally exempt from filing Form 5500, but do have to file under the following circumstances if:
- It includes a medical reimbursement feature, and
- It has more than 100 participants on the first day of the plan year.
How can a “wrap plan” minimize filing requirements?
Welfare Benefit Plans, as discussed above, can include plans that provide medical, sickness, accident, disability, death, unemployment, vacation, and similar benefits. Does that mean that a Form 5500 must be filed for each one that meets the requirements?
Not if a “wrap plan” is used. That’s the non-technical name that describes a plan document that wraps or incorporates all welfare benefit plan into one document so that only one Form 5500 has to be filed. A wrap plan can provide other advantages, but we’ll make that the subject of its own blog post.
When is Form 5500 due?
As with due dates for retirement plans, Form 5500 must be filed within 7 months after the end of the plan year. A 2 ½ month extension is available by filing Form 5500.
Is a Summary Annual Report required?
All plans that file Form 5500 must be distributed to employees within 9 months after the close of the plan year or 2 months after the due date for filing Form 5500 with extension.
What if the Form 5500 is delinquent?
Fortunately, plan sponsors can use the DOL’s Delinquent Filer Voluntary Compliance program (DFVC) which caps penalties for small plans at $750 for one delinquent Form 5500 and $1,500 for more than one year and caps penalties for large plans at $1,000 for one year and $2,000 for more than one year.
The alternative to not taking advantage of the DFVC can be much more expensive – very much more.
- IRS penalties: $25 per day up to a maximum of $15,000.
- DOL penalties: Recently increased up to $2,063 per day with no maximum. For willful violations, individuals face up to a $100,000 fine and/or imprisonment up to 10 years.
Caveat: The act of filing starts the statute of limitations running. Thus, if a Form 5500 is never filed, then the statute of limitations never starts running. There is no point, then, when the DOL’s right to collect penalties for late or missed filings will cease.
Very directly, the cost of non-compliance can be huge. So please keep in mind that this blog post is general in nature and for discussion purposes only. Plan sponsors should always review their specific situation with qualified advisors to decide the extent to which Form 5500 should be filed for their welfare benefit plans.