Although employers who maintain tax-qualified retirement plans are well aware of the requirement to file an annual information return (Internal Revenue Service (IRS) Form 5500), many employers appear unaware of their responsibility to file a similar return for other employee benefit programs. If the IRS discovers that required filings have not been made, penalties are severe. This article will discuss what types of plans need to file, potential penalties and a program that can minimize the penalties for late/non-filers.
Who needs to file?
Our experience has been that many employers believe that there is no IRS Form 5500 filing requirement if their health insurance plans are fully insured; this is not the case. A return has to be filed in the following cases:
- The program is a welfare benefit plan under ERISA, which covers many types of programs, including but not limited to health benefits, dental benefits, vision benefits, short term disability, long term disability, life insurance, and prepaid legal services.
- The employer must have 100 or more employees eligible to participate in the program at the beginning of the plan year.
- The method by which the program is funded (through insurance contracts or solely by employer payments from its general assets, for example) does not impact the filing requirement; the funding method may dictate the necessity of an audit by an independent certified public accountant.
What are the penalties for non-filing?
Failure to file information returns related to employee benefit programs can result in substantial penalties to the employer. Among the penalties that can be imposed are:
- IRS failure to file a return—maximum of $15,000 per return
- IRS willful failure to file a return—maximum of $25,000 and one year of imprisonment per return
- DOL failure to file a Form 5500–$1,100 per day per return, without a cap
As an example, one return that is filed two years late could generate a DOL penalty of $803,000 and IRS penalties of $40,000. Clearly, this is a serious issue.
A potential remedy
The Department of Labor (DOL) created the Delinquent Filer Voluntary Compliance (DFVC) program in 1995. Basically, DFVC allows an employer who has not filed required Form 5500s to file all required Form 5500s for a particular program at one time, and pay a reduced one-time penalty. The penalty amount will vary depending on the number of program participants, the number of delinquent returns for that program and how late the returns are—but the maximum penalty is $4,000 per program.
Participation in DFVC is relatively simple—the delinquent returns are prepared, filed with both the IRS and the DOL and the penalty is paid. Participating in the DFVC will prohibit the DOL and the IRS from assessing late filing penalties.
DFVC is not available to those employers who have already been contacted by the IRS/DOL about a delinquent return; if an employer files a return for the first time in the current year, and should have been filing in prior years, the employer runs the risk of receiving a letter from the IRS/DOL about the prior returns which would then prohibit the employer from using the DFVC.
What should an employer do?
The first step is to analyze the programs that the employer offers to its employees and the levels of eligibility to determine if filing is required. The design of the programs should be examined to determine if programs can be combined for Form 5500 purposes. The second step would be to make certain that no correspondence from the IRS/DOL about non-filing has been received by the employer. Then, the returns should be prepared (which could involve significant research, particularly if the programs have been operating for a number of years) and the DFVC filing made, including penalty payment.
We would be pleased to assist you in reviewing this issue and preparing the DFVC filing package if needed. For more information on this topic, post a comment below or contact our Compensation & Benefits Advisory Services Group at 440-449-6800.