In response to a request for comments on revisions to the Form 5500 Series, the American Retirement Association has provided suggestions to remedy some concerns expressed by our members.
The Department of Labor (DOL), IRS, and Pension Benefit Guaranty Corporation (PBGC) issued proposed revisions to the Form 5500 series on Sept. 14. The proposed changes implement certain provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and make additional “modernizations” to the Form 5500 series. A summary of the proposed changes can be found in the Sept. 15 ASPPA Net article, Proposed SECURE Act Revisions to Form 5500 Issued, but the most notable changes proposed were:
- Revising the small plan audit waiver to count only participants with account balances (instead of all eligible participants);
- Updating Schedule H to include additional information on plan investments;
- Revising Schedule R to include additional compliance questions and plan detail; and
- Implementing new consolidated reporting, including the Group of Plans reporting.
That proposal garnered a significant amount of attention, with over 100 comments on the proposal. On November 1, ARA provided the agencies with our comments.
Small Plan Audit Waiver
The proposed change that garnered the most attention was undoubtedly the agencies' proposal to revise the small plan audit waiver. The revised rule would base the small plan audit waiver on the number of participants with account balances, rather than the current rule that is based on those eligible to participate (even if they are not actually participating). This change was also proposed by the agencies in a 2016 proposal that wasn't finalized. ARA again expressed strong support for this change and commended the agencies for the proposal.
A significant number of commenters, mostly CPAs and CPA organizations, wrote in to oppose this change, arguing that small plans were not being operated correctly and needed the oversight of an independent audit. On the other hand, a number of small employers as well as the US Chamber wrote to express their support for the change, noting the significant cost impact on small plans.
ARA expressed strong support for the change—acknowledging that independent audits do provide value, but noting that that value must be balanced with the cost of the audit. ARA noted that the cost of plan audits has increased and is expected to continue increasing and that cost can have a significant and staggering impact on plan fees for participants in plans with very few account balances. Further, ARA noted that the number of plans that will be subject to audit under the current standard will dramatically increase when long-term part-time employees become eligible to participate. This only furthers the need for the proposal to ensure the retirement outcomes of participants are not negatively impacted by the increased coverage of their part-time colleagues.
Investment Information
The agencies also proposed changing Schedule H to provide additional breakdown and detail of plan expenses and investment expense ratios, performance, and other information. A stated purpose of this change is to increase transparency and make the data more mineable.
ARA expressed several significant concerns with having this specific data be so broadly available. Most notably, we expressed concerns that public reporting could significantly and unnecessarily heighten the risk of frivolous litigation, which unnecessarily increases the cost of maintaining retirement plans. In addition, there will be significant costs for modification of systems to comply with this detail. While ARA favors transparency of fees and expenses to participants, Form 5500 is not where participants find this information and therefore this change is only reasonably seen as a tool for enforcement. ARA expressed concern that the cost of modifying systems together with the certain increase in costs that will come from making information publicly available significantly outweighs any marginal benefit in enforcement.
Plan Information
The proposal also added several questions for IRS-related compliance gathering—including questions on coverage testing, safe harbor status, pre-approved plan provider and opinion letter, and plan trust information. ARA recommended that these questions be revised, or in some cases made optional or eliminated, to reflect the practical realties of how plans are designed and operated.
Groups of Plans
The proposal would implement the SECURE Act's new consolidated Form 5500 for Groups of Plans. The proposal creates a new Defined Contribution Group reporting arrangement (DCG) and adds a new Schedule DCG (Individual Plan Information) that such reporting groups must file for each participating plan, in addition to meeting more generally applicable Form 5500 requirements. Notably, the proposal would subject the DCG to a trust-level audit (regardless of the size of the DCG or the participating plans) in addition to plan-level audits for each large plan in the group.
ARA noted that this proposal would increase the filing burden for small plans that may have benefitted from Groups of Plans, contrary to the intent in the SECURE Act. Most notably ARA argued that the addition of a trust-level audit was unnecessary and contrary to the statute and its intent. Further, ARA encouraged the agencies' to revise the guidance with respect to eligibility for DCGs to eliminate the same trust requirement, allow 403(b) plans to form groups of plans, and clarify the "same investments" requirement.
Other Suggestions
ARA also provided a variety of other comments on the proposal, including encouraging the agencies to permit electronic filing for a Form 5558 (on a consolidated basis for a groups of plans), to revise instructions to reflect certain nuances applicable to 403(b) plans, and to update the Schedule H to reflect 403(b) plan specific transactions (such as plan-to-plan transfers).
Timing
Finally, ARA advocated for delaying implementation of changes other than the audit change and the SECURE Act changes until the 2024 plan year. We pointed out that the data necessary to respond to many of the new line items includes information that service providers are not immediately poised to provide. Therefore, additional time is needed to update systems and collect data to ensure the quality and accuracy of reporting.
Kelsey Mayo, a partner with the Poyner Spruill LLP law firm, is the American Retirement Association’s Director of Regulatory Policy.
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