2015 Form 5500 Includes New Compliance Questions:

On December 4, the DOL released an advance copy of the 2015 Form 5500 (for large plans) and Form 5500-SF (for small plans). It is always interesting to review the newly-released instructions each year to see what changes are being made to the Form 5500 series. For 2015, important changes have been made, in the form of several new compliance questions. The new questions that will have the broadest applicability are as follows [bracketed text below constitutes my comments]:

• Were in-service distributions made during the plan year? [This raises a host of compliance issues, such as whether the recipients were eligible to receive those distributions, whether the amounts were proper, and whether corresponding tax reporting occurred.]
• For 401(k) plans, how does the plan satisfy the nondiscrimination requirements for employee deferrals and employer matching contributions (as applicable) under applicable Internal Revenue Code rules? [Certain plan designs constitute safe harbors in this regard, as long as all safe harbor requirements are satisfied each year.]
• For 401(k) plans, if the ADP/ACP test was used, did the plan perform that testing for the plan year by using the “current year testing method” for nonhighly compensated employees? [This must be consistent with the plan document. Also, note that there are special rules for changing testing methods in this regard.]
• Report whether the plan used the ratio percentage test or the average benefit test to satisfy the Internal Revenue Code’s coverage requirements. [This test is a threshold test, to determine if the plan is being offered to a sufficient number of nonhighly compensated employees. Importantly, all controlled group and/or affiliated service group members must generally be included in this test.]
• Does the plan satisfy the coverage and nondiscrimination tests by combining the plan with any other plans under the permissive aggregation rules? [When an “employer” (which includes all controlled group and/or affiliated service group members) maintains more than one plan, under certain circumstances the plans can be tested together to satisfy the coverage and nondiscrimination requirements.]
• Has the plan been timely amended for all required tax law changes? [Given the frequency of law changes in this field, and given the maze of plan amendment deadlines, the failure to adopt timely amendments is still high on the IRS’s list of common issues it finds when it audits retirement plans.]
• Enter the date on which the last plan amendment/restatement for the required tax law changes was adopted. [The next major restatement deadline for most defined contribution plans is April 30, 2016, for the so-called PPA Restatement, which includes provisions of the Pension Protection Act of 2006 and subsequent law changes.]
• If the plan sponsor is an adopter of a pre-approved master and prototype (M&P) or volume submitter plan that is subject to a favorable IRS opinion or advisory letter, enter the date of that favorable letter, as well as the letter’s serial number. [When plan sponsors execute their PPA restatement, they should ensure that they receive a copy of the corresponding IRS opinion or advisory letter from their plan document provider.]

The instructions note that “these new IRS compliance questions are optional for the 2015 plan year” though the IRS and DOL have indicated that they will not be optional after the 2015 plan year.

In addition, on December 7, the IRS published guidance in the form of Frequently Asked Questions (“FAQs”) addressing these new compliance questions. In the introduction, the IRS states that “these IRS compliance questions will help the IRS to effectively focus on specific factors and issues of federal tax law compliance. Although responses to these new questions are optional for the 2015 plan year, we strongly encourage you to answer them.” These FAQs provide helpful guidance on several points (e.g., for 401(k) plans, the new in-service distribution question only applies to hardship withdrawals). Here is a link to the FAQs: https://www.irs.gov/Retirement-Plans/Frequently-Asked-Questions-Regarding-the-IRS-Compliance-Questions-on-the-2015-Form-5500-Series-Returns