Hot tips on filing Forms 5500 (for those who file and those who should but don't).

Sponsors of employee retirement and welfare benefit plans are required to make their annual filing of Form 5500, Annual Return/ Report of Employee Benefit Plan (With 100 or more participants), by the end of the seventh month following the plan year-end.

By correctly addressing certain often misunderstood areas of the form, plan sponsors can avoid unwarranted scrutiny from the IRS or the Department of Labor (DOL). There are also steps that plan sponsors who are out of compliance with the Form 5500 filing requirements should take.

Nonfiling

The risks of not filing Form 5500 for a plan are significant. The Service can assess a penalty of $25 per day on each late return, with a maximum penalty of $15,000. The DOL has the authority to assess a penalty of $300 per day, with a maximum penalty of $30,000 per report.

Lateness is measured from the original due date of the report without regard to extensions. If a Dec. 31, 1994 plan year with a Form 5500 due by July 31, 1994 is extended to Oct. 15, 1995 but filed on Aug. 12, 1996, the report is more than one year late. The time runs from July 31, 1994, not the extended due date of Oct. 15,1995.

The most common nonfilers are employers that sponsor health and welfare plans. Many employers believe they are not subject to filing requirements for these plans; however, in general, if an employer provides health, dental, group life, disability or other welfare benefits to 100 or more employees, it must file Form 5500 each year.

Another group of nonfilers are sponsors of nonqualified deferred compensation plans. The general rule is that Form 5500 is required unless a special "one-time" filing was made with the DOL in the year the plan was established.

If a late Form 5500 is filed, the penalty exposure is $50 per day to the DOL instead of the $300 per day nonfiling penalty. The IRS $25 per day penalty is still applicable in addition to the DOL penalties.

Recognizing that these onerous penalties often prevent plan sponsors from filing late Forms 5500, the DOL initiated a Delinquent Filer Voluntary Compliance (DFVC) program last spring. This program limits the DOL penalties for late filing to $5,000 per Form 5500 and $2,000 per Form 5500-C/R, Return/Report of Employee Benefit Plan (With fewer than 100 participants). If the reports are less than one year late, the maximum penalty is $2,500 per Form 5500 and $1,000 for Form 5500-C/R.

Although this is expensive, it is a Abetter deal than employers would receive if the DOL catches on to the situation before the application to the DFVC program (i.e., the $30,000 penalty)

To enter the program:

* Determine that the plan administrator has not received a penalty notice from the DOL. (Because this program is voluntary, it is not available if the plan sponsor has already been caught out of compliance.)

* Prepare a complete Form 5500 or 5500-C/R (including schedules). Make a copy of Form 5500 or 5500-C/R, page 1, for the DOL.

* On the face of the completed form and the extra DOL copy of page 1, write in red bold print, "DFVC Program".

* Mail the completed form with a letter requesting that IRS penalties be abated to the Service at the regular address listed in the Form 5500 instructions.

* Write a check payable to the "U.S. Department of Labor" in the amount of the penalty. (This cannot be a plan check; civil penalties must be paid by the administrator or plan sponsor.)

* Mail the copy of Form 5500 or 5000C/R, page 1, along with the check, to the DOL:

DFVC Program

Pension and Welfare

Benefits Administration

P.O. Box 277025

Atlanta, GA 30384-7025

What About IRS Penalties?

The IRS does not have a formal program that reduces penalties. However, as always, the Service will entertain arguments of reasonable cause for late filing if it receives a request that the penalties be abated. To request that the IRS abate its late penalties, a letter should be attached to the Form 5500 explaining the facts and cause for late filing.

What If Late Forms 5500 Have Already Been Filed?

If forms have already been filed late and are subject to the DOL penalties, make a copy of the first page of the filing, write in bold red "DFVC Program" and mail along with the applicable penalty check to the DOL.

If the Service generates a penalty notice based on a late Form 5500 that was subsequently submitted to the DOL under the DFVC Program, respond to that notice explaining the reason for the late filing and that the sponsor has filed under the DFVC program.

What About Top Hat Plans?

Top hat plans that failed to file their one-time statement with the DOL exempting them from future Forms 5500 can also file under the DFVC program. These plans should refer to the guidance for the specific line items to be completed and pay a total penalty of $2,500, no matter how many plans. The mailing address for the filings is:

Top Hat Plan Exemption

Pension and Welfare

Benefits Administration

Room N-5638

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, D.C. 20210

Apprenticeship and training plans also receive relief under this program.

What If DFVC Is Too Expensive?

Even with the substantial reduction in penalties, some employers are faced with extremely large penalty exposure. The DOL's authority to assess penalties goes back to 1988. Therefore, plan sponsors could owe up to $30,000 per plan to the DOL. If there are multiple plans (which is often the case), the $30,000 is due on each plan.

First, carefully evaluate the number of plans that exist. The facts might support that one welfare benefit plan offering health, life, disability, etc., exists. Secondly, if there are extenuating circumstances, consider not entering the DFVC program and requesting a penalty abatement under reasonable cause.

Reasonable cause should be a last resort effort. If this argument fails, the plan sponsors could be subject to the maximum penalties without the benefit of DFVC.

Hot Tips for Filers

The DOL has announced that the 1996 Forms 5500 will be simplified. Many third-party administrators and trustees opposed the changes on the 1995 forms; they did not have enough advance notice to reprogram their systems to collect data in a new format. CPAs working on fiscal-year filings of the 1994 and 1995 Forms 5500 should take special note of the following tips.

Haphazardly completing the return will result in IRS/DOL notices because the data on the returns is subject to an edit-check program by the IRS. Here are a few tips to simplify return preparation and minimize contacts with the IRS or DOL.

* Plan audit requirement: Question 27 of the return focuses on whether the plan sponsor needs to engage independent accountants to audit the plan's financial statements. The general rule is that all retirement plans and welfare plans that are "funded" (have plan assets) must be audited if there are 100 or more participants in the plan as of the first day of the plan year. The audited financial statements are attached to the return before filing with the Service.

Employers approaching the magical 100-participant threshold must be careful to monitor participant counts each year; failing to audit the plan when required can result in penalties for failure to file a complete return.

This group of employers should familiarize themselves with the mysterious "80/120 rule," which can work to their advantage. This rule allows an employer to indefinitely forgo the audit requirement if the plan crosses over the 100-participant threshold and remains below 121 participants. As soon as there are 121 participants, however, the audit requirement kicks in. (The "80" part of the rule is not often used and provides that the plan can file the longer Form 5500 with the audit attached if the plan counts drop from over 100 participants but still exceed 79 participants.)

* Counting participants: A great deal of confusion exists in the area of counting participants, but it is important to count them correctly. Since the welfare plan filing requirements and plan audit requirement are based on participant counts, a mistake could subject the employer to potential penalties. Question 7 also requires a year-end participant count.

Individuals who are eligible to participate in retirement and welfare plans but choose not to must be counted as participants. For instance, in a Sec. 401 (k) plan, if an individual is eligible to defer wages but decides to keep all of his take-home pay, that person must be counted as a participant even though he does not have any accrued benefits in the plan. This is a commonly overlooked rule.

If a new Sec. 401 (k) plan has 75 individuals deferring money and 50 eligible to do so but opting out, the annual audit requirement applies (75 + 50 =125, which exceeds the 100-participant threshold).

In completing welfare plan returns or to determine whether a filing is required, employers must count employees eligible to receive benefits but need not count dependents.

* Use of "nonapplicable (N/A)": The questions on the filing, other than for numeric information, require a response of "yes", "no" or "N/A." The 1994 Form 5500 instructions clearly indicate which questions a filer must complete; a response of N/A to a question requiring a yes or no answer may cause an IRS notice to be issued to the filer.

When N/A is the right answer, employers can simplify return preparation by leaving the question blank, since the Service's computer interprets a blank field as N/A. However, Question 1(e) (CUSIP number) should be answered N/A if the employer has no CUSIP number.

* "Trick" questions: A brief summary of the questions often answered incorrectly includes:

Question 4 (Entity Code). A tiny box (easily overlooked) is provided and requires a code to indicate the type of entity sponsoring the plan.

Question 21(c) (Attachments). Retirement plans, such as Sec. 401 (k) plans or union plans that also benefit noncollectively bargained employees, must provide special attachments to indicate that each "part" of the plan passes coverage testing under tax law.

Question 23 (Non Traded Assets). Asks for identification of assets not stated at fair market value and is used by the IRS as a red flag. Examples of such assets are closely held employer securities and partnership investments.

Question 27. Supplemental schedules are required (e.g., Schedule of Assets Held for Investment Purposes) and must be in the specific format required by the DOL.

Questions 31 and 32 (Balance Sheet and Income Statement). For funded plans, must be completed and must tie out to the audited financial statements attached to the return or a reconciliation is required.

A little extra attention to Form 5500 can keep the IRS and DOL from paying an unwanted visit.