Common problems with Form 5500 filings and employee benefit plan audits.

• Author: Walker, David M.

Private pension plans in the United States hold approximately $2 trillion in assets and cover over 60 million workers. A general concern about the instability of employee benefit plans has arisen in the wake of recent failures by banks, thrifts and insurance companies. Consequently, the federal government has focused significant attention on enforcement directed at the annual reporting and audit requirements prescribed for employee benefit plans by the Employee Retirement Income Security Act (ERISA).

The Department of Labor (DOL) has proposed to assess significant penalties for improperly filed Forms 5500, Annual Return/Report of Employee Benefit Plan (With 100 or more participants). ERISA Section 502(c)(2) permits the DOL to assess a penalty of up to $1,000 per day for failure to timely file a correct Form 5500 or 5500-C/R, Return/Report of Employee Benefit Plan (With fewer than 100 participants). This penalty applies to all employee benefit plans required to file such forms. In addition, the IRS can impose a penalty of $25 per day, up to $15,000, for late filing of Forms 5500, 5500-C/R and 5500EZ, Annual Return of One-Participant (Owners and Their Spouses) Pension Benefit Plan, for qualified retirement plans, group legal-service plans, cafeteria plans and certain educational assistance programs (Sec. 6652(e)).

The most common reasons for a DOL rejection of a Form 5500 include the audit opinion's failure to refer to the supporting schedules required by the ERISA; failure to provide comparative statements of net assets; failure to provide an audit report for certain plans with assets invested with insurance companies and certain welfare plans funded with employee contributions; and failure to fully describe the valuation method for employer securities. Plan supervisors should also be aware of the reporting of gains and losses on plan investments and reportable transactions for ERISA plans.

Proposed penalties and abatement requests

As part of its stepped-up effort to enforce the ERISA's reporting requirements, the DOL has proposed substantial penalties for numerous deficient 1988 Form 5500 filings. These penalties have ranged up to $90,000, including penalties of up to $50,000 for deficient audit reports. These fines are imposed on the plan administrator, not on the plan. The DOL also has authority to replace existing auditors and appoint new auditors if the circumstances warrant. (In addition, the DOL has referred approximately 50 allegedly deficient ERISA audits to the AICPA Ethics Committee for possible action.)

The DOL has authority to consider timely filed requests for abatement of ERISA Section 502(c)(2) penalties. In considering the...