All qualified retirement plans are subject to a myriad of requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The United States Department of Labor (DOL) is charged with enforcing the requirements of ERISA. This article discusses some of these requirements and related guidance issued by the DOL, the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC), as well as some related future guidance to be issued by the DOL as required by SECURE Act 2.0.

1. Requirement to Timely File an Annual Report with the Department of Labor (DOL)

Filing Deadline

All qualified retirement plans-profit-sharing plans, stock bonus plans, defined benefit pension plans and money purchase plans, and 401(k) plans-must file an annual return/report on Form 5500. The Form 5500 must be filed whether or not the plan is “tax-qualified,” benefits no longer accrue (i.e., the plan is “frozen”), contributions were not made for the most recent plan year, or contributions are no longer made to the plan.

To be considered complete and timely filed, all required forms, schedules, statements, and attachments to the Form 5500 must be filed by the last day of the seventh calendar month after the end of the plan year. As explained below, a small plan (generally under 100 participants at the beginning of the plan year) may be eligible to file Form 5500-SF instead of Form 5500.

A plan may obtain a one-time extension of time to file a Form 5500 or Form 5500-SF (up to two and a half months) by filing IRS Form 5558, Application for Extension of Time To File Certain Employee Plan Returns, on or before the normal due date (not including any extensions) of the return/report. The Form 5558 MUST be filed with the IRS.

An automatic extension of time to file the Form 5500 Annual Return/Report or Form 5500-SF until the due date of the federal income tax return of the employer (plan sponsor) will be granted if all of the following conditions are met: (1) the plan year and the employer’s tax year are the same; (2) the employer has been granted an extension of time to file its federal income tax return to a date later than the normal due date for filing the Form 5500 or Form 5500-SF; and (3) a copy of the application for extension of time to file the federal income tax return is maintained with the plan sponsor’s records. An extension granted by using this automatic extension procedure CANNOT be extended further by filing a Form 5558, nor can it be extended beyond a total of 9½ months beyond the close of the plan year. For calendar year plans, this means that a Form 5500 would be due by October 15 of the year following the applicable plan year.

Penalties

Plan administrators and plan sponsors must provide complete and accurate information in a Form 5500 and must otherwise comply fully with the filing requirements.

ERISA and the Internal Revenue Code of 1986, as amended (Code) provide for the DOL and the IRS, respectively, to assess or impose penalties for not giving complete and accurate information and for not filing complete and accurate statements and returns/reports. As an example, a Form 5500 filed for a large plan (as explained below) will not be considered filed timely if there has not been an audit of the financial statements by an independent qualified public accountant (IQPA) and the requirements of Schedule H to the Form 5500 (as explained below) have not been satisfied. Certain penalties are administrative (i.e., they may be imposed or assessed by one of the governmental agencies delegated to administer the collection of the annual return/report data). Others require a legal conviction.

ERISA provides a penalty of up to $2,400 a day may be imposed for each day a plan administrator fails to file a complete and accurate Form 5500.

The Code provides a penalty of $1,000 for each failure to file an actuarial statement for a qualified defined benefit pension plan Schedule MB (Form 5500) or Schedule SB (Form 5500) required by the applicable instructions. The actuarial statement is based upon the plan actuary’s (i) reconciliation of census data, (ii) review of assumptions and experience study, (iii) review of actuarial methods, (iv) review of liabilities, (v) review of contribution calculations and (vi) review of the valuation report.

Small Plan Exception

If the number of participants reported on line 5 of the Form 5500 is between 80 and 120, and a Form 5500 Annual Return/Report was filed for the prior plan year, then the plan sponsor may elect to complete the return/report in the same category (“large plan” or “small plan”) as was filed for the prior return/report. A benefit to a small plan is that it may file a Form 5500-SF and an audit of the financials by an IQPA is not required. Thus, if a Form 5500-SF or a Form 5500 Annual Return/Report was filed for the 2022 plan year as a small plan, including the Schedule I, if applicable, and the number entered on line 5 of the 2022 Form 5500 is 120 or less, then the plan sponsor may elect to complete the 2023 Form 5500 and schedules in accordance with the instructions for a small plan, including for eligible filers, filing the Form 5500-SF instead of the Form 5500.

Schedule H

Schedule H (Financial Information) is required for qualified retirement plans filing as “large plans”. Large plans filing Schedule H are generally required to engage an IQPA and attach a report of the IQPA under ERISA section 103(a)(3)(A). These plans are also generally required to attach to the Form 5500 a “Schedule of Assets (Held At End of Year),” and, if applicable, a “Schedule of Assets (Acquired and Disposed of Within Year),” a “Schedule of Reportable Transactions,” and a “Schedule of Delinquent Participant Contributions.”

2. Use of Forfeitures in 401(k) Plans

At least nine proposed class actions are currently pending from 401(k) plan participants who claim employers misused forfeitures by reducing expenses on required employer contributions to individual workers’ accounts instead of putting the money towards lowering plan fees.

The recent uptick in forfeiture suits has roots in a DOL lawsuit against a technology company which challenged how the plan sponsor used forfeitures. That case was settled in 2023.

The DOL alleged that the company breached its fiduciary duty with regard to several 401(k) plans it sponsored because it failed to follow the terms of the plan documents. The plan terms required using forfeitures to lower plan expenses before using them to reduce employer contributions, according to the DOL’s complaint.

The SECURE Act 2.0 legislation of 2022 directed the DOL to examine ways to improve plan information, including how to understand fees. The DOL expects to report to Congress with recommendations in this area by the end of 2025. The DOL publishes a guide to 401(k) fees and has a toll-free line with advisers who can help participants understand their fees (866-444-3272).

The Financial Industry Regulatory Authority offers an online tool that analyzes how fees and other expenses affect the value of mutual funds and exchange-traded funds over time.

3. Expected Pension De-risking Report

Lisa M. Gomez, Assistant Secretary for Employee Benefit Security of the Employee Benefits Security Administration (EBSA), recently announced that the DOL expects to submit a report to Congress shortly on so-called pension risk transfers, which involve the exchange of defined benefit pension plan liabilities for annuity insurance contracts.

Congress directed EBSA to submit a report to Congress on pension de-risking as part of a retirement plan overhaul passed at the end of 2022 under SECURE Act 2.0. Lawmakers specifically directed the DOL to study whether to modify a piece of agency guidance called Interpretive Bulletin 95-1, which details the standards for a pension plan fiduciary in selecting an annuity provider for a de-risking transaction. The legislation requires the DOL to produce a report to Congress by December 2024 on the findings of that review as well as an assessment of “any risk to participants.”

Pension de-risking transactions reached a historic record in 2022 with $52 billion worth of transactions according to the Pension Risk Transfer Poll Infographic produced by insurance giant MetLife. A recent crop of ERISA class actions has also targeted a set of de-risking deals conducted in recent years by three large companies, alleging their employer’s choice of the same private equity-linked annuity provider to annuitize their pension obligations was not the safest available choice as Interpretive Bulletin 95-1 requires.

4. Adequate Consideration Rule

Another DOL project in the works is the so-called adequate consideration rule, which relates to employee stock ownership plan (ESOP) valuations. Members of the ESOP industry have long called for rules clearly defining what “adequate consideration” means in the context of an exemption to ERISA’s strict rules prohibiting transactions between parties in interest.

Essentially, the exemption allows managers to engage in transactions that would otherwise be prohibited by ERISA related to the ESOP, as long as they meet certain standards related to how the parties conduct valuations of the company’s stock. One condition specified under ERISA is that the ESOP cannot pay more than fair market value for shares, but disputes over what that means have been the subject of extensive litigation.

Congress in SECURE Act 2.0 required guidance on “acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan.”

Then in April 2023, the DOL committed to proceeding with notice-and-comment rulemaking on the definition of adequate consideration in a letter to the ESOP Association. The DOL produced that regulatory update in response to a petition the group filed using the Administrative Procedure Act calling for regulations on the adequate consideration exemption. Then in February 2024, the ESOP Association sent the DOL model proposed regulations defining adequate consideration.

Ms. Gomez recently stated at a speaking event that while the pension de-risking rule is expected in a few weeks, the adequate consideration rule is “probably going to be more, you know, summer or fall” as the proposal is still being drafted.

5. Locating Lost Participants

ERISA’s fiduciary obligations apply equally to defined benefit plans and defined contribution plans, and the DOL’s guidance on lost participants (as summarized below) apply equally to both types of plans. The DOL also stresses that ERISA’s fiduciary obligations fully apply to missing participants whose accounts the plan purports to treat as “conditionally forfeited” under Treasury Regulation 1.411(a)-4(b)(6). Under Title I of ERISA, plan fiduciaries retain full responsibility for adhering to Title I’s provisions with respect to such participants and their beneficiaries; these participants and beneficiaries remain fully entitled to all of their vested benefits under the plan; and the fiduciaries have an obligation to keep accurate records and take appropriate steps to ensure that the participants and beneficiaries are paid their full benefits when due.

There are multiple DOL regulations and supplemental guidance that deal with the problem of missing participants:

• DOL FAB 2014-01: This guidance was issued in conjunction with the obligation of plan fiduciaries to search for lost and missing participants upon termination of a defined contribution plan.
• DOL Best Practices for Pension Plans: Describes a range of best practices fiduciaries of retirement plans, such as 401(k) plans, should consider as steps their plan could take to help reduce missing participant issues and ensure that plan participants receive promised benefits when they reach retirement age.
• DOL Compliance Assistance Release 2021-01: Outlines the general investigative approach that will guide all of EBSA’s Regional Offices under the Terminated Vested Participants Project and facilitate voluntary compliance efforts by plan fiduciaries
• DOL Field Assistance Bulletin 2021-01: Announced the DOL’s temporary enforcement policy on terminating defined contribution plans use of the PGBC’s Missing Participant Program. The policy applies to fiduciaries of terminating defined contribution plans for missing or nonresponsive participant’s account balances.
• IRS Field Directive regarding Lost and Missing Participants and RMDs (10/19/17): This guidance directs IRS examiners not to challenge a qualified plan as failing to satisfy the required minimum distribution standards under the Code provided that the plan takes the appropriate steps in seeking to locate the missing participant.
• PBGC Guidance – 82 Fed. Reg. 60,800 – in conjunction with the PBGC expansion of the PBGC Missing Participant Program, the regulation requires that plan administrators conduct a diligent search as a prerequisite to participating in the program.

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