401(k) QNECs & QMACs: what are they and does my plan need them?
QNECs and QMACs are special 401(k) contributions employers can make to correct certain ...401(k) QNECs & QMACs: what are they and does my plan need them? QNECs and QMACs are special 401(k) contributions employers can make to correct certain compliance errors without incurring IRS penalties. Even the best laid plans can go awry, especially when some elements are out of your control. Managing a 401(k) plan is no different. For example, your plan could fail certain required nondiscrimination tests depending solely on how much each of your employees chooses to defer into the plan for that year (unless you have a safe harbor 401(k) plan that is deemed to pass this testing) QNECs and QMACs are designed to help employers fix specific 401(k) plan problems by making additional contributions to the plan accounts of employees who have been negatively affected. What is a QNEC? A Qualified Nonelective Contribution (QNEC) is a contribution employers can make to the 401(k) plan on behalf of some or all employees to correct certain types of operational mistakes and failed nondiscrimination tests. They are typically calculated based on a percentage of an employee’s compensation. QNECs must be immediately 100% vested when allocated to participants’ accounts. This means they are not forfeitable and cannot be subject to a vesting schedule. QNECs also must be subject to the same distribution restrictions that apply to elective deferrals in a 401(k) plan. In other words, QNECs cannot be distributed until the participant has met one of the following triggering events: severed employment, attained age 59½, died, become disabled, or met the requirements for a qualified reservist distribution or a financial hardship (plan permitting). These assets may also be distributed upon termination of the plan. What is a QMAC? A Qualified Matching Contribution (QMAC) is also an employer contribution that may be used to assist employers in correcting problems in their 401(k) plan. The QMAC made for a participant is a matching contribution, based on how much the participant is contributing to the plan (as pre-tax deferrals, designated Roth contributions, or after-tax employee contributions), or it may be based on the amount needed to bring the plan into compliance, depending on the problem being corrected. QMACs also must be nonforfeitable and subject to the distribution limitations listed above when they are allocated to participant’s accounts. QNECs vs. QMACs Based on % of employee’s compensation based on amount of employee’s contribution QNECs (Qualified Nonelective Contribution) QMACs (Qualified Matching Contribution) Commonly used to pass either the Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) test Most commonly used to pass the Actual Contribution Percentage (ACP) test Frequently Asked Questions about QNECs and QMACs How are QNECs and QMACs used to correct nondiscrimination testing failures? One of the most common situations in which an employer might choose to make a QNEC or QMAC is when their 401(k) plan has failed the Actual Deferral Percentage (ADP) test or the Actual Contribution Percentage (ACP) test for a plan year. These tests ensure the plan does not disproportionately benefit highly compensated employees (HCEs). The ADP test limits the percentage of compensation the HCE group can defer into the 401(k) plan based on the deferral rate of the non-HCE group. The ACP test ensures that the employer matching contributions and after-tax employee contributions for HCEs are not disproportionately higher than those for non-HCEs. When the plan fails one of these tests at year-end, the employer may have a few correction options available, depending on their plan document. Many plans choose to distribute excess deferrals to HCEs to bring the HCE group’s deferral rate down to a level that will pass the test. Your HCEs, however, may not appreciate a taxable refund at the end of the year or a cap on how much they can save for retirement. Making QNECs and QMACs are another option for correcting failed nondiscrimination tests. This option allows HCEs to keep their savings in the plan because the employer is making additional contributions to raise the deferral or contribution rate of the lower paid employees (non-HCEs) to a level that passes the test. How much would I have to contribute to correct a testing failure? For QNECs, the plan usually allows the employer to contribute the minimum QNEC amount needed to boost the non-HCE group’s deferral rate enough to pass the ADP test. The contribution formula may require that an allocation be a specific percentage of compensation that will be given equally to all non-HCEs, or it may allow the allocation to be used in a more targeted fashion that gives the amount needed to pass the test to just certain non-HCEs. QMACs are most commonly made to pass the ACP test. As with QNECs, there are allocation options available to the plan sponsor when making QMACs. A plan sponsor can make targeted QMACs, which are an amount needed to satisfy a nondiscrimination testing failure, or they can allocate QMACs based on the percentage of compensation deferred by a participant. QNECs and QMACs can both be made to help pass the ADP and ACP tests, but a contribution cannot be double counted. For example, if a QNEC was used to help the plan pass the ADP test, that QNEC cannot also be used to help pass the ACP test. How long do I have to make a QNEC or QMAC to correct a testing failure? QNECs/QMACs used to correct ADP/ACP tests generally must be made within 12 months after the end of the plan year being tested. Beware, however, if you use the prior-year testing method for your ADP/ACP tests. If you use this testing method, the QNEC/QMAC must be made by the end of the plan year being tested. For example, if you’re using the prior-year testing method for the 2022 plan year ADP test, the non-HCE group’s deferral rate for 2021 is used to determine the passing rate for HCE deferrals for 2022 testing. Using this prior-year method can help plans proactively determine the maximum amount HCEs may defer each year. But, if the plan still fails testing for some reason, a QNEC or QMAC would have to be made by the end of 2022, which is before the ADP/ACP test would be completed for 2022. QNECs and QMACs deposited by the employer’s tax-filing deadline (plus extensions) for a tax year will be deductible for that tax year. What other types of compliance issues may be corrected with a QNEC or QMAC? Through administrative mix-ups or miscommunications with payroll, a plan administrator might fail to recognize that an employee has met the eligibility requirements to enter the plan or fail to notify the employee of their eligibility. These types of errors tend to happen especially in plans that have an automatic enrollment feature. And sometimes, even when the employee has made an election to begin deferring into the plan, the election can be missed. These types of errors are considered a “missed deferral opportunity.” The employer may correct its mistake by contributing to the plan on behalf of the employee. How is a QNEC or QMAC calculated for a “missed deferral opportunity”? When a missed deferral opportunity is discovered, the employer can correct this operational error by making a QNEC contribution up to 50% of what the employee would have deferred based on their compensation for the year and the average deferral rate for the group the employee belongs to (HCE or non-HCE) for the year the mistake occurred. The QNEC must also include the amount of investment earnings that would be attributable to the deferral had it been contributed timely. If a missed deferral opportunity is being corrected and the plan is a 401(k) safe harbor plan, the employer must make a matching contribution in the form of a QMAC to go with the QNEC to make up for the missed deferrals, plus earnings. Is there a way to reduce the cost of QNECs/QMACs? Employers who catch and fix their mistakes early can reduce the cost of correcting a compliance error. For example, no QNEC is required if the correct deferral amount begins for an affected employee by the first payroll after the earlier of 3 months after the failure occurred, or The end of the month following the month in which the employee notified the employer of the failure. Plans that have an automatic enrollment feature have an even longer time to correct errors. No QNEC is required if the correct deferral amount begins for an affected employee by the first payroll after the earlier of 9½ months after the end of the plan year in which the failure occurred, or The end of the month after the month in which the employee notified the employer of the failure. If it has been more than three months but not past the end of the second plan year following the year in which deferrals were missed, a 25% QNEC (reduced from 50%) is sufficient to correct the plan error. The QNEC must include earnings and any missed matching contributions and the correct deferrals must begin by the first payroll after the earlier of: The end of the second plan year following the year the failure occurred, or The end of the month after the month in which the employee notified the employer of the failure. For all these reduced QNEC scenarios, employees must be given a special notice about the correction within 45 days of the start of the correct deferrals. For More Information These rules are complex, and the calculation of the corrective contribution, as well as the deadline to contribute, varies based on the type of mistake being corrected. You can find more information about correcting plan mistakes using QNECs or QMACs on the IRS’s Employee Plans Compliance Resolution System (EPCRS) webpage. And you can contact your Betterment for Business representative to discuss the correction options for your plan. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. Betterment assumes no responsibility or liability whatsoever for the content, accuracy, reliability or opinions expressed in a third-party website, to which a published article links (a “linked website”) and such linked websites are not monitored, investigated, or checked for accuracy or completeness by Betterment. It is your responsibility to evaluate the accuracy, reliability, timeliness and completeness of any information available on a linked website. All products, services and content obtained from a linked website are provided “as is” without warranty of any kind, express or implied, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose, title, non-infringement, security, or accuracy. 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What is a Fidelity Bond?
401(k) plan sponsors are required to purchase a fidelity bond to protect the plan against ...What is a Fidelity Bond? 401(k) plan sponsors are required to purchase a fidelity bond to protect the plan against fraudulent or dishonest acts. Here are answers to common questions. What is a fidelity bond? A fidelity bond is a type of insurance required for those responsible for the day-to-day administration and handling of “funds or other property” of an ERISA (Employee Retirement Income Security Act of 1974) benefit plan such as a 401(k). The purpose of the bond is to protect the plan from losses due to acts of fraud or dishonesty including theft, embezzlement, larceny, forgery, misappropriation, wrongful abstraction, wrongful conversion and willful misapplication. What are “Funds Or Other Property”? “Funds or other property” refers to 401(k) plan assets. In addition to publicly-traded stocks, bonds, mutual funds, and exchange-traded funds, all employee and employer contributions are considered “funds,” whether they come in the form of cash, check or property. Who must be covered by a fidelity bond? Under ERISA, it is illegal to receive, disburse, or exercise custody or control of plan funds or property without having a fidelity bond in place. Therefore, anyone who handles or manages 401(k) funds must be covered by a fidelity bond. This includes anyone who has: Physical contact with cash, checks, or similar property Authority to secure physical possession of cash, checks, or similar property through access to a safe deposit box, bank accounts, etc. Authority to transfer plan funds either to oneself or a third party Authority to disburse funds Authority to sign or endorse checks Supervisory or decision-making authority over plan funds This requirement is not just limited to plan managers and plan sponsor employees. Third party service providers that have access to the plan’s funds or exercise decision-making authority over the funds may also require bonding. This includes investment advisors and third-party administrators (TPAs). How much coverage is required? ERISA requires each person handling the plan to be covered for at least 10% of the amount of funds they handle. The coverage can’t be less than $1,000 or more than $500,000, (unless the plan includes employer securities, in which case the maximum amount can be $1,000,000). The exception to the 10% rule applies to ‘non-qualifying plan assets” that may represent more than 5% of the plan’s total assets. Qualifying assets include items held by a financial institution such as a bank, insurance company, mutual funds, etc. Non-qualifying assets are those not held by any financial institution including tangibles such as artwork, collectibles, non-participant loans, property, real estate and limited partnerships. Fidelity bonds have a minimum term of one year. Longer-term bonds will typically include an inflation provision so the value of the bond will increase automatically. The bond amount should be reviewed and updated as the plan assets increase or decrease. Where can I obtain a fidelity bond? The bond must be issued by an underwriter from an insurance company that is listed on the Department of Treasury’s Listings of Approved Sureties. These are companies that have been certified by the Treasury Department. Fidelity bond application During the application process, some plan information may be required. Common items the application will ask is the plan name, address, IRS plan number (ex. 001), and trustee information. Most of the items asked can be found under the administrative information section (usually second to last page) within the Summary Plan Description (SPD). What happens if I don’t cover my plan with a Fidelity Bond? The existence and amount of the plan’s fidelity bond must be reported on your plan’s annual Form 5500 filing. Not having a bond, or not having sufficient coverage based on plan assets, may trigger a Department of Labor audit and may risk the plan’s tax-qualified status. Additionally, the plan fiduciaries may be held personally liable for any losses that may occur from fraudulent or dishonest acts.
Key 2023 Deadlines for 401(k) Plan Sponsors
Birthdays, wedding anniversaries … and 401(k) plan compliance deadlines. Some dates are worth ...Key 2023 Deadlines for 401(k) Plan Sponsors Birthdays, wedding anniversaries … and 401(k) plan compliance deadlines. Some dates are worth saving more than others. Offering a 401(k) plan has many benefits for both your company and your employees, but keeping your calendar clear of important dates isn’t one of them. Plan sponsors have several responsibilities throughout the year to keep their plan operating in compliance with federal regulations. We’ve summarized a few biggies for 2023—along with the remaining weeks of 2022—below to make your life a little easier. If a deadline falls on a weekend, it’s safest to submit the previous business day unless otherwise noted. Please also keep in mind there may be additional state regulations applicable to your plan not listed here. January February March April May June July August September October November December Remaining of 2022 January Friday, Jan. 13 Betterment at Work loads the prior year census template and compliance questionnaire to plan sponsors’ Compliance Hubs. Plan sponsors have until Tuesday, Jan. 31 to complete and submit both documents. Tuesday, Jan. 31 Betterment at Work makes IRS Forms 1099-R available to participants Send Form W-2 to your employees. Submit Form W-2 to the Social Security Administration. Submit the prior year census data and compliance questionnaire to Betterment at Work. Submit Annual Return of Withheld Federal Income Tax (Form 945) to the IRS. If you’ve made all your deposits on time and in full, then the due date is Friday, Feb. 10. February Wednesday, Feb. 1 Send Form 1099-NEC to both the IRS and your employees. Post the prior year’s OSHA Summary of Illness and Injuries in your workplace between February 1 and March 2. Tuesday, Feb. 28 For Applicable Large Employers (ALE) Submit paper Forms 1094-C and 1095-C to the IRS. If you intend to e-file your forms, then the deadline is Friday, March 31. For self-insured, non-ALE companies Submit paper Forms 1094-B and 1095-B to the IRS. If you intend to e-file your forms, then the deadline is Friday, March 31. Note: Form 1095-B must be filed electronically if the reporting entity is required to file 250 or more returns. March Wednesday, March 15 Make refunds to participants for failed ADP/ACP tests(s), if applicable. As the plan sponsor, you must approve corrective action by your 401(k) provider by this date. Failure to meet this deadline could result in a 10% tax penalty for plan sponsors. For S-Corps and LLCs taxed as Partnerships Employer contributions (e.g., profit sharing, match, Safe Harbor) are due for deductibility. For S-Corps and Partnerships Deadline to establish a traditional (non-Safe Harbor) plan for the prior tax year, unless the tax deadline has been extended. Thursday, March 30 For companies in Connecticut with 5+ employees Deadline to comply with Connecticut’s retirement plan mandate. Friday, March 31 File Form 1099s electronically with the IRS. For companies with 100+ employees Submit your EEO-1 report. April Saturday, April 1 Confirm initial Required Minimum Distributions (RMDs) were taken by participants who turned 72 before previous year-end, are retired/terminated, and have a balance. For companies in Maine with 25+ employees Deadline to comply with Maine’s retirement plan mandate. Tuesday, April 18 Tax Day For C-Corps, LLCs taxed as C-Corps, or sole proprietorships Employer contributions (e.g., profit sharing, match, Safe Harbor) are due for deductibility. For C-Corps and Sole Props Deadline to establish a traditional (non-Safe Harbor) plan for the prior tax year, unless the tax deadline has been extended. May Monday, May 1 File Form 941 (Employer’s Quarterly Federal Tax Return) with the IRS. Monday, May 15 For non-profit companies Tax returns due June N/A July Saturday, July 1 For companies in Virginia with 25+ employees Deadline to comply with Virginia’s retirement plan mandate. Monday, July 10 Mid-Year Benefits Review: Remind employees to take advantage of any eligible voluntary benefits. Saturday, July 29 If your plan was amended, this is the deadline to distribute Summary of Material Modifications (SMM) to participants. Sunday, July 30 For self-insured companies Submit the PCORI fee to the IRS. Monday, July 31 File Form 941 (Employer’s Quarterly Federal Tax Return) with the IRS. Electronically submit Form 5500 (and third-party audit, if applicable) OR request an extension (Form 5558). Betterment at Work prepares these forms on our plan sponsors’ behalf, with plan sponsors being responsible for filing them electronically. August Tuesday, Aug. 1 For *new* Betterment 401(k) plans Deadline to sign a services agreement with Betterment at Work in order to establish a new Safe Harbor 401(k) plan for 2024. Deferrals must be started by Sunday, Oct. 1. September Friday, Sept. 15 For S-Corps and Partnerships Deadline to establish a traditional (non-Safe Harbor) plan for the prior tax year if the tax deadline has been extended. Saturday, Sept. 30 Distribute Summary Annual Report (SAR) to your participants and beneficiaries. If a Form 5500 extension is filed, then the deadline to distribute is Friday, Dec. 15. October Sunday, Oct. 1 Deadline to establish a new Safe Harbor 401(k) plan. The plan must have deferrals for at least 3 months to be Safe Harbor for this plan year. For companies in Maine with 15-24 employees Deadline to comply with Maine’s retirement plan mandate. Sunday, Oct. 15 For C-Corps and Sole Props Deadline to establish a traditional (non-Safe Harbor) plan for the prior tax year if the tax deadline has been extended. For companies that offer prescription drug coverage to Medicare-eligible employees Notify Medicare-eligible enrollees of creditable coverage for prescription drugs. Monday, Oct. 16 Electronically submit Form 5500 (and third-party audit if applicable) if granted a Form 5558 extension. Betterment at Work prepares these forms on our plan sponsors’ behalf, with plan sponsors being responsible for filing them electronically. Tuesday, Oct. 31 File Form 941 (Employer’s Quarterly Federal Tax Return) with the IRS. November Wednesday, Nov. 1 For companies in Illinois with 5+ employees Deadline to comply with Illinois’ retirement plan mandate. Thursday, Nov. 2 If you’re adopting a new 401(k) plan for 2024, this is the deadline to notify SIMPLE IRA participants (if applicable) that their plan will terminate January 1. A company cannot sponsor a SIMPLE IRA and a 401(k) plan at the same time. December Friday, Dec. 1 Betterment at Work prepares 2024 Annual Notices (listed below) and sends relevant notices to our plan sponsors for distributing to participants. Plan sponsors to disseminate paper copies if required. Deadline for plan sponsors to distribute notices (if applicable) to participants for 2024 plan year: Safe Harbor notice Qualified Default Investment Alternative (QDIA) notice Automatic Enrollment notice Deadline to execute amendment to make a traditional plan a 3% Safe Harbor nonelective plan for the 2023 plan year. Deadline to execute amendment to make a traditional plan a Safe Harbor match plan for the 2024 plan year. Friday, Dec. 15 Distribute Summary Annual Report (SAR) to participants, if granted a Form 5558 extension. Sunday, Dec. 31 Post required workplace notices in conspicuous locations. Deadline to execute amendment to make a traditional plan a 4% Safe Harbor nonelective plan for the 2022 plan year. Deadline to make Safe Harbor and other employer contributions for 2022 plan year. Deadline for annual Required Minimum Distributions (RMDs). For companies that failed ADP/ACP compliance testing Deadline to distribute ADP/ACP refunds for the prior year; a 10% excise will apply. Deadline to fund a QNEC for plans that failed ADP/ACP compliance testing. Remaining 2022 Deadlines Thursday, Dec. 1, 2022 Betterment at Work prepares 2023 Annual Notices (listed below) and sends relevant notices to our plan sponsors for distributing to participants. Plan sponsors to disseminate paper copies if required. Deadline for plan sponsors to distribute notices (if applicable) to participants for 2024 plan year: Safe Harbor notice Qualified Default Investment Alternative (QDIA) notice Automatic Enrollment notice Deadline to execute amendment to make traditional plan a 3% safe harbor nonelective plan for the 2022 plan year. Deadline to execute amendment to make a traditional plan a safe harbor match plan for the 2023 plan year. Thursday, Dec. 15, 2022 Deadline to distribute Summary Annual Report (SAR) to participants, if granted a Form 5558 extension. Saturday, Dec. 31, 2022 Deadline to distribute ADP/ACP refunds for the prior year; a 10% excise will apply Deadline to fund a QNEC for plans that failed ADP/ACP compliance testing. Deadline to execute amendment to make traditional plan a 4% safe harbor nonelective plan for the 2021 plan year. Deadline to make safe harbor and other employer contributions for 2021 plan year. Deadline for Annual Required Minimum Distributions (RMDs).
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What is a 401(k) Plan Audit?What is a 401(k) Plan Audit? If an audit of your 401(k) plan is required, Betterment can help you understand what to expect and how to prepare. The Employee Retirement Income Security Act of 1974 (ERISA) requires that certain 401(k) plans be audited annually by a qualified independent public accountant subject. The primary purpose of the audit is to ensure that the 401(k) plan is operating in accordance with Department of Labor (DOL) and Internal Revenue Service (IRS) rules and regulations as well as operating consistent with the plan document, and that the plan sponsor is fulfilling their fiduciary duty. A 401(k) plan audit can be fairly broad in scope and usually includes a review of all of the transactions that took place throughout the plan year such as payroll uploads, distributions, corrective actions, and any earnings that were allocated to accounts. It will also include a review of administrative procedures and identify potential areas of concern or opportunities for improvement. When does a 401(k) Plan need an audit? Whether or not your plan requires an audit is determined by the number of participants in your plan at the beginning of the plan year. In this case, participants include not just those employees actively contributing to the plan but also those who were eligible but not participating as well as any terminated participants with a balance. Generally speaking, ERISA requires an audit for any plan that had 100 or more participants (so-called “large plans”) at the beginning of the plan year. However, as shown in the table below, there are exceptions to this general rule, captured in the “80-120 Participant Rule,” to address plans that may have fluctuating participant counts close to that 100 cut-off. Participant Count at Beginning of Plan Year Filing Status on Previous Year’s Form 5500 80-120 Participant Rule 100-120 participants Small Plan Considered a Small Plan (no audit required) until plan has more than 120 participants 80-100 participants Large Plan Considered a Large Plan (audit optional) until plan has fewer than 80 participants It is therefore important to review the plan’s eligible participant count before engaging an auditor, especially if the participant count fluctuates between 80 and 120. If your plan falls under the large plan filer category, engaging a qualified independent auditor as soon as possible after plan year end is advisable. How do I prepare for a 401(k) plan audit? To get started, an auditor will request all plan-related documents, which will likely include: Executed plan document or an executed adoption agreement Any amendments to the plan document Current IRS determination letter (these are attached in the plan document we provide for plan sponsors to execute) Current and historical summary plan description and summaries of material modifications Copy of the plan’s fidelity bond insurance Copy of the most recent compliance test performed Service agreements In general, these documents should be easily accessible and current. That’s why it’s important for plan sponsors to safely keep all applicable plan-related documents, especially if there are changes made. In addition, the auditor will need financial reports of your plan. As part of its 3(16) fiduciary support services, Betterment provides a full audit package which includes: Participant contribution report Plan activity report Payroll records Schedule of plan assets Distributions and/or loans report Fees report Reports regarding investment allocation of plan assets Copies of prior Form 5500 (available on eFAST within the DOL website) Trustee certification/agreement It’s also possible that the auditor may request copies of the committee or board minutes that document considerations and decisions about the plan, including choosing service providers and monitoring plan expenses. What will happen during a 401(k) plan audit? Once the auditor receives all the necessary documents, they will review the plan to gain a solid understanding of the plan’s operations, internal controls and plan activity. The auditor will pick a sample of employees for distributions, loans or rollovers (activity of assets moving out or in of plan) and will request documentation that support such activity. For example, this may include loan applications, distribution paperwork and the image of the check or proof of funds being delivered to the participant. Once the assessments of the samples and financials are complete, the auditor will draft something called an “accountant’s opinion.” The plan sponsor should carefully review this document, which outlines any control deficiencies found during the audit. The auditor will also provide a final financial statement that must be attached to the plan’s Form 5500 before filing with the DOL. Important Deadlines for 401(k) Plan Audits Annual audits should be completed before the Form 5500 filing deadline. Form 5500s are required to be filed by the last day of the seventh month after the plan year ends. For example, if your plan year ends on December 31, your Form 5500 is due on July 31 of the following year. However, you may file an extension with the DOL using Form 5558 to get an additional 2 ½ months to file, pushing the due date to October 15 for calendar year plans. It’s important to meet the required deadline to avoid any DOL penalties. Ready to learn more about how Betterment can help you with plan audits (and so much more)? Let’s talk.
Everything You Need to Know about Form 5500Everything You Need to Know about Form 5500 If you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. As you can imagine, the Internal Revenue Service (IRS) and the Department of Labor (DOL) like to keep tabs on employee benefit plans to make sure everything is running smoothly and there are no signs of impropriety. One of the ways they do that is with Form 5500. You may be wondering: What is Form 5500? Well, Form 5500—otherwise known as the Annual Return/Report of Employee Benefit Plan—discloses details about the financial condition, investments, and operations of the plan. Not only for retirement plans, Form 5500 must be filed by the employer or plan administrator of any pension or welfare benefit plan covered by ERISA, including 401(k) plans, pension plans, medical plans, dental plans, and life insurance plans, among others. If you’re a Betterment client, you don’t need to worry about many of these Form 5500 details because we do the heavy lifting for you. But if you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. 1. There are three different versions of Form 5500—each with its own unique requirements. Betterment drafts a signature-ready Form 5500 on your behalf. But if you were to do it yourself, you would select from one of the following form types based on your plan type: Form 5500-EZ – If you have a one-participant 401(k) plan —also known as a “solo 401(k) plan”—that only covers you (and your spouse if applicable), you can file this form. Have a solo 401(k) plan with less than $250,000 in plan assets as of the last day of the plan year? No need to file a Form 5500-EZ (or any Form 5500 at all). Lucky you! Form 5500-SF– If you have a small 401(k) plan—which is generally defined as a plan that covers fewer than 100 participants on the first day of the plan year—you can file a simplified version of the Form 5500 if it also meets the following requirements: It satisfies the independent audit waiver requirements established by the DOL. It is 100% invested in eligible plan assets—such as mutual funds and variable annuities—with determinable fair values. It doesn’t hold employer securities. Form 5500– If you have a large 401(k) plan—which is generally defined as a plan that covers more than 100 participants—or a small 401(k) plan that doesn’t meet the Form 5500-EZ or Form 5500-SF filing requirements, you must file a long-form Form 5500. Unlike Form 5500-EZ and Form 5500-SF, Form 5500 is not a single-form return. Instead, you must file the form along with specific schedules and attachments, including: Schedule A -- Insurance information Schedule C -- Service provider information Schedule D -- Participating plan information Schedule G -- Financial transaction schedules Schedule H or I -- Financial information (Schedule I for small plan) Schedule R -- Retirement plan information Independent Audit Report Certain forms or attachments may not be required for your plan. Is your plan on the cusp of being a small (or large) plan? If your plan has between 80 and 120 participants on the first day of the plan year, you can benefit from the 80-120 Rule. The rule states that you can file the Form 5500 in the same category (i.e., small or large plan) as the prior year’s return. That’s good news, because it makes it possible for large retirement plans with between 100 and 120 participants to classify themselves as “small plans” and avoid the time and expense of completing the independent audit report. 2. You must file the Form 5500 by a certain due date (or file for an extension). You must file your plan’s Form 5500 by the last business day of the seventh month following the end of the plan year. For example, if your plan year ends on December 31, you should file your Form 5500 by July 31 of the following year to avoid late fees and penalties. If you’re a Betterment client, you’ll receive your signature-ready Form 5500 with ample time to submit it. Plus, we’ll communicate with you frequently to help you meet the filing deadline. But if you need a little extra time, Betterment can file for an extension on your behalf using Form 5558—but you have to do it by the original deadline for the Form 5500. The extension affords you another two and a half months to file your form. (Using the prior example, that would give you until October 15 to get your form in order.) What if you happen to miss the Form 5500 filing deadline? If you miss the filing deadline, you’ll be subject to penalties from both the IRS and the DOL: The IRS penalty for late filing is $250 per day, up to a maximum of $150,000. The DOL penalty for late filing can run up to $2,259 per day, with no maximum. There are also additional penalties for plan sponsors that willfully decline to file. That said, through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP), plan sponsors can avoid higher civil penalty assessments by satisfying the program’s requirements. Under this special program, the maximum penalty for a single late Form 5500 is $750 for small 401(k) plans and $2,000 for large 401(k) plans. The DFVCP also includes a “per plan” cap, which limits the penalty to $1,500 for small plans and $4,000 for large plans regardless of the number of late Form 5500s filed at the same time. 3. The Form 5500 filing process is done electronically in most cases. For your ease and convenience, Form 5500 and Form 5500-SF must be filed electronically using the DOL’s EFAST2 processing system (there are a few exceptions). EFAST2 is accessible through the agency’s website or via vendors that integrate with the system. To ensure you can file your Form 5500 quickly, accurately, and securely, Betterment facilitates the filing for you. Whether you file electronically or via hard copy, remember to keep a signed copy of your Form 5500 and all of its schedules on file. Once you file Form 5500, your work isn’t quite done. You must also provide your employees with a Summary Annual Report (SAR), which describes the value of your plan’s assets, any administrative costs, and other details from your Form 5500 return. The SAR is due to participants within nine months after the end of the plan year. (If you file an extension for your Form 5500, the SAR deadline also extends to December 15.) For example, if your plan year ends on December 31 and you submitted your Form 5500 by July 31, you would need to deliver the SAR to your plan participants by September 30. While you can provide it as a hard copy or digitally, you’ll need participants’ prior consent to send it digitally. In addition, participants may request a copy of the plan’s full Form 5500 return at any time. As a public document, it’s accessible to anyone via the DOL website. 4. It’s easy to make mistakes on the Form 5500 (but we aim to help you avoid them). As with any bureaucratic form, mistakes are common and may cause issues for your plan or your organization. Mistakes may include: Errors of omission such as forgetting to indicate the number of plan participants Errors of timing such as indicating a plan has been terminated because a resolution has been filed, yet there are still assets in the plan Errors of accuracy involving plan characteristic codes and reconciling financial information Errors of misinterpretation or lack of information such as whether there have been any accidental excess contributions above the federal limits or failure to report any missed contributions or late deposits Want to avoid making errors on your Form 5500? Betterment prepares the form on your behalf, so all you need to do is review, sign, and submit—it’s as simple as that. 5. Betterment drafts a signature-ready Form 5500 for you, including related schedules When it comes to Form 5500, Betterment does nearly all the work for you. Specifically, we: Prepare a signature-ready Form 5500 that has all the necessary information and related schedules Remind you of the submission deadline so you file it on time Guide you on how to file the Form 5500 (it only takes a few clicks) and make sure it’s accepted by the DOL Provide you with an SAR that’s ready for you to distribute to your participants Ready to learn more about how Betterment can help you with your Form 5500 (and so much more)? Let’s talk.