Which Plans Must File Form 5500?

Are we a Large or Small Plan?

To qualify as a “large” plan, the plan must have 100 participants covered at the beginning of the plan year.

  • The participant is an eligible employee or a former employee
    • Does not include covered spouses, dependent children, QMSCO alternate recipients, domestic partners
    • Does include COBRA   qualified beneficiaries
    • Only count “covered” participants (e.g., count participants actually enrolled in the plan

Are we Funded or Unfunded?

  • An unfunded plan is one in which benefits are paid as needed solely from the general assets of the employer-maintained plan.  An unfunded plan uses neither plan assets nor insurance to pay benefits.
  • A funded plan is a loan with plan assets.  Plan assets may occur if: (1) funds are set aside in a custodial account or trust fund for the exclusive benefit of plan participants, or (2) the plan includes participant contributions (e.g. salary reductions)
    • Special Rule:  Most insured plans and plans with participant contributions made through a Section 125 plan will be treated as unfunded due to DOL Technical Release 92-01

Full Narration:

To qualify as a large plan, the plan must have a hundred or more participants covered at the beginning of the plan year. So, a participant is an eligible employee or former employee and It does not include dependents; like a covered spouse, dependent children, but it does include COBRA qualified beneficiaries. We’re only counting covered participants, which means participants actually enrolled in the plan.

Essentially we’re looking at a snapshot of the first day of the plan year to make this determination. If an employee goes above or below that one hundred person threshold during the year, it makes no difference when determining their filing obligation.

The next step is to determine whether the plan is funded or unfunded. There’s a lot of confusion surrounding these terms and some of these terms are used interchangeably to characterize plans.

For instance, the term self-funded is commonly used for a self-insured benefit and it’s important not to confuse the term funded with self-funded.

First, an unfunded plan is a plan in which benefits are paid as needed solely from the general assets of the employer-maintained plan. And an unfunded plan uses neither plan assets nor insurance to pay benefits. So there’s no one, there’s no trust involved here with this plan unfunded plan.

In contrast, a plan is funded if it uses plan assets to provide benefits. A basic requirement for funded plans is that they must hold their assets in a trust. And a trust may be found to exist despite the absence of formal trust documents, and even absent any intent on the part of the employer to create a trust.

What’s more, employee contributions are always considered plan assets. And since most employers do require some form of employee participation and the cost of health plan coverage, one might conclude that there are, or should be a lot of trusts floating around. In fact, many employer-sponsored health plans do not have trusts, and the reason is that there’s this special rule that the DOL has provided significant relief from the trust requirement through a non-enforcement policy announced in technical or release 92-01. This technical release states that the DOL will not view a health plan as being in violation of ERISA’S trust requirement if the only reason for the plan to have a trust is as acceptance of employee contributions; provided that certain requirements are met.

There are two prongs to this non-enforcement policy. The first applies to cafeteria plans in which simply states that if the employer withholds employer contributions and in accordance with a cafeteria plan, establish pursuant to internal revenue code Section 125, the department will not assert a violation in any enforcement proceeding solely because of a failure to hold participant contributions and trust.

This relief is available regardless of whether the health plan is insured or self-insured. And so this is the part of the 92-01 that will be the most used to employers. The second prong applies to fully insured plans with respect to which participant contributions are not withheld pursuant to a cafeteria plan, and are applied only to the payment of premiums.

This is a cautionary note; plans with self-insured benefits with participant contributions and no Section 125 plan must be aware that their plan is funded and must file regardless of size.

So, restating, if you’re a self-insured plan and you don’t have a Section 125 plan, and your less than a hundred participants …you would be required to file a Form 5500.

To view the webinar in its entirety, go to http://filice.hs-sites.com/2021-webinar-series