The DOL's New Math: Form 5500 + 408(b)(2) = Fireworks

Written by Bob Toth

"Were there any nonexempt transactions with any party in interest?"

Plan administrators have been answering that question (or versions of it) on Form 5500 for years, as part of either Schedule H (for large plans) or Schedule I (for small plans).  In the past, answering the question has largely been a simple matter of looking for the "usual suspects" of delinquent deposits, excessive participant loans or other obvious financial transactions of the plan.  That world, however, is about to change.

We have said from time to time (for example, see our posts on 408(b)(2)) that one of the most challenging aspects of the DOL's "three pronged effort" at forcing greater transparency isn't complying with any of the three sets of rules in isolation.  Since they individually are sensitive in many ways to the administrative concerns of employer and service providers,  the biggest challenge is what happens when you put all three sets of rules together. 

The proposed service provider regs are a classic example.  The failure of a service provider to properly update in a timely manner its disclosure to the "responsible plan fiduciary" makes the receipt of direct or indirect compensation (including, by the way, things like 12(b)-1 fees) by that "untimely" provider a prohibited transaction.  If a fiduciary doesn't report this failure to the DOL, that fiduciary may be jointly liable for the prohibited transaction penalties related to the receipt of those funds by that service provider.

This may or may not be a significant penalty, depending upon the size of the compensation.  Where the fiduciary may really get hurt, however, is in the answer to Line 4(d) on either Schedule H or I on the Form 5500, which asks for an affirmation that there has been no non-exempt prohibited transaction.  If the plan administrator doesn't list the payment of that comp to the "untimely" provider, or if the administrator incorrectly answers "no" to that question, the DOL can then consider that 5500 incomplete and assess penalties. Now THIS can get hugely expensive, with potential penalties which may far exceed those assessed for the prohibited transaction itself.  And don't think this is a problem just for the larger plans which need to file audited financial statements. This also applies to the small plans, under Schedule I.

Let the fireworks begin.