IRS Suspends Form 5500 Schedule F Filing Requirement

The IRS has suspended the Form 5500 Schedule F filing requirement for all plan years for section 125 cafeteria plans, section 127 educational assistance programs, and section 137 adoption assistance programs. This article clarifies some of the issues arising from this guidance. Notice 2002-24.

Practical Application
The wording of the notice is somewhat confusing. Informal conversations with the IRS have clarified that cafeteria plans that have only been filing Form 5500 and Schedule F because of the section 6039D requirement no longer have to file Form 5500. Because the effect of the notice is both prospective and retroactive, such cafeteria plans that have been nonfilers in the past are now free from the filing obligation.

In order to assess the applicability of this change to a company's Form 5500 filings, it is important to clarify the interaction between cafeteria plans and health and welfare plans. ERISA section 3(1) defines an "employee welfare benefit plan" and a "welfare benefit plan" as "any plan, fund, or program which [is]...established or maintained by an employer or by an employee organization, or by both, to the extent that [it is] established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise...medical, surgical, or hospital care or benefits in the event of sickness, accident, disability, death or unemployment..."(emphasis added).

Thus, a health flexible spending arrangement (FSA) or medical reimbursement plan that reimburses participants and beneficiaries for medical expenses meets the definition of a welfare benefit plan under ERISA section 3(1) on its own (regardless of whether it is part of a cafeteria plan) because it provides medical benefits by a means other than insurance.

In order to determine whether an FSA or medical reimbursement plan is required to file Form 5500, the arrangement needs to be analyzed under the Department of Labor's (DOL's) Form 5500 exemption regulation.

Under ERISA section 104(a)(3), the DOL may exempt any welfare benefit plan from all or part of ERISA's reporting and disclosure requirements. Under ERISA Reg. Sec. 2520.104-20, the DOL exempts certain health and welfare plans from filing Form 5500.

To be exempt, such a plan:

  • Must have fewer than 100 participants at the beginning of the plan year for whom benefits are paid as needed solely from the general assets of the employer or employee organization maintaining the plan.
  • The benefits are provided exclusively through insurance contracts or policies issued by a qualified insurance company or through an HMO, the premiums for which are paid directly by the employer or employee organization from its general assets or partly from the employers general assets and partly from employee/member contributions, or both.

Here are some examples of the effect of Notice 2002-24 on cafeteria plan filings:

  Less than 100 participants 100 or more participants
Cafeteria Plan with group health benefits No Form 5500 File Form 5500
Cafeteria plan with FSA—and all benefits fully insured and/or paid from employers' general assets No Form 5500 Form 5500, no audit
Cafeteria plan with FSA and some or all benefits paid from a trust (VEBA) File Form 5500 File Form 5500 – need an audit

Affect on Government and Church Plan Sponsors
Government and church benefit plans are generally exempt from the Form 5500 filing requirement, but until now were required to file under the section 6039D for their cafeteria, adoption assistance, and educational assistance plans. By suspending the Form 5500 filing requirement for these plans, the IRS has basically eliminated that last of the Form 5500 filing obligations for governmental and church plan sponsors.

Interaction with DOL Compliance Programs
The Schedule F is one of a few schedules on the Form 5500 that is a purely IRS document, and therefore does not request information needed under the DOL's statutory jurisdiction. The IRS has specifically stated that sponsors of fringe benefit plans granted relief under this notice that have not filed Form 5500 and/or Schedule F for plan years prior to 2001 should not seek relief under the DOL's Delinquent Filer Voluntary Compliance Program (DFVC), thus, there is no need to request relief from the IRS for failure to file these forms.

Effect on Companies
Notice 2002-24 is effective as of April 22, 2002—the date it was published in the Internal Revenue Bulletin. Because the notice is retroactive to all prior plan years, any cafeteria plan with a filing deadline prior to April 22, 2002, will be covered by the notice, and may act as if the notice were already effective.

Because the 2001 Form 5500 was released prior to the issuance of Notice 2002-24, the Form includes references to fringe benefits and Schedule F that are no longer relevant. Thus, plan sponsors no longer indicate on the Form 5500, Line 8c that the plan has fringe benefit features, nor do they check box 10c, which indicates a Schedule F is attached.

The DOL and the IRS both administer ERISA rules that are applicable to retirement plans. The IRS generally focuses on tax-related qualified plan requirements under Code section 401(a) and on the collection of excise taxes on prohibited transactions under Code section 4975. The DOL focuses on the reporting and fiduciary requirements of Title I of ERISA.

Both DOL and IRS have the right to collect penalties for the late filing of the Form 5500 annual report by retirement plans, and they both administer voluntary fiduciary correction programs.

IRS Relief
When the DOL started DFVC to provide relief for delinquent filers of Form 5500, the IRS declined to join the program, but generally did not assess penalties for the late filings of plan sponsors who entered DFVC. In releasing Notice 2002-23, the IRS has joined forces with the DOL and officially agrees to waive its penalty provisions for employers who use the DFVC program.

When the DOL established VFC to allow for the correction of certain prohibited transactions, the program did not provide for waiver of the IRS penalties under Code section 4975. Plan sponsors were still exposed to the collection of Code section 4975 penalties for the prohibited transactions reported in their VFC filings. The DOL is working on a prohibited transaction class exemption that would eliminate this problem, but class exemptions take time. In Announcement 2002-31, the IRS states it will essentially waive its prohibited transaction excise tax for plan sponsors who satisfy the proposed exemption's conditions (one of which is successful completion of VFC).

© 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.