If you are new to the market and the 5500, there are likely to be a ton of terms that you may be unfamiliar. Before you dig too deep into your 5500 research, review the below ten terms. Whether you are in the retirement or group insurance market, studying the below terms will help you prepare for prospecting.
The Employee Retirement Income Security Act of 1974. This law sets minimum standards for most voluntary health and retirement plans offered in the private sector. Yearly completion of the Form 5500 is one part of this law.
A Sponsor is a company that provides a retirement plan to their employees
A provider is a company or agent who services a retirement plan for the sponsor. These services can be anything from investment management, to recordkeeping, to third-party administration. You can view the providers for a plan on the Schedule C of the 5500, where you’ll find information on the company, services provided, and the compensation they’re required to disclose.
An employee of a plan who is part of a plan. They may be active or retired.
5. Plan Number
Each ERISA qualified plan is assigned a three-digit plan number. Together with an Employer Identification Number (EIN) and Plan Year, a specific plan may be identified. Plan numbers from 001 to 500 are Retirement plans. Plan numbers from 501 and 999 are Health and Welfare plans. A Plan number provides no other additional data.
6. Plan Year
This is the year of which the plan covers. For instance is a plan’s term runs from January 1, 2017, to December 31, 2017, the Plan Year is 2017. Much like an individual’s income tax filings, these forms are submitted yearly for the previous year. As a sponsor has 201 days to file a 5500, and they may apply for a two-month extension, a 5500 may be made available to the public up to 10 months after the plan renews.
7. Plan Type
Plan types on the 5500 are indicated by a code consisting of a number and a letter and denote the features of a plan. This could cover anything from whether a plan is a defined benefit or defined contribution plan, whether a plan is a 401(k) plan, 403(b) plan, etc., and other features of the plan like having automatic enrollment and allowing participant directed accounts. It is not uncommon for retirement plans to have several of these plan type codes listed, and understanding them is key to understanding the structure of a retirement plan.
8. Defined Benefit
A defined benefit plan are employer-sponsored retirement plans where the retirement Benefits owed are calculated using a variety of factors such as length of employment and compensation history. They more commonly referred to as pension plans. The company invests in a pension fund and pays the retirees their benefits out of that fund. Defined benefit plans used to be the more popular type of retirement plan, but 401(k)s and other defined contribution plans have swiftly become the preferred choice for retirement plan sponsors.
9. Defined Contribution
A defined contribution plan is a retirement plan paid for in contributions directly from the employee’s pay, instead of the employer. These contributions are typically tax-deferred and employers generally choose to match varying percentages of employee contributions. While the benefit from a pension plan is precalculated, and the employer is on the hook for that amount no matter what, defined contribution plan benefits ultimately depend on the level of employee contributions and the rate of return on the investments made by the plan.
10. Corrective Distribution
Every year a plan’s participant may contribute up to $18,500 into their 401(k) plan. Contributions above this amount are not allowed by the IRS. When a participant, often a Highly Compensated Employee (HCE) contributes over this amount, this overage must be corrected.
THE JUDY DIAMOND ADVANTAGE
Now that you are more familiar with these foundational terms, put them to use looking at some 5500s. You can find 5500s either of Judy Diamond Associate’s sites, FreeERISA and Retirement Plan Prospector.