By Fred Reish, Bruce Ashton, Joshua Waldbeser and Joan Neri
Advisors have an opportunity to help their clients with a Form 5500 reporting wrinkle that may catch plan sponsors and plan committees, in their roles as ERISA administrative fiduciaries, off-guard.
Here’s the wrinkle: Failure to obtain the required disclosures under ERISA Section 408(b)(2) results in prohibited transactions that must be reported on the form.
There are two ways a non-exempt prohibited transaction can arise from a 408(b)(2) failure. First, if a covered service provider (CSP) does not make a complete and timely 408(b)(2) disclosure, its arrangement with the plan is automatically deemed not reasonable, and will therefore not qualify for the exemption for “reasonable” service arrangements.
Second, if the “responsible plan fiduciary” (RPF), which is also usually the plan sponsor or committee, does not take action to verify that the CSP’s 408(b)(2) disclosure is adequate (and further action if it is inadequate), it will not satisfy the requirements of the separate exemption available to RPFs. Advisors can add value by educating clients about this.
All plans are required to indicate on the Form 5500 whether any non-exempt prohibited transactions occurred during the reporting year. Furthermore, the ERISA plan administrator must sign the form under penalties of perjury, certifying that “to the best of (its) knowledge and belief [the filing] is true, correct, and complete.” If a prohibited transaction is not reported, the filing can be rejected – leading to late filing penalties – and the ERISA plan administrator can be subject to additional consequences for filing a false report. Advisors can help clients with a 408(b)(2) checklist that can be provided to the Form 5500 preparer as evidence of the client’s prudent process.
Fred Reish, APM, is a partner in the law firm of Drinker Biddle & Reath LLP; Joan Neri is of counsel to the firm; and Joshua J. Waldbeser is an associate with the firm.
FP01/ 6982148.2
4/11/13
