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Department of Labor

Recommendations and Actions

DOL05: Automate the Processing of ERISA Annual Financial Reports (Forms 5500) to Cut Costs and Delays in Obtaining Employee Benefit Plan Data

Background

The Employee Retirement Income Security Act of 1974 (ERISA) requires pension plan administrators to file an annual return/report (Form 5500 series) with the Department of Labor (DOL). The Internal Revenue Code requires the same report to be filed with the Internal Revenue Service (IRS). The Form 5500 series, titled "Annual Return/Report of Employee Benefit Plan," are publicly available documents containing data used by IRS, the Social Security Administration, the Pension Benefit Guaranty Corporation, and the Pension and Welfare Benefits Administration (PWBA).(1) All forms are submitted to and processed by the IRS' Atlanta, Brookhaven, and Memphis service centers.

IRS processes approximately one million of these reports each year. During fiscal year 1993, IRS' processing costs were approximately $21 million.(2) PWBA's portion of that amount was $12 million, or $12 per form. This processing operation requires more than 415 full-time equivalents (FTEs), including staff for information systems management, administration, keypunching, entity control (i.e., identifying and verifying the plan's file on the master database), correspondence, coding, and editing.

IRS service center staff manually convert the Form 5500 data submitted on paper to electronic form. An IRS edit system then checks the data for errors and applies computerized tests for compliance with tax reporting and ERISA Title 1 reporting requirements.

IRS corresponds with filers to obtain corrections to the Form 5500 filings, and it adds any information from responses and amended returns/reports to the database of report information compiled from the original submissions. This database is then sent to DOL, where PWBA transfers the data into its ERISA Information System (EIS). The EIS is used to analyze the data to identify plans for investigation of possible ERISA violations. The EIS is also the primary governmental source of employee benefit plan data and information and is used in social and economic research, as well as in legislative and regulatory policy making.

Computerized targeting is a very important part of PWBA's enforcement role under ERISA, and timely and accurate Form 5500 data are critical to this mission. ERISA requires a pension plan administrator to file the necessary Form 5500 within 210 days after the close of its pension plan year, unless an extension has been granted. After IRS completes its keypunching, edit tests, and correspondence cycles, the Form 5500 data and attachments are microfiched by a contractor and returned to IRS for storage.(3) The microfiches are then sent to PWBA.

IRS' processing time averages 60 to 90 days for filings that present no problems; others can take four to six months to process. Complete Form 5500 data (required of plans with 100 or more participants) are retrievable only after the data entry, correspondence, and microfiche cycles are completed. The delay occurs because attachments are not converted to electronic form. As a result, when prohibited transactions take place early in a reporting period, the data used to detect them are as much as two years old when provided to PWBA.

Although IRS error rates in processing the data are minimal for smaller filers, the error rates for the larger, more complex plan filings average 20 percent. In an effort to reduce errors and shorten the processing times, PWBA has encouraged IRS to develop computer software for the electronic filing of these data. As an incentive to file electronically, PWBA would like to distribute the software free of charge to the Form 5500 series filers. IRS, however, has taken the position that any income tax filing software should be privately developed and sold commercially after IRS reviews and approves it for compliance with IRS' specifications.

IRS has had an electronic filing system for plans with fewer than 100 participants in place for five years. The average number of plans participating in this program has been approximately 0.1 percent of those required to file. To improve filing, reduce errors, and improve enforcement, electronic filing efforts should be aggressively expanded.

Actions

1. ERISA should be amended to change the employer's filing deadline from 210 days after the close of a reporting period to 90 days.

Most pension plan administrators should have little difficulty in meeting this requirement because they generate much of the same data captured in the Form 5500 series within 90 days of a plan period for income tax purposes.

2. DOL and the IRS should work to develop an automated processing system for Form 5500 series data and incentives to file the data electronically.

Providing free computer software should be considered as one of the incentives. Most of the developmental funds will be directed toward designing or modifying off-the-shelf personal computer software that will be used to generate Form 5500 data in electronic format. Consideration should be given to providing the computer software to users for free, as an incentive to use it.

3. IRS should revise its regulations to facilitate electronic filing of Form 5500-series data.

The pertinent provisions of IRS regulations will need to be revised so that Form 5500-series data can be prepared and submitted on electronic media after the developmental effort in Recommendation 2 is completed.

Implications

The Form 5500 series data are publicly available, and the manual preparation and processing are time consuming and costly to the federal government and the filers alike. Although very small employers are likely to continue manual preparation of the forms, an increasing number of businesses are using personal computers for all of their financial transactions, including federal income taxes. Accordingly, personal computer software for preparation and filing of Form 5500 series data should reduce the employers' costs of preparing the forms as well as the federal government's costs for capturing the data.

More important for PWBA will be the timely and accurate acquisition of data used for detecting prohibited transactions and other signs of financial trouble evidenced by the plan administrators' submissions. This will enhance PWBA's ability to protect the pension funds of America's workers.

Changing the filing deadline from 210 days after close of a reporting period to 90 days may be problematic for those who file income tax returns during this period. Accordingly, the overlapping filing issues will need to be resolved.

Fiscal Impact

Although an initial cost of up to $5 million will be associated with developing a new system and computer software for use by those submitting Form 5500 series data, it will be recovered in significantly lower operating costs for both IRS and DOL.

As shown in the chart below, developmental costs will be incurred in fiscal years 1994 and 1995. Cost savings begin in fiscal year 1996 and run through 1998. In 1999, the maximum savings would be realized when total participation rates are estimated to reach 95 percent, even though some small plans may continue to file paper returns.

The following chart is based on financial industry experience that the cost of processing automated transactions is about one-fourth of the cost associated with manual processing. Applying this assumption to the current combined IRS/PWBA annual expenditure of $21 million yields the following projection, if a new electronic filing system is installed in accordance with the recommendations outlined above.

 Budget Authority (BA) and Outlays (Dollars in Millions) 
 *******************************************************
 Fiscal Year
           1994    1995    1996    1997    1998    1999    Total
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 BA        $5.0   -$2.1   -$8.4  -$12.6  -$15.8  -$15.8   -$49.7

Outlays $1.7 $1.3 -$8.2 -$12.4 -$15.7 -$15.7 -$49.0

Change in FTEs 0 -42 -166 -249 -332 -332 -332

Endnotes

1. Three forms make up the 5500 series: Form 5500, Form 5500C, and Form 5500R. In addition, pension plan administrators are required to submit specified schedules and attachments with the applicable Form 5500-series reports.

2. U.S. Department of Treasury, Internal Revenue Service, IRS Employee Plan Return Processing Budget (Washington, D.C., July 14, 1993). (Memorandum.)

3. Since 1990, the 5500Cs and 5500Rs have not been microfiched. IRS performs 100 percent data entry on these returns/reports, and the data are downloaded from the mainframe computer to PWBA's Public Disclosure Facility. As such, these data are available as soon as the 5500s are processed.

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