Schedule R

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Now that the Schedule R has the coverage test information on it do you need to file the schedule if you do not have any distributions during the year?

[Tom Poje]

page 2 of the 2005 instructions for form 5500

"Changes to Note for 2005"

clearly answers this question - not just once but actually twice. there are only 11 short bullet points

I would answer the question, but this is for anyone else as well - you should have a copy of these instructions on hand.

http://www.irs.gov/pub/irs-pdf/i5500.pdf

[DTH]

Tom,

The 2005 Form 5500 Instructions are clear stating that if you meet one of the exceptions you don't need to file Schedule R. However, I have not seen any changes to Rev. Proc 93-42. So if the three-cycle testing cycle still exists and say in year two of the cycle I am required to file Schedule R, do I re-do the coverage test or can I use the numbers from year one of the cycle?

Here is the note from the 2005 Schedule R:

"Questions regarding coverage were previously raised in the Schedule T but the Schedule T has been discontinued. The instructions to the Schedule T provided that the Schedule T need not be filed every year if the employer was using the three-year testing cycle of Rev. Proc. 93-42. 1993-2 C.B. 540. That exception does not apply to Part IV of the Schedule R."

I can interpret this two ways:

1. Each year you need to file Schedule R, you need to do coverage testing.

2. The three-year cycle still exists, and each year you file Schedule R, use the figures from the first year of the cycle.

It would not make sense that you only need to do coverage testing only if you file Schedule R ... What if you don't need to file it for numerous years (past the three-year cycle).

Let me know your thoughts. Thanks!

[Tom Poje]

The whiz kid who produces the 5500 user manual has the following on her 5500 website. It does not address the 3 year cyscle you are talking about however...

no numbers are ever reported anymore. the only thing you check is whether plan passes ratio or avg ben test.

this does not mean you are not running the test, it simply means you are not reporting the results. good grief, if plan fails, are you going to correct the problem or are you going to hope the plan never gets audited? or another way of looking at it, if plan failed, it is impossible to file the 5500 and say the plan failed, so this whole thing (at least to me) seems rather stupid to even report. of course the plan passes, otherwise it would be disqualified.

I don't see too much different than with the ADP test. There is no check box that says plan passes or fails ADP test. so merely reporting the results of coverage, well, I don't see that as life or death. (as long as I have something in my records to prove the plan passes under whatever method I use. I assume that still applies to the 3 year cycle.

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Reporting Coverage on Line 9 of Schedule R (instead of Schedule T)

The most notable change in the 2005 package is the complete elimination of Schedule T. This revision, which had been rumored to be coming during the past year, is coupled with a change to Schedule R to report how the plan satisfies the coverage rules under IRC Section 410(b). Line 9 of the 2005 Schedule R instructs the preparer to “check the box for the test this plan used to satisfy the coverage requirements” followed by separate boxes for the ratio percentage test and the average benefit test.

But which plans complete the 2005 Schedule R? Remarkably, the rule for which plans complete Schedule R has not been revised. That is, Schedule R is not completed for a plan that is not a defined benefit plan or otherwise subject to the minimum funding standards of Code Section 412 or ERISA Section 302 if there were no distributions from the plan during the year. Those plans will not report any coverage information at all under the new format!

For plans that are required to complete Schedule R - whether defined benefit or defined contribution - line 9 must be completed unless the plan satisfies coverage under the exceptions that appeared on the 2004 Schedule T at line 3. This means that plans that are designed to automatically satisfy coverage rules - no HCEs benefit; only collectively-bargained employees benefit under the plan; all nonexcludable NHCEs are covered; or plans falling under the “acquisition or disposition” rule in Code Section 410(b)(6)© - do not complete line 9 even when Schedule R is completed for other reasons.

What is unclear is how you complete line 9 if a plan has disaggregated parts and not all of the parts satisfy coverage on the same basis. For example, suppose your 401(k) feature is available to all employees so meets one of the exceptions for completing line 9, but the matching feature has a last day, 1000 hour requirement. Do you complete line 9 or not? It is arguable that both disaggregated parts in this example satisfy the ratio percentage test so that checking that box would be an accurate reflection of the plan’s coverage results for 2005. I’ll clarify how the IRS expects the information to be reported in different situations as I learn more.

[Guest DazedAndConfused]

ok- now I am confused - do we need to complete the sch R for a profit sharing plan that had no distributions during the year?

[JanetM]

EBSA uses automated system to kick out error letters for things that aren't errors. If it were me I would do it and put zero for the number. That way you don't have to explain why you didn't file one for the year.

[Tom Poje]

based on what I have read, the answer is no sched R is needed.

If the plan is DB or money purchase then you have to fill out the sched R, but you might be able to skip question 9 which deals with coverage. you skip filling it out if you would have filled in section 3 on the sched T in previous years.