When completing form 5500-EZ, one of the most daunting tasks is filling out the list of plan characteristics codes. The IRS does not give a lot of detail on these codes. In many cases, it leaves filers basically guessing.
Unfortunately, most DIY filers don’t really know much about their retirement plans. That’s, in part, why these codes can be a little bit confusing to an unsuspecting filer.
In this post, we will discuss a little bit about what these codes actually mean and give you our comments on each code. We will also give you some common codes that most people will use. Let’s get started!
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The IRS requires these for codes because it allows them to consider internal statistics and also identify things that could be an audit risk. For example, if the IRS determines a type of characteristics is subject to confusion or other issues they might want to see them listed so they can potentially audit them or send them notices of correction.
The IRS allows you to enter up to 10 codes on the Form 5500. Typically, most Form 5500-EZ filers will have two to four applicable codes. But more complex plan designs may have many codes.
There are three main categories of characteristic codes. They are listed below:
- Defined Benefit Pension Features. These codes are only for defined benefit plans (including cash balance plans). If you do not have such a plan then you can skip these codes. In addition, if you have a type of defined benefit plan, these codes should be completed by an experienced administrator who will have greater insight into how to complete this section.
- Defined Contribution Pension Features. This section covers defined contribution plans, like 401(k) plans. Small businesses with 401(k) plans are the largest group who file form 5500-EZ.
- Other Pension Benefit Features. These codes are for miscellaneous features that can pertain to both defined benefit plans and defined contribution plans. It covers features like foreign plans and other unusual plan designs.
Defined Benefit Pension Features
Remember that these codes are solely for defined benefit plans and cash balance plans. So if you have a 401(k) plan or other type of defined contribution plan, you can skip this section.
|Code||Defined Benefit Plan Pension Features||Comment|
|1A||The benefits are mostly pay related.||This is true for most defined benefit plans.|
|1B||Benefits are mostly flat dollar based (includes dollars for each year of service).||Most defined benefit plans are NOT flat dollar based.|
|1C||Cash balance plan or similar structure. The plan has a “cash balance” formula. For this code, a “cash balance” formula is a benefit formula in a defined benefit pension plan that rather than, or in addition to, expressing the accrued benefit as a life annuity beginning at normal retirement age (NRA), defines the benefit for each employee in terms more consistent with a defined contribution plan such as a single sum distribution (as an example, 15% of final average pay times years of service, or the amount of the employee’s hypothetical account balance). The plan may be called a pension equity plan, personal account plan, cash account plan, pension equity plan, life cycle plan, etc.||Use this code for cash balance plans or similar plan structures.|
|1D||Floor-offset plan. This is for a plan where benefits are subject to offset for specified retirement benefits provided by a company provided defined contribution plan.||For floor-offset plan arrangements.|
|1E||Section 401(h). This is for section 401(h) arrangements that provide separate accounts for employee health and medical benefits.||Use this code for 401(h) plans.|
|1F||Section 414(k) arrangement. These benefits are based (in part) on the separate account balance of the participant (also please include related defined contribution pension feature codes).||This is a rare plan structure that allows a plan to have individual accounts within a defined benefit plan.|
|1l||Frozen plan. As of the final day of the plan year, the plan states that no participant will receive any new benefit accrual (whether because of compensation or by service).||Use this code for frozen plans.|
Defined Contribution Pension Features
|Code||Defined Contribution Pension Features||Comment|
|2A||Age/Service Weighted or New Comparability or Similar Plan. For an Age/Service Weighted Plan, the allocations are based on age or service, or even both age and service. For a New Comparability or Similar Plan, the allocations would be based on participant classifications and such classifications consist primarily of highly compensated employees; or the plan will provide an additional allocation rate applied to compensation above a determined threshold, and that threshold or rate exceeds the maximum threshold (or rate) allowed under the section 401(l) permitted disparity rules.||This is a common code for plans under New Comparability.|
|2B||Target benefit plan.||Use only for target benefit plans.|
|2C||Money purchase plan (other than target benefit arrangement).||Use for money purchase plans.|
|2D||Offset plan – The plan benefits are subject to offset by retirement benefits provided in another company plan.||Use this code for offset arrangements|
|2E||Profit-sharing plan.||Code for profit-sharing plans.|
|2J||Section 401(k) feature. A deferred or cash arrangement based on code section 401(k) that is part of a qualified defined contribution plan. It provides for an employee election to defer a portion of compensation or to receive these amounts in cash.||Common code for 401(k) plans|
|2K||Section 401(m) arrangement. Employee contributions are made to separate accounts or the employer contributions are based, at least in part, on employee deferrals or plan contributions. This is not applicable if the plan is a 401(k) plan with only QNECs and/or QMACs, it is a section 403(b)(1), 403(b)(7), or 408 arrangement/accounts annuities.||Only use this code if the plan allows 401(m) arrangements.|
|2R||Participant-directed investment accounts provided as a plan option.||This is common for most 401(k) plans.|
|2S||Plan has automatic enrollment feature that has elective contributions that are deducted from payroll.||Use this code when plan has automatic enrollment.|
|2T||Total or even partial participant-directed account plan. The plan uses default investment accounts for any participants who fail to direct account assets.||The code used when companies direct funds that are not designated by the employee.|
Other Pension Benefit Features
|Code||Other Pension Benefit Features||Comments|
|3A||Non-U.S. plan. The pension is maintained outside of the U.S. primarily for the use of nonresident aliens.||Use this code for a foreign plan.|
|3B||Plan that covers self-employed individuals.||This code is common for small business owners.|
|3C||Plan is not intended or structured to be qualified. A plan is not structured as a qualified plan under section 401, 403, or 408.||This is normally for deferred compensation plans and other non-qualified plans.|
|3D||Pre-approved pension plan. This is a pre-approved pension plan falling under sections 401, 403(a), and 4975(e)(7) that is subject to a favorable IRS opinion letter.||For pre-approved plans with favorable IRS letters.|
|3E||A one-participant pension plan that meets section 410(b) minimum coverage requirements only when it is combined with another employer plan.||Must meet section 410(b) combination rules.|
|3F||The company has leased employees, as defined in section 414(n), during the specified plan year.||Only use this code when there are leased employees.|
|3H||The company is a member of a controlled group, or affiliated service group. This falls under section 414(b), (c), or (m).||If you are part of a control group use this code.|
|3J||U.S.-based plan that covers residents of Puerto Rico and is qualified under both section 401 and section 1165 of the Internal Revenue Code of Puerto Rico.||Rather rare code. But used when the company has employees in Puerto Rico.|
As you can see, the IRS has plenty of characteristic codes for qualified plans. The codes are challenging for most filers because plan design can be complex and most companies just don’t know enough about how there plan is designed.
Fortunately, we have given you some helpful comments and pointed out some of the common codes for many popular plans. Make sure you review with your CPA or plan administrator to make sure that you have completed the codes accurately and completely.