When it comes to managing a defined benefit plan, accuracy in reporting is essential for compliance with regulatory standards and ensuring financial transparency. Schedule SB to Form 5500 is a critical component in this process, providing detailed actuarial information for defined benefit pension plans.
But what is the purpose of Schedule SB and why is it required?
In this article, we will review the pages of Schedule SB and also provide answers to important FAQs. Let’s dive in!
What Is Form 5500 Schedule SB?
Required annually for most defined benefit plans, Schedule SB is used to disclose key funding and actuarial data, helping the IRS and the Department of Labor (DOL) monitor the plan’s funding status and adherence to minimum funding requirements.
Schedule SB is a complex form attached to the Form 5500 series. It discloses and certifies the funding adequacy of the cash balance or defined benefit plan. The actuary must certify the numbers on the form.
It is important to note that Schedule SB does not show the maximum deductible contribution. It also does not demonstrate and disclose compliance with nondiscrimination testing. Instead, a separate report shows compliance for these items and minimum funding requirements.
In this schedule, plan administrators provide a snapshot of the plan’s funding status, contributions, and any changes in actuarial assumptions, making it a crucial resource for assessing a plan’s financial health. This information helps not only in regulatory compliance but also in protecting the retirement benefits of employees who rely on the plan for long-term financial security.
The Schedule SB contains various actuarial information about the Plan’s funding requirements and whether the employer met minimum funding. The IRS and Department of Labor (DOL) ensure that plans are adequately funded by requiring employers to report whether they sufficiently fund the Plan annually.
How to Complete Schedule SB
This is an IRS form that documents the annual funding valuation results for single employer defined benefit plans. It is filed annually as part of the Form 5500.
Most of the information needed to complete the Schedule is typically found in the valuation report. The government wants proof that the pension plan made contributions in accordance with minimum funding requirements.
In some instances, the Schedule SB does not have to be filed with the Form 5500. This applies to one-participant plans in conjunction with filing the Form 5500-EZ. The Schedule SB must still be completed, signed by the plan actuary and retained in plan sponsor’s plan records.
Some information contained in the Schedule SB may not be found in the standard valuation report including:
- Contribution date/amounts for the plan year
- Present value of these contributions
- Reporting of funding waivers
- Reporting of funding deficiencies from current or prior years
A certification is signed by the plan actuary attesting that professional standards have been met and providing assurance that all rules and regulations were followed. In many cases an analyst prepares the Schedule SB for the actuary’s review.
A set of attachments must be provided according to the Form’s instructions to detail certain aspects of the funding and determination. Note that the maximum tax-deductible contribution is not shown.
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Are You Required to File Schedule SB?
Clients with a defined benefit plan must file the Schedule with forms 5500 and 5500-SF. Although form 5500-EZ is not required, it must still be completed and maintained by the client. Form 5500 is generally filed electronically.
When Is Form 5500 Schedule SB Due?
Schedule SB is due (and included) with the filing of Form 5500. The deadline for a defined benefit or cash balance plan is July 31st. This is for the prior calendar year plan.
The company can file an extension on Form 5558. This will extend the deadline to October 15th.
Plan Information, Including Assets and Liabilities
In the first section of the SB, the actuary provides some basic information regarding the Plan, and the company that sponsors the plan actuary also includes the value of plan assets and liabilities. The liabilities are categorized based on participant status and employee vesting.
If a plan is “at-risk,” the actuary must calculate “at-risk” liability amounts. The “at-risk” status will not apply to smaller defined benefit and cash balance plans.
Finally, the actuary will provide the interest rate to calculate any funding liability, and the benefit value increases for the applicable year.
Actuary Certification
The plan actuary must certify the Form 5500 Schedule SB.
Is a Cash Balance or Defined Benefit Plan Right For You?
Credit Balances
If an employer has funded more than required in previous years, they may apply any excess against current plan contribution requirements. To accomplish this, the company must elect to “store” these excess credit balances for future use.
The Schedule SB will also provide a reconciliation of credit balances. Additionally, the actuary shows interest on prior year balances, additional amounts the employer added, and a reduction for credit balances used. Credit balances are then divided into two main categories depending on when the company established them.
Required Funded Status and Contributions
Using the plan assets and liabilities from page one, the actuary will calculate the current year and the prior year’s funded status. In some instances, when calculating these ratios, the actuary must subtract credit balances from plan assets.
The company can apply credit balances to reduce required contributions rather than making cash contributions.
The actuary will report contributions made for the current plan year. For any calendar year, plan employers can contribute as late as September 15th of the following year. However, the actuary will discount the contributions to the valuation date using the plan’s flexibility interest rate.
Once the discount is applied, the actuary will allocate any contributions by category. The first category will be for any amounts that satisfy the late required contributions.
If a company contributes to avoid benefit restrictions (due to poor funding), the actuary will classify the deposits in the second category. The third and most relevant category is contributions that satisfy the current year’s requirements.
In the last part of this section of the Schedule, the actuary indicates whether the company was required to make applicable quarterly contributions.
Assumptions, Actuarial Methods, and Unpaid Contributions
The actuary discloses their actuarial methods and assumptions in Part V of the SB. The actuary will include a detailed description of the assumptions. If the PBGC covers the Plan, the Plan actuary consists of active employees’ service/age grid.
As a general rule, regulations prescribe the actuary’s interest rate and mortality table options. However, larger plans can usually justify a custom mortality table.
In Part VI, the actuary will indicate if the methods or assumptions have changed from the previous year and provide the rationale for any change in an attachment.
Finally, the actuary reconciles any unpaid plan contribution requirements in Part VII.
Cash Balance Plan and Defined Benefit Plan Required Contributions
Part VIII will state the current year’s contribution requirement. Generally, this will equal the present value of benefit increases in the current year plus the amortization of any unfunded liability. But when the Plan is overfunded, there is no amount to amortize. Instead, the actuary reduces any asset surplus’s value of benefit increases.
If the employer elects to apply any credit balances against the funding requirement, the actuary can reduce the need for that amount.
If the company funds more than the required contribution, the actuary calculates the amount that may be added to the credit balance.
Funding Relief
The last section of the Schedule covers 2010 funding relief. This Schedule section is unlikely to apply to small defined benefit plans. This specific funding relief allows the alternative amortization of unfunded liabilities (if any).
Companies can elect a 15-year amortization rather than a 7-year amortization. The 2022 and subsequent plan years will use 15-year amortization for calendar year plans. The 2010 relief also permitted a 2-year interest-only option, followed by a 7-year amortization.
Key Takeaways
The requirements and detailed calculations for Schedule SB can be complex, involving numerous fields that require precise actuarial inputs and knowledge of current funding rules.
Understanding the importance of Schedule SB and its role in the Form 5500 filing process can aid plan sponsors and administrators in avoiding penalties, ensuring compliance, and maintaining the financial stability of their pension plans.
Are you required to file a Schedule SB? You probably do if you have a cash balance plan or defined benefit plan. Fortunately, your actuary and plan administrator will coordinate and complete the filing.
