Employee Benefit Plans Alert | February 2026 Edition

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This edition of Employee Benefit Plans Alert focuses on the following topics:

• IRS and DOL Enforcement Trends: Notices, Examinations and Voluntary Corrections
• 2025 Form 5500 Updates and Electronic Extension Filing
• Required Plan Amendments Due by December 31, 2026
• IRS User Fee Increases Effective January 1, 2026
• ACA Reporting Reminder for 2025 Filings

IRS and DOL Enforcement Trends

Although the IRS has incurred significant workforce reductions in recent years, the Employee Plans Division, as well as the Department of Labor (DOL), has maintained an enforcement presence as examinations and investigations of employee benefit plans have continued.

Notices

We are seeing an increase in rejected Form 5500 filings and related DOL penalty notices issued due to reporting errors. These notices have included such matters as incorrect completion of Schedule C (regarding expenses paid by the plan), Schedule D (incorrect reporting of certain investments of the plan), etc.

The PKF O’Connor Davies Employee Benefit Tax Practice reviewed each situation and completed amended Form 5500, which provided comprehensive replies to the DOL resulting in the elimination or a significant reduction of the proposed penalty.

In another recent matter, we assisted a 401(k) plan sponsor who was part of a controlled group undergoing organizational changes during the year. The Form 5500s that were prepared by the Plan’s third-party administrator failed to properly identify the change of the Plan Sponsor and the employer identification numbers, etc. for more than one plan year. Several IRS notices were presented to the Plan Administrator containing multiple-year penalties totaling over $300,000. Their responses sent to the IRS were less than comprehensive and failed to correct the matter.

After reviewing the information, we subsequently filed amended Form 5500s and wrote a detailed letter providing information on the organization’s transactions and changes to the sponsorship of the plan. Recently, a no-change closing letter from the IRS was received by the Plan Sponsor.

These examples are a reminder that expert completion of the Form 5500 and careful review of the reporting to the government regulators must be judicious and can eliminate unnecessary expense to correct errors.

Examinations

The following are summaries of the identified omissions on recent examination activity of qualified retirement plans by the IRS. These are provided as a reminder for employers to be aware of common errors that can occur and to carefully review and understand their plan operations, as well as to periodically have a review performed to identify any inefficiencies in the plan processing. These situations may have been eliminated if a plan review was performed and if the IRS or DOL voluntary correction program was utilized. Following are some examples of the reasons for plan examinations:

• The employer used an incorrect definition of compensation when allocating the employer contribution to the plan. Typical compensation errors involve including or excluding a certain component of compensation (e.g., OT pay, commissions, bonuses, etc.). This employer used budgeted wages which were determined as of the beginning of the plan year, instead of actual wages earned for the year. There were several affected participants and the examination was expanded to more than one plan year.
  
  The duration of the IRS examination was two years. The additional time was needed because the examination was transferred during its processing on two occasions to a different agent, plus the work stoppages of the government. With our assistance, the examination was resolved through the IRS Employee Plan Compliance Resolution System (EPCRS) utilizing self-correction principles. Although there was a favorable outcome, the cost of correction was increased based on the time delays to finalize the examination.

• Another IRS examination determined certain participants benefiting in the plan should have been excluded based on their classification. The plan had changed its record keeper several times over a five-year period and each change required the adoption of a new document. In one of the restated plan documents, an error was made regarding the eligibility provision of the plan. This provision was not identified until 2025 when it was corrected. However, the prior plan years maintained the wrong eligibility.
  
  The IRS determined this matter to be a disqualifying event and negotiated a “closing-agreement” with the employer. That circumstance required a monetary sanction payment to the IRS (for the plan to maintain its qualified status) and a retroactive amendment to allow the classification of employees to be eligible for the plan.
  
  This situation emphasizes the importance of a careful review of a plan document anytime an amendment is required or the plan is required to be restated. Ensuring the plan’s features are “caried-over” correctly to the new plan and understanding the changes that are being made to the prior plan document should be a required step in the process.

Voluntary Corrections

During an audit of a retirement plan’s financial statements, several instances of the untimely transmission of employee elective contributions and loan repayments were identified. The principal amount involved with these transactions was significant.

After we discussed the correction alternatives with the employer, the employer decided to complete a Voluntary Fiduciary Correction (VFC) application to be submitted to the appropriate Regional Office of the Department of Labor. Utilizing this correction method, the employer was able to use the DOL’s correction method (interest rate) to calculate the lost earnings that are required to be contributed to the plan as part of the correction process. When employers self-correct for this operational error, alternative earnings are supposed to be used for the correction, resulting in a higher cost of correction.

2025 Form 5500 Updates and Electronic Extension Filing

There are no significant changes to the Form 5500 or the related schedules for the 2025 year. The only material changes regard plan characteristic codes that are reported for defined benefit plans.

• New Plan Characteristic Codes for Line 8a – Form 5500:

• 1J, 1K, 1L: Added to identify multiemployer defined benefit plans terminated due to mass withdrawal, plan amendment or insolvency, respectively.

• 1G: Identifies defined benefit plans using a variable annuity benefit formula (applies to Forms 5500, 5500-SF and 5500-EZ).

• 1H: Clarified to apply exclusively to terminated single-employer plans covered by the Pension Benefit Guaranty Corporation (PBGC).

• Filing of an extension for an employee benefit plan is required by the original due date. This process has been made easier as it is now permitted to be performed electronically. Form 5558 (extension request) can be submitted electronically via the DOL’s EFAST2 system. This process was started in 2025.

Required Plan Amendments Due by December 31, 2026

By December 31, 2026, most non-governmental and non-collectively bargained retirement plans must adopt formal written amendments to comply with various provisions contained in the SECURE Acts, CARES Act and hardship withdrawal regulations. While plans have been required to follow these rules operationally since their effective dates, the December 31, 2026 deadline is when these changes must be adopted by the plan.

The plan amendments are typically provided by the plan document preparer and the changes are identified as unilaterally adopted or a choice can be made by the employer to select and adopt a new feature. Frequently provisions included in the amendments are mandatory as they were required by a statute change.

Examples of some of the new plan requirements and features include the:

• Raising of the required minimum distribution age (currently 73).
• Roth catch-up contributions for highly compensated individuals over age 50, allowing long-term part-time employees who work more than 500 hours in two (2) consecutive years to participate in the retirement plan.
• Raising the cash-out limit to $7,000.

Additionally, several changes to hardship withdrawal administration will be required depending on the selections made by the record keeper’s administration of this operation and/or the employer’s selections including:

• Allowing a participant to continue to contribute to the plan after receiving a hardship distribution.
• No longer requiring a loan be utilized before a hardship distribution.
• Accepting an employee’s self-certification of the need for the hardship distribution.
• Other options.

IRS User Fee Increases Effective January 1, 2026

Effective January 1, 2026, the Internal Revenue Service (IRS) updated and increased certain user fees including Voluntary Correction Program (VCP) and request for Determination Letter. The revised fee schedule is outlined on the IRS Rev. Proc. 2026-4.

Voluntary Correction Program Fees

The VCP allows plan sponsors to correct plan failures on a voluntary basis and maintain the plan’s tax favored status. The user fees were increased by $500 across all asset tiers, the new user fees apply to submission filed on or after January 1, 2026. The table below summarizes the 2026 VCP user fees:

Determination Letter and Related Filing Fees

User fees for the determination letter requests and certain related filings were also increased. These filings are commonly required for plan terminations, amendments and certain qualification confirmations. Below is a table summarizing user fees increased:

ACA Reporting Reminder for 2025 Filings

Under the Affordable Care Act (ACA), employers with 50 or more full-time employees (including full-time equivalent employees) in the previous calendar year must file with the IRS Forms 1094-C and 1095-C to report the information required under IRC sections 6055 and 6056 about offers of health coverage and enrollment in health coverage for their employees. Employers subject to this mandatory reporting are known as Applicable Large Employers (ALEs).

For calendar year 2025, Forms 1094-C and 1095-C must be filed with the IRS no later than March 31, 2026.

A notable change from prior year reporting is that the IRS no longer requires that employers provide their employees a copy of Form 1095-C filed on their behalf. However, employers must notify employees that the Form is available to them and must provide the employee with a copy of the Form upon the employee’s request. Aside from this change, the Forms themselves, along with the information required and the instructions for the preparation of the Forms, remain the same.

Contact Us

The Employee Benefit Services practice at PKF O’Connor Davies is available to assist plan sponsors in meeting the various compliance requirements applicable to their plans. We also provide a full spectrum of compliance services for qualified retirement plans, non-qualified deferred compensation plans and welfare plans.

For more information, please contact your client service team or any of the following: 

Timothy J. Desmond, CPA
Partner
Employee Benefit Services Practice Leader
tdesmond@pkfod.com | 551.249.1728

Louis F. LiBrandi, EA, CEBS, ChFC, TGPC
Partner
llibrandi@pkfod.com | 646.449.6327

Ashley Mayer, CPA
Partner
amayer@pkfod.com | 914.341.7094

Joseph J. Farrenkopf, CPA
Partner
jfarrenkopf@pkfod.com | 914.341.7002