March 9, 2016
Oh No! My Client’s Solo 401(k) Plan Required a 5500-EZ Filing?
Many financial advisors have self-employed clients looking to find ways to save for retirement. The common solution is the Solo 401(k) Profit Sharing Plan (“Solo–k”). The financial advisor establishes the Solo-k using a brokerage account reflecting his firm’s prototype adoption agreement. The adoption agreement requires just a few signatures and dates and the plan is up and running. It is an easy, cost effective way for any business owner with no employees (or maybe just a spouse) to start saving for retirement. Every year the business owner can put away slightly more than $50K pre-tax ($53K for 2016, $59K if age 50+) dependent on his income and ability to save. No annual IRS 5500-EZ Filing is required … or is there?
The reporting requirements for these Solo-k plans are light, but there are some events that require a 5500-EZ be filed. The IRS requires all Solo-k plan sponsors to file an annual 5500-EZ form either (a) when the plan assets first exceed $250,000; or (b) when they are terminating the plan, regardless of the asset level.
Many Solo-k plan sponsors are not aware of the $250,000 threshold and continue to fund their plan or rollover assets from an IRA or former employer 401(k) account without submitting any filings. This causes a reporting failure which may not be discovered until the plan is shut down and assets are transferred over to an IRA. This distribution event requires a Form 1099-R to be issued. The IRS can use this 1099-R filing to determine the total assets in a Solo – k and then check to see if the proper 5500-EZ filings had been made.
The IRS, recognizing that this problem exists, established in 2015 a voluntary correction program specifically for these types of Solo-k plans. This voluntary correction program encourages plan sponsors to submit all delinquent 5500-EZ filings and pay a relatively small fee ($500 minimum fee in the case of one overdue filing, and a $1,500 maximum for 3 or more overdue filings). This is a relatively small price to pay to protect your client’s rollover and to retain its tax-qualified status.
Most investment firms do not offer 5500-EZ tax preparation, which is one of the reasons that many 5500-EZ filings do not get filed. While correcting the filing deficiency is not a difficult project by IRS standards, it is certainly prudent to engage a retirement consultant in order to ensure both that it encompasses all of the required years and that the IRS application is properly completed.
Don’t let your clients continue down this path of non-compliance. The ease with which the IRS can now identify late or non-filers means that it is just a matter of time until these self-employed plan sponsors are on their radar and subjected to late fees and penalties. It is always better and less expensive when you get to the IRS before the IRS gets to you.
To learn more about the voluntary correction program for self-employed individuals:
Email us at: Info@BenefitPractice.com or call us toll-free at: (855) 738-9778
