Do you have a solo 401(k)? Have you been filing form 5500-EZ each year for the 401(k)? Are you aware that there is a penalty up to $15,000 per year for failure to file? While many solo 401(k)s are exempt from the 5500-EZ filing requirement, we have ran across many solo 401(k) owners who should have filed and who have failed to do so. If you you have a solo 401(k) and have no idea what I’m talking about, stay calm, but read on.
ANNUAL 5500-EZ FILING FOR SOLO 401Ks
One of the benefits of a solo 401(k) is the ease of administration and control because you can be the 401k trustee and administrator. However, as the 401(k) administrator and trustee it is your own responsibility to make the appropriate tax filings. This would include filing any required tax returns for the 401(k). In general, there is no tax return to file for a self-directed solo 401(k) with total assets below $250,000. However, once the plan assets exceed $250,000 at the end of a plan year, a tax return filing is required. The return the 401(k) files is called a 5500-EZ. Recently, more and more solo 401(k) owners have contacted us because they set up their solo 401(k) online or with some other company and they were never made aware that they are supposed to file a 5500-EZ when their plan assets exceed $250,000. Some of these individuals have multiple years in which they should have filed the 5500-EZ but failed to do so. The penalties for failing to file a 5500-EZ when it is required can be quite severe, with fees and penalties as high as $15,000 for each late return, plus interest.
TEMPORARY PENALTY RELIEF PROGRAM EXPIRED
The IRS conducted a temporary program and allowed penalty relief from June 2, 2014 to June 2, 2015. We used this temporary penalty relief program to avoid tens of thousands of dollars of penalties from the IRS for clients who had failed to properly file annual 5500-EZ returns for their solo 401(k). The IRS has indicated that over 10,000 delinquent returns were filed under the temporary program which ended on June 2, 2015.
PERMANENT PENALTY RELIEF PROGRAM
The IRS recently announced a new 5500-EZ penalty relief program for delinquent returns from solo 401(s)s (aka, one-participant plans). This new relief program is known as Rev. Proc. 2015-32 and is similar to the temporary program except that a submission fee is now due. The procedure and criteria of the new program are as follows.
- In order to qualify for this program, your solo 401(k) plan must not have received a CP 283 Notice for any past due 5500-EZ filings, and the only participants of your solo 401(k) plan can be you and your spouse, and your business partner(s) and their spouse. This program is available to all solo 401(k) plans, regardless of whether it is a self-directed plan. I will note that we have successfully used the temporary program which had this same requirement for a client who did have a IRS collection notice (CP 283 Notice) so don’t count yourself out if you have received a notice.
- File all delinquent returns using the IRS form in the year the filing was due.
- Write in red letters at the top of the first page of each filing, “Delinquent return submitted under Rev. Proc. 2015-32, Eligible for Penalty Relief”.
- Attach IRS form 14704.
- Mail all documents to the IRS, Ogden, UT office.
- Pay a $500 fee per delinquent return being filed up to a maximum total fee of $1,500 (e.g. three years of delinquent returns). You can file more than three years of delinquent returns but the total fee will not exceed $1,500. While this fee seems high, we have seen $15,000 penalties per year against solo 401(k) plans who have failed to file so it is a deal in contrast to the penalty.
In sum, if you have a solo 401(k) plan that should have filed a 5500-EZ for years past because the plan assets exceeded $250,000 at the end of the plan year, then you should take advantage of this program. This relief program can literally save you thousands of dollars in penalties and fees. If you have any questions about this program or would like assistance with submitting your late 5500-EZ filings under this program, please contact the law firm as we are assisting clients with current and past due 5500-EZ filings for their solo 401(K)s.
By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook