Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan can be easily over looked by sponsors of one-participant retirement plans. Common mistakes can be avoided by understanding the basic rules.
The 5500-EZ filing specifically covers plans that are not subject to ERISA. Required sponsors include one-participant defined contribution plans such as a 401(k) and profit sharing and defined benefit plans. The plan may cover an owner and spouse or one or more partners in a partnership that provides benefits to only these individuals. For each of these combinations, the plan does not have other eligible employee participants.
There are asset minimums that impact the filing. It is required if the total plan’s assets and all combined plans of the owner (for example a sponsor has two plans: a DC and DB) are $250,000 or greater as of the end of the plan year. If the plan is filing a return for the final year, it is required even if the assets are below this threshold or had not previously filed.
Electronic filing is required if plan sponsors file at least 250 returns of any type with the IRS (including W-2, Form 1099). As a result, the plan sponsor must file Form 5500-SF with the Department of Labor (DOL) instead of Form 5500-EZ. This scenario would be uncommon but could be applicable in some circumstances. Certain one-participant plans may file Form 5500-SF electronically with the DOL instead of filing with the IRS optionally as well. It’s important that it is noted on Form 5500-SF that it is filed for a one-participant plan so the information is not publically disclosed on the DOL website. Currently all the filings for Form 5500-EZ are paper-only filings.
Form 5500-EZ has no filing attachments except for Schedule MB from Form 5500: Multiemployer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information or Schedule SB Single-Employer Defined Benefit Plan Actuarial Information. These are required for defined benefit plans. The filing lists various financial information including total plan assets, loans, funding and withdrawals from the plan in addition to important information about the sponsor and overall plan.
The return is due the 7th calendar month after the end of the plan year, similar to the regular Form 5500, except Form 5500-EZ is due to the IRS and not the DOL. It may be extended two and half months past the due date on Form 5558.
New IRS compliance questions which were added to the 2015 form should not be completed. The IRS issued a statement in early 2016 in this regard. These questions will be used by the IRS to determine that the plan is in compliance with important plan qualification matters including plan documents with related updates, required minimum distributions, unrelated business taxable income and in-service distributions. These questions will be on the 2016 Form in various formats and it is anticipated they will need to be answered at that time. Note compliance questions 10-12 must still be answered for 2015 (related to loans and minimum funding).
Late Filer Penalty Relief Program
The IRS finalized the penalty relief filing program for late filers of Form 5500-EZ as of June 3, 2015. In order to apply for the program, plan sponsors must Complete Form 14704, Transmittal Schedule – Form 5500-EZ Delinquent Filer Penalty Relief Program (Revenue Procedure 2015-32). Applicants pay a sanction of $500 per delinquent return up to $1,500. This will allow the sponsor to file previously missed or late returns and obtain sanction relief from the IRS, provided the returns are submitted in good form.
It is important for plan sponsors of one-participant plans to consult with their tax advisors and also qualified plan experts in regards to annual funding limits and plan compliance matters as the financial advisor may not have the expertise needed accordingly. The plans are subject to annual funding limits as well as withdrawal restrictions that must be adhered to even though there are no employee plan participants in the plan. A common question is whether an LLC member or partner within a partnership may open a one-participant plan based on earned income reportable on Form K-1 within the corporate entity. Note the owner may only contribute to an employer- sponsored plan that is made available to all employees and other members on a non-discriminatory basis. A member or partner may not open a one-participant plan under these circumstances.
One-participant plan sponsors should keep in mind the plan design and filing requirements for these types of plan. Overlooked, there can be considerable penalties and ramifications with the IRS. The Form 5500-EZ filing does not take a lengthy amount of time to prepare but should be filed timely.
Kimberly Flett CPA, QPA, QKA, is Senior Director Compensation and Benefits, BDO USA, LLP. She is a member of the NTSA Communications Committee.