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 run across many solo 401(k) owners who should have filed and who have failed to do so. If you have a solo 401(k) and have no idea what I’m talking about, stay calm, but read on.
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). However, one exception to this rule is if the plan assets exceed $250,000 at the end of the plan year, in which case, 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.
Fortunately, the IRS has a temporary pilot program that provides automatic relief from IRS Late filing penalties on past due 5500-EZ filings. This temporary program began on June 2, 2014, and will end on June 2, 2015. The IRS has yet to decide if they will continue with this program and make it permanent after June 2, 2015, but if they do, they plan to charge a filing fee. Under this temporary program, there is no filing fee.
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.
The IRS has provided a step-by-step process that can be found at http://www.irs.gov/Retirement-Plans/New-Penalty-Relief-Program-for-Form-5500-EZ-Late-Filers and at http://www.irs.gov/pub/irs-drop/rp-14-32.pdf. In order to qualify and receive a waiver of penalties under the program, you must follow the program exactly. Basically, you must do all of the following:
- 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. 2014-32, Eligible for Penalty Relief”.
- Attach a one-page transmittal schedule to the front of each filing.
- Mail all documents to the IRS.
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, which will save you literally thousands of dollars in penalties and fees. Under this program, the IRS must receive your past due to 5500-EZ filings before June 2, 2015. 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.