Financial advisors: Are assets in your client's 1-participant plans more than $250,000?

 

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The Employee Plans Compliance Unit (EPCU) is looking at filed Forms 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, to determine if one-participant plan sponsors complied with their annual information reporting and plan qualification requirements (Form 5500-EZ, First Return Filer Project).

A one-participant plan sponsor must file a Form 5500-EZ (or a Form 5500-SF with the one-participant plan box checked) when the plan’s total assets and the assets of all their other one-participant plans at the end of the plan year are greater than $250,000. Sometimes, one-participant 401(k) plans are referred to as a Solo K, an Individual K or a Uni-K Plan.

A one-participant plan covers individuals who own the entire business (which may be incorporated or unincorporated) as:

  • a 100% business owner (and his or her spouse), or
  • one or more partners and their spouses (no common law employee participants).

Project goals

To determine whether:

  • plan sponsors either didn’t file required annual returns or filed late, and
  • our records reflect accurate information.

Project results

Failure to file - Most of the plan sponsors we contacted failed to file one or more Forms 5500-EZ. Many sponsors said their financial or investment advisor didn’t tell them about the filing requirement. These sponsors are correcting using our late filer penalty relief program for Form 5500-EZ filers.

IRS can impose a penalty of $250 a day (up to $150,000 per year) for not filing a Form 5500-EZ return by the required due date. However, under the penalty relief program (Revenue Procedure 2015-32), IRS gives administrative relief when an eligible sponsor late files Form(s) 5500-EZ and pays a $500 fee per return (up to a maximum of $1,500 per plan).

First return filed for the plan - Most of the plan sponsors we contacted incorrectly checked the Form 5500-EZ, Part I, Line A(1) box indicating it was the first return filed for the plan. Sponsors should only check that box once - the first time they file a Form 5500-series return for the plan. If the sponsor has ever filed a Form 5500-series return for the plan, even if it was on a different form (for example, Form 5500-SF), then they shouldn’t check this box.

$250,000 combined plan assets - Many plan sponsors didn’t know the $250,000 in plan assets is a combined total for all their one-participant plans. Sponsors must file a Form 5500-EZ for each of their one-participant plans when the total assets at the end of the plan year for all one-participant plans they maintain is greater than $250,000. Some plan sponsors incorrectly thought the $250,000 filing requirement was per plan, per participant or per investment.

Example: Plan sponsor has two one-participant plans. Plan A has $200,000 total assets at the end of the plan year and Plan B has $53,000 total assets at the end of the plan year. Plan sponsor must file a Form 5500-EZ for Plan A and a Form 5500-EZ for Plan B.

Final return - We found some plan sponsors weren’t aware they needed to file a Form 5500-EZ in the final year of the plan, even if the plan assets prior to distribution or transfer were less than $250,000. The final plan year is the year in which the sponsor either:

End of year/beginning of year asset mismatch - We found some plan sponsors had assets at the end of a plan year that didn’t equal the assets at the beginning of the next plan year. The dollar amount of plan assets at the beginning of a plan year must be identical to the dollar amount of plan assets on the last day of the prior plan year. For more information on asset matching, see the EPCU End of Year/Beginning of Year Asset Mismatch Project.

Filing for IRA-based plans - Some plan sponsors incorrectly filed Forms 5500-EZ for their Simplified Employee Pension Plan (SEP) or Savings Incentive Match Plan for Employees Plan (SIMPLE). SEPs and SIMPLEs are IRA- based plans that don’t have a Form 5500-series filing requirement. Instead, the financial institution or trustee files Form 5498, IRA Contribution Information PDF.

Rounding - We found some plan sponsors didn’t use whole dollars for financial information.

Don’t enter cents or use a period or comma after the whole dollar amount. If assets aren’t rounded, we may read them as being greater than $250,000 when they’re not. For example, enter $220,069.42 as 220069 instead of 220069.42 or 220,069.42.

EIN Errors - Some sponsors didn’t use their 9-digit employer identification number (EIN) to file their Forms 5500-EZ or used the incorrect EIN because they:

  • Transposed digits
  • Used too many or too few digits
  • Used a prior EIN after an entity change (for example, after changing a partnership to limited liability company)
  • Used a social security number instead of an EIN
  • Used the trust’s EIN instead of the plan sponsor’s EIN

Correction

If you or your clients didn’t file required Forms 5500-EZ, we encourage you to use our penalty relief program per Revenue Procedure 2015-32 to catch up.

If you find errors on a return or information report, fix these errors promptly by amending the return or filing a corrected information report. There’s no fee to amend a Form 5500-EZ.

If you find other plan errors, encourage your clients to fix them using our Employee Plans Compliance Resolution System (EPCRS). Because a compliance check isn’t an examination, your clients can still correct certain form and operational mistakes by using EPCRS.

Prevention

It’s very important that you alert your clients to review their end-of-year plan assets for all of their one-participant plans so they are current on their Form 5500-EZ filings. If you prepare or file the Forms 5500-EZ for your clients, ensure you have administrative procedures in place to remind you of the filing requirement when combined plan assets exceed $250,000.

Planning tips

Maintaining retirement plan records until the trust or IRA has distributed all benefits and enough time has passed that the plan won’t be audited, is not only good business practice, it’s required. We encourage you to suggest that your clients keep copies of their Forms 5500-EZ.

In a previous EPCU project, Rollovers as Business Start-Up (ROBS), we determined that a large reason many plan sponsors weren’t filing required Forms 5500-EZ was that they and their advisers incorrectly interpreted an exemption to the filing requirement for ROBS plans. The filing exemption only applies if combined one-participant plan assets are less than $250,000 and the plan provides deferred compensation solely for an individual, or an individual and his or her spouse (or partners and their spouses) who wholly own a trade or business, whether incorporated or unincorporated. In ROBS arrangements (the plan not the individual) owns the trade or business. Therefore, this filing exemption doesn’t apply and ROBS plan sponsors are required to file Form 5500-series returns.

Contact us

If you have questions about the Form 5500-EZ First Return Filer project, email us and include “Form 5500-EZ First Return Filer” in the subject line. Make sure you include your phone number and the best time to reach you, and we’ll contact you with answers. We can’t respond by email. For retirement plan questions not related to EPCU projects, please visit Customer Account Services.

Related

We have many resources to help you keep your retirement plan compliant. Our resources can help you find and fix errors and avoid making them in the future.

Page Last Reviewed or Updated: 15-Nov-2024