That’s the sigh of relief you may have heard recenly when the IRS announced Revenue Procedure 2015-32.
The Rev. Proc. made permanent a pilot program that ended Tuesday, June 2 that provided administrative relief for delinquent Form 5500-EZ for owner-only plans with over $250,000 in plan assets.
Business owners will be able to avoid substantial penalties for late 5500-EZ filings by following the program and paying $500 for each delinquent return for each plan, up to a maximum of $1,500 per plan.
It was a long time in the making. Here’s the back story.
Since 2002, business owners and their spouses could set up their own 401(k) plans in which they were the only participants to take advantage of increased deduction limits. No matter if the entity in which they were receiving otherwise taxable income was a Sole Proprietorship, Partnership, C-Corporation, S-Corporation, or LLC, the tax benefit were the same as plans in which common law employees participated.
It didn’t take long for practically every major financial service company, e.g., insurance companies, brokerage firms, and mutual funds, to offer a low 401(k) plan that came to be known as Solo-K Plans. It also didn’t take long for many owners to accumulate more than $250,000 in their plans, and that’s the point at which many owners had compliance problems.
Once that $250,000 threshold was passed, owners now had the obligation to file Form 5500-EZ each year. For those of us who work with business owners, we were never surprised that some new clients had never filed Form 5500-EZs – ever!
Until recently delinquent Form 5500-EZs were not eligible for the Department of Labor’s Delinquent Filer Voluntary Compliance (DFVC) program which caps penalties at $750 for one delinquent Form 5500 and $1,500 for more than one year, however many years are involved. The penalty for non-compliance could be large which plans with at least one non-owner can avoid.
- IRS penalties: $25 per day up to a maximum of $15,000.
- DOL penalties: Up to $1,100 per day (no maximum). For willful violations, individuals face up to a $100,000 fine and/or imprisonment up to 10 years.
So there was huge sigh of relief from those of us in the retirement business on May 9, 2014 when the IRS published Revenue Procedure 2014-32. The Rev. Proc. established a temporary one-year Pilot Program providing administrative relief from the imposition of penalties for failure to timely file Form 5500-EZ and similar filers. The termination date of which was June 2, 2015.
Our collective anxiety about “would they or won’t they” make the program permanent was eliminated when the IRS announced Revenue Procedure 2015-32. The new Rev Proc makes the pilot program permanent. You can get all the details here.