Form 5500 plays a key role in ensuring that employee benefit plans are properly managed. By disclosing 401(k) plan information to the Federal government each year, the form enables all parties involved to monitor plan participation and activity. Below is a look at the three versions of Form 5500 and the penalties you could face if the proper version is not filed on time.
What Is Form 5500 and Why Does It Exist?
Form 5500 is a report that is submitted to the IRS. It summarizes 401(k) activity for the previous year, including the degree of employee participation, the plan’s financial performance, and the plan’s operations. It exists to satisfy reporting requirements put forth by the IRS and Department of Labor (DOL).
“The IRS, Department of Labor, and Pension Benefit Guaranty Corporation jointly developed the Form 5500-series returns for employee benefit plans to satisfy annual reporting requirements under ERISA and the Internal Revenue Code.” – U.S. Internal Revenue Service (IRS)
What Are the Three Variations of Form 5500?
There are three versions of Form 5500. Typically, the version selected reflects the total number of employees participating in your company’s 401(k). Here is a look at the three versions and guidelines for selection:
- Form 5500: This version is designed for use for companies that have over 100 401(k) plan participants.
- Form 5500-SF: This form exists for companies that had fewer than 100 employees participating in their 401(k) on the first day of the plan year.
- Form 5500-EZ: This less common version is designed for situations in which the only participants are a business owner and their spouse.
How Is Form 5500 Prepared and Filed?
Form 5500 is usually prepared by the 401(k) provider. But as an employer, you should have a general understanding of the filing requirements for Form 5500. For instance, you should make sure the form is filed on time and in accordance with IRS requirements.
Filing procedures for Form 5500 depend on which version of the Form is prepared. Form 5500 and 5500-SF are filed electronically using a special EFAST2 processing system provided by the DOL. Form 5500-EZ, on the other hand, cannot be filed electronically. You must file using a paper form.
Why Is Form 5500 So Important?
“The Form 5500 Series is part of ERISA’s overall reporting and disclosure framework, which is intended to assure that employee benefit plans are operated and managed in accordance with certain prescribed standards…” – U.S. Department of Labor, Employee Benefits Security Administration
Form 5500 is important because employee benefit plans impact employers, employees, and regulators. With so many different parties affected by benefit plans, it is vital that plans are properly managed according to universal standards.
What Are the IRS Penalties for Failing to File Form 5500?
Failure to file Form 5500 on time can lead to significant financial penalties imposed by both the IRS and the DOL. Unfortunately, many employers have no idea they missed the filing deadline until they receive a letter from the DOL or IRS.
Because this letter can take months to a year to arrive, the employer ends up paying even more money because penalties continue to be applied until filing occurs and penalties are paid. Here is a look at the penalties you could face:
- DOL penalties: You could pay up to $1,100 per day for failing to file Form 5500 on time. There is no maximum penalty.
- IRS penalties: The IRS penalty is $25 per day for filing late. There is a maximum penalty of $15,000.
Is There Any Way for Late Filers to Minimize These Penalties?
“Plan administrators are eligible to pay reduced civil penalties under the program if the required filings under the DFVCP are made prior to the date on which the administrator is notified in writing by the Department of Labor (Department) of a failure to file a timely annual report under Title I of the Employee Retirement Security Act of 1974 (ERISA).” – U.S. Department of Labor
The penalties outlined above can add up quickly, creating stress and financial strain for many businesses. While you may not be able to eliminate all penalties issued, there are some steps you can take to help reduce the total amount you pay to the DOL. You could be eligible to participate if you have not yet received notification from the DOL about your missing Form 5500.
If you realize you have not yet filed Form 5500 but have not been notified by the DOL, you can file a delinquent Form 5500 through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP). This program features reduced, flat penalty amounts and imposes maximum penalties of $750 for small 401(k) plans and $2,000 for larger plans. The IRS also outlines some steps you can take to help fix a late filing.
What Is the Best Way to Ensure That You File Form 5500 Properly?
Keeping your business in good standing with the IRS and Department of Labor is critical. It is up to you as a business owner or operator to file the proper version of Form 5500 to satisfy annual ERISA reporting requirements.
The single best way to ensure that the proper version of Form 5500 is filed on time is to consult with an IRS tax lawyer. A skilled tax lawyer can review your company structure and 401(k) participation and confirm which of the three variations of Form 5500 is best for your company. A tax attorney can also make sure Form 5500 is filed on time to help you avoid financial penalties.
Contact a Professional Today
We invite you to contact us at Silver Tax Group to discover why business owners across America turn to us for help with their tax questions. Whether you are the CFO of a multi-million dollar company or the owner of a growing startup, we are here to make the tax filing process smooth and pleasant for your business. We look forward to providing you with the guidance you need to complete Form 5500 and the rest of your tax return.
