A cautionary notice of the avoidable penalties for sponsoring retirement plans | Pullman & Comley – Labor, Employment and Worker Advantages Act
Do you remember the scene in the Wizard of Oz when Dorothy, the Scarecrow, and Tin Man went into the woods and sang, “Lions, tigers, and bears, oh my god”? I couldn’t help but mumble “oh my” when I heard the following story, especially over concerns that the smallest small business will be hardest hit by the increased penalties imposed in SECURITY for late filing by retirement plan sponsors would law last December.
The plan sponsor of a one-party plan (i.e., a plan that only covers self-employed (e.g., a sole proprietorship (and spouse) or one or more partners (and spouse))) decides to close the business and his End Profit Sharing Plan The annual report on Form 5500-EZ for the last plan year of the plan will not be submitted. The omission will not be discovered until the Plan Sponsor receives an IRS CP 403 notice regarding the missing Form 5500-EZ. After Offender Filing Form 5500-EZ The Plan Sponsor will be fined $ 150,000 for late filing! Oh my God.
It appears that the Internal Revenue Service (the “IRS”) was a little premature in assessing this penalty. The missed return was due before 2020 and the increased late penalties were in effect for returns submitted after December 31, 2019. Nonetheless, this story has many lessons for all plan sponsors of retirement benefit plans that are required to file annual reports on the operation of retirement benefit plans on Forms 5500, 5500-SF, and 5500-EZ (each an “Annual Report”).
The lack of a deadline for filing an annual report is a big deal that can have adverse financial consequences. The IRS and the US Department of Labor (“DOL”) have long had the power to impose separate civil penalties on late filing of annual reports. The IRS can now impose a late filing penalty of $ 250 per day up to a maximum of $ 150,000 per annual report. In 2020, the maximum late filing fee that the DOL can charge is $ 2,233 per day. Oh my god indeed.
Given this penalty scheme, plan sponsors and administrators literally can’t afford to:
- Deliberately ignoring the reporting requirements for their retirement plans; or
- Rely on their advisors only to ensure that all necessary steps are taken to maintain the tax status of the plan.
Both the DOL and the IRS sponsor relatively inexpensive programs to help plan sponsors and administrators avoid these draconian penalties if a registration deadline is missed for any reason. Plan sponsors and administrators should be aware that these programs exist and be ready to use them if a registration deadline is not met.
The DOL’s voluntary compliance program for delinquent filers (“DFVC program”), first adopted in 1995, is a cost-effective way for most plan sponsors to submit delinquent annual reports on Form 5500 or Form 5500-SF and subject to high civil penalties for late filing to avoid . The minimum fine under the DFVC program is $ 10 per day late. There is a per-filing cap and a per-plan cap for the penalty, which varies based on the size of the plan. For small plans (less than 100 participants), the cap per submission is $ 750 and the cap per plan is $ 1500 (i.e. if three or more criminal returns are submitted at the same time, the fine is $ 1500). For large plans, the cap per submission is $ 2,000 and the cap per plan is $ 4,000.
Since 2002, the IRS has granted administrative relief from the penalties it could impose on plan offenders, large and small, for plan sponsors who use the DFVC program, provided all conditions in the 2014-35 notice are met. In addition to meeting all requirements of the DFVC program, the Plan Sponsor must submit a hard copy of Form 8955-SSA within 30 calendar days of completing the DFVC submission in order to receive the 2014-35 notification relief.
The DFVC program is not available for any participant’s plans as DOL is not responsible for any participant’s plans, including any participant’s plans filing annual reports on Form 5500-SF. Fortunately, the IRS maintains its own penalty relief program under Rev. Proc. 2015-32 plans for one participant. Under the IRS Penalty Relief Program, the registration fee is $ 500 per return, up to a maximum of $ 1500 per plan.
According to the IRS Understanding Your CP 403 or CP 406 page, it will take approximately 20 months after a late return due date before a formal missing return notification is sent. By the time this notice is received, the maximum IRS penalty will be fully determinable and the amount of DOL civil penalty that could be assessed will vary.
Sponsors of any plan for a participant should pay particular attention to the notice they receive from the IRS. Rev. Proc. 2015-32 provides that eligibility for the IRS Penalty Relief Program will be lost if “a penalty has been imposed in relation to this criminal return (i.e., if the IRS issued a CP 283 notice to a plan sponsor or administrator) . If the sponsor receives a CP 403 notice stating that a return was not submitted on time, the sponsor appears to still be eligible to submit the delinquent return through the Penalty Relief Program. A CP 403 notification requires a response to the IRS within 30 days of receipt to avoid further action.
Sponsors of both small and large plans are still entitled to submit annual criminal reports via the DOL’s DFVC program upon receipt of an IRS notice. Eligibility for the DFVC program is lost after the DOL has notified in writing that a timely annual report has not been submitted. These sponsors may be required to guide the IRS through its own procedures as per Notice 2014-35 to avoid the US $ 150,000 penalty.