Here are some ways to avoid massive penalties if you forget to file this 401(k).

By Bill Jackson December 3, 2022 5 mins read 137 Views

By Steffan Weiner, Guest Writer

This post is intended as an addendum to Dr. Jim Dahle’s 2018 post on How to Fill Out IRS Form 5500-EZ for those who have solo 401(k)s. As Jim stated:

“The good news is you don't have to file this form at all if your individual 401(k) has less than $250,000 in it at the end of the year. If you're only putting a few thousand into the plan each year, it may be decades before you have to do this form.”

Therein, lies the problem. We are supposed to remember to complete annual 5500-EZ filings that typically initiate at a date years in the future, and we don’t even know which year it will be. When I initiated my solo 401(k), I learned about having to fill out Form 5500-EZ and didn’t worry about it since it would be years before it became relevant. Eventually, that day came . . . and went.

Nearly two years after the deadline, I stumbled across an article about solo 401(k) screw-ups and was reminded. I determined the penalty for failing to file is severe (Per the IRS, “No penalty is imposed under these sections if it is shown that such failure to timely file is due to reasonable cause.”). If you’re anything like me, you either forgot about Form 5500-EZ or you were unaware of it and now you have to correct the oversight. Otherwise, you could be liable for hundreds of thousands of dollars worth of penalties.

How Do I Know If My Solo 401(k) Is Delinquent?

Your solo 401(k) had more than $250,000 in it at the end of the plan year; and
You failed to complete a 5500-EZ “by the last day of the seventh calendar month after the end of your plan year” (July 31 if you’re on the calendar year), per the IRS.

What Is Form 14704?

Fortunately, the IRS recognizes how difficult it is to remember to initiate annual 5500-EZ form filings many years in the future and the Penalty Relief Program (Revenue Procedure 2015-21) is available to save your retirement plan. For a relatively small payment, you can avoid a potentially catastrophic hit to your solo 401(k).

To apply:

If you have more than one delinquent 401(k), each 14704 is submitted individually (along with the accompanying 5500-EZs), but all delinquent filings from a particular plan may be sent together.
A 5500-EZ must be completed for every delinquent year. If the delinquency is prior to 1990, use the 5500-EZ from the current year. If you're delinquent from 1990 to the present, use 5500-EZ forms that correspond to the delinquent years.
On the 5500-EZ Part 1, check box D (only for delinquent years, not the current one if timely). For 5500-EZ years prior to having box D, write “Delinquent Return Filed under Rev. Proc. 2015-32, Eligible for Penalty Relief” in red.
Give the IRS money. As of this writing, the fee is $500 for each delinquent return maxing out at $1,500 per plan.
Attach Form 14704 to the front of the oldest delinquent return in your submission.
Mail in paper returns since returns filed electronically are ineligible for penalty relief.

IRS instructions for late filers can be found here: Penalty Relief Program for Form 5500-EZ Late Filers

If you believe you do have a reasonable cause for the late 5500-EZ filing, the IRS offers guidance to avoid penalties. Your reason must show “you used all ordinary business care and prudence to meet your Federal tax obligations.” Example reasons include fire, casualty, natural disaster, lack of access to records, death, severe illness, and incapacitation. Typically, you will be required to provide supporting documentation and to establish facts substantiating your claim of reasonable cause.

The IRS instructions to apply for a reasonable cause can be found here: Penalty Relief Due to Reasonable Cause

If you make a request to waive the penalty due to a reasonable cause and that request is denied, you are no longer eligible to use form 14704. Being that the worst scenario payout using Form 14704 is $1,500 and late 5500-EZs can result in hundreds of thousands of dollars worth of penalties, you should scrutinize this option carefully.

What Does Form 14704 Look Like?

irs form 14704

What Are the Penalties for Failing to Complete a 5500-EZ?

As of this writing, the penalty is $250 per day up to $150,000 for every late 5500-EZ, plus interest.

If I just realized I owe the IRS for late 5500-EZ filings, should I risk skipping out on it?

No, not even if you owe for 20 years or more. You’ll never be able to legitimize your solo 401(k) (if it's valued over $250,000) if you don’t start filling out 5500-EZ forms annually, and you risk serious penalties. The annual payment using Form 14704 is $500 per year, and it maxes out after three years (Note that this payment increases over time to account for inflation.). Even if you have missed 20 years of 5500-EZs that have to be completed, you only pay $1,500 max if you fill out Form 14704. Furthermore, if you receive a penalty assessment notice (Form CP 283), you will be ineligible to participate in the program.

solo 401(k) 5500 EZ img

Fortunately for me, I discovered my 5500-EZ oversight in late June, just a month shy of the second year of delinquency. I owed $500 for failing to file in 2020 and narrowly avoided an additional $500 for 2021. I did feel the penalty was excessive for failing to file an informational form. But I was glad to have the Penalty Relief Program available as opposed to facing a potential 401(k) penalty nightmare.

This article is about fixing an oversight. However, if you made this mistake as a DIY investor, don’t despair. You still likely came out way ahead compared to someone paying a financial advisor.

Besides, making these mistakes is one way we DIY investors learn. For the future, I suggest adding the 5500-EZ Form to your tax to-do list so you don't repeat this problem down the road.

Do you know how much money is in your solo 401(k)? Have you heard of the 5500-EZ form and that you needed to fill it out if you're above $250,000? If you messed up and didn't know about it, did you have to pay a penalty? How did it all work out? Comment below!

[Editor's Note: Steffan Weiner is a Psychiatric-Mental Health Nurse Practitioner and a financial hobbyist (featured on the Milestones to Millionaire podcast #30) living in the state of California. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]

The post If You Forgot to File This 401(k) Form, Here’s How to Avoid Massive Penalties appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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By: Lauren O'Brien
Title: If You Forgot to File This 401(k) Form, Here’s How to Avoid Massive Penalties
Sourced From: www.whitecoatinvestor.com/late-5500-ez-form/
Published Date: Sat, 03 Dec 2022 07:30:12 +0000

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