IRS Provides Permanent Penalty Relief for Late-Filed Form 5500-EZ

Under Revenue Procedure 2015-32, the Internal Revenue Service has made permanent its penalty relief for late filers of IRS Form 5500-EZ and is encouraging eligible small businesses that did not file certain retirement plan returns to take advantage of a low-cost penalty relief program, which enables them to quickly come back into compliance.

Background

The program, started as a one-year pilot in June 2014, is designed to help small businesses that may have been unaware of the reporting requirements that apply to their retirement plans.  The IRS has received about 12,000 late returns since the pilot program began in June 2014.

Small businesses that fail to file required annual retirement plan returns, including Form 5500-EZ, can face penalties of up to $15,000 per return.  However, by filing late returns under this program, eligible filers can avoid these penalties by paying $500 for each return submitted, up to a maximum of $1,500 per plan. For that reason, plan sponsors are encouraged to include multiple late returns in a single submission.

Eligibility for Penalty Relief

The program is open to retirement plan sponsors who are eligible to file Form 5500-EZ, which generally means one-participant plans that satisfy the requirements of the IRS revenue procedure and certain foreign plans (not discussed in this Alert).  Plan sponsors who have already been assessed a penalty for late filings are not eligible for the penalty relief, but may seek relief for a failure to timely file that is due to a reasonable cause.  Under the IRS revenue procedure, a one-participant plan is a retirement plan that:

1. Covers only the 100% owner(s) of the business (or the owner and the owner’s spouse) or only one or more partners (or the partners and their spouses) in a business partnership, and
2. Provides benefits only to the owner(s) and their spouse(s) or one or more partners and their spouses.
   If a retirement plan has eligible participants other than owners/partners and their spouses, it is not a one-participant plan and must file IRS Form 5500 with the appropriate schedules.  For this purpose, the U.S. Department of Labor offers a similar penalty relief program for businesses with retirement plans that include non-owner employees under its Delinquent Filer Voluntary Compliance Program.

Conclusion

In most cases, retirement plan sponsors and administrators must file a Form 5500-EZ or Form 5500 each year for their plan by the end of the seventh month following the close of the plan year.  For most plans that operate on a calendar-year basis this means the Form 5500-EZ or Form 5500 is due on July 31 of each year.  This date may be extended to October 15 for calendar year plans by using IRS Form 5558.  If a plan sponsor misses these deadlines, then it is strongly recommended that they utilize the late filer program to avoid penalty assessments as IRS is now routinely issuing penalty assessment letters with $15,000 penalties.