At the outset, individuals with assets of more than $250,000 in a Solo 401(k) plan must annually report the assets of the plan through the IRS 5500-EZ form. HOWEVER, this post is not intended for those individuals….today.
Rather, individuals who have sponsored a Solo 401(k) plan as a sole proprietor or through some other entity (e.g., S-Corp, LLC) and have discontinued or terminated their plan must file the 5500-EZ within 7 months after the closing (terminating) of the plan. But, some individuals unfortunately believe that “terminating” their plan is simply moving their assets out of the plan to, for example, an IRA. Folks, this isn’t terminating the plan. The plan must be formally terminated through the plan document sponsor and a final 5500-EZ must be filed to report to the IRS the termination of the plan.
Termination of the Plan
Yes, termination of the plan! Your plan document sponsor is merely that…your plan document sponsor. You are the Trustee of your plan and have the responsibility to correctly administer and operate your plan in compliance with IRS regulations. So, doesn’t it make sense that IF you were to terminate YOUR plan, you would be contacting the plan document sponsor to advise them of your intent. The document sponsor does not magically know this. Once you would notify the document sponsor, there are required termination forms that would be sent to you for completion. The plan document sponsor would also update their files of the termination. Think of this as Step 1.
Filing IRS Form 5500-EZ
So, now let’s say you took care of Step 1 correctly, you, as Trustee of your plan, must alert the IRS through the 5500-EZ that the plan has been terminated and that plan assets have been moved elsewhere. As noted earlier, this reporting must occur within 7 months after the plan has been terminated. Think of this as Step 2.
So, Let’s Say You Forgot?!
Well, yikes. Let’s use a simple example. “Joe” is self-employed and sells widgets. He initially set up his plan on January 1 of 2012 and executed a permissible rollover of $100,000 from another retirement plan. During 2012 and 2013, Joe made a total of $30,000 in plan contributions (we will assume he made this in compliance with what IRS rules allow). However, as luck would have it, Joe was not uber successful with the business and he (in his mind) stopped his business at the end of 2013. At that time, he rolled the money out of the plan to an IRA and did not advise his 401(k) plan document sponsor of this, and also did not file the 5500-EZ (which would have been due no later than July 31, 2014….7 months after the termination of the plan.
Well, Joe, has an issue on two fronts. One, he never terminated the plan and he rolled money out of the plan when he would not have been entitled to do so….he had not terminated the plan as the Trustee. Second, while in his mind he terminated the plan by moving the assets, he also never filed the final 5500-EZ with the IRS to report the “termination.”
IRS Pilot Program to Assist
This is certainly a convoluted matter that Joe got himself into. While it is hard to “terminate” the plan with the plan document sponsor after the fact, Joe, in effect terminated the plan. Joe should go back to the plan document sponsor to correctly report the plan was terminated, but keep in mind that the plan document sponsor should have known this prior to Joe initially rolling the funds out of the plan. But, there is a bit of good news….the IRS has had a relief pilot program for failing to file the 5500-EZ(s) timely. This program will expire June 2, 2015, but it permits people to file the required (and late) 5500-EZ form(s) to the IRS without any financial penalty. There are specific steps that must be followed. The individual, normally, could incur some hefty fees and penalties for not previously submitting this for each year they would have otherwise been required to file. PGI did a previous post on this subject.
Time is running short on individuals being able to submit the 5500-EZ(s). The following IRS link is a recent reminder that the IRS has sent out on this topic to help individuals who may be in default in filing this form. It lays out exactly what must be done to “make oneself whole.” Also, the following IRS 5500-EZ link may be of benefit with some additional information. Finally, the following IRS video on this topic may be of assistance as well.
As always, the information is intended to be educational in nature. It is not intended, nor should it be interpreted, as any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all such matters.