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Penalties For Late Filing of Form 5500 or 5500-EZ

Penalties For Late Filing of Form 5500 or 5500-EZ

Most people don't understand the late-filing penalties associated with Form 5500 (including 5500-EZ and 5500-SF).


Why should they?

But once you file late (or do not file at all), you'll learn just how painful penalties can be. They can go up to $150,000 per form (Form 5500 and Form 5500-EZ).

While penalties are steep, you can often get relief or a reduction if you have reasonable cause. You just need a few tips.

This article will give you some strategies to mitigate or reduce these penalties. Let's dive into it.

What is Form 5500?

Form 5500 (which includes the 5500-EZ and 5500-SF) is filed for certain pension and retirement plans. They disclose certain financial information, such as plan contributions and employee participation.

Generally, the company must file Form 5500 by the end of the seventh month after the plan year's end. It's usually July 31st for calendar year plans. But you can file an extension until October 15th.

Companies often use Third Party Administrators (or TPAs) to prepare and file Form 5500. Therefore, most companies never take it seriously if their company's Form 5500 is prepared and filed accurately and on time.

They realize their mistake when they get a letter from the IRS or DOL telling them they missed the deadline. Now, the stress starts to mount as they realize the substantial penalties they face.

Form 5500 Penalties

Under the SECURE Act, penalties have increased significantly. Effective for returns due after December 31st, 2019, the SECURE Act increased the penalty to $250 per day, not to exceed $150,000 for a late-filed form.

But the penalties don't stop there. In addition to the IRS penalty, the DOL can impose a civil penalty on a plan sponsor of up to $1,100 per day for failing to file Form 5500 promptly.

Plan administrators may also be subject to other penalties for incomplete filings unless they submit a statement of reasonable cause for not filing a complete annual return and the DOL approves it.

Form 5500 Late Filing Penalty Relief

Plan administrators can submit Form 5500 electronically to the DOL's Employee Benefits Security Administration (EBSA) and attach a letter stating the reason or cause for the late filing. If the DOL and IRS find reasonable cause, the plan administrators will be forgiven for any delay.

If the process does not satisfy the DOL and the IRS, a notice of proposed penalty will be sent to the plan administrators. The plan can appeal the imposed penalty.

Another option is participating in the DOL's Voluntary Delinquent File Compliance (DFVC) program. The DFVC limits the potential penalties imposed by the DOL but does not eliminate them.

To qualify, plan administrators electronically file a completed Form 5500 or 5500-SF and include all schedules and attachments for each year of non-payment. They must check a box indicating they are applying for the DFVC program.

An online calculator is used to determine the fines to be paid, a check for the same amount is sent, or an electronic payment method can be used.

The IRS may also waive late payment penalties for taxpayers who qualify for the DOL's Voluntary Compliance Program, must also file any missing Form 8955-SSA, and receive penalty relief. Amend and submit all required documents within 30 days of submitting the DFVC application.

Reasonable Cause for Late Filing of Form 5500

In addition to using the DFVC program, another option is to apply for a penalty abatement request. The IRS will consider these requests on a case-by-case basis. You must have "reasonable cause" if you make such a request.

Reasonable cause is a legitimate excuse for not filing your claim on time. This means you must convince the IRS that you could not complete the form due to unforeseen circumstances. You did everything a reasonable person could have done to submit your application on time.

Common Reasonable Cause Examples

Some of the most common reasonable causes are listed below. I'm not saying these reasons always work and often don't. But at least they're something you can consider:

  • Death of a close relative.

  • Unavailable absences due to events such as hospitalization, imprisonment, or even rehabilitation.

  • Civil disturbances such as riots etc.

  • Destruction of documents due to flood, fire, or other events.

  • Stuck in another country. 

  • Inadequate advice from a competent or reputable tax practitioner.

  • You cannot file for reasons beyond your control.

Even if any of the above items apply, the IRS wants you to take responsibility for late filing. You must be honest and admit that you understand that the penalties are imposed by law and that it is your responsibility to apply them promptly. You can't "blame" someone else.

Additional information requested by the IRS

The IRS may ask you for additional information or documents to support your claim for reasonable cause. Some of the information that may be requested is:

  • Do you have any evidence to support your claims, such as third-party documents such as hospital bills, news clippings, or even evidence of natural disasters (or other events) that prevented you from complying?

  • How were other financial matters handled during this period? By asking this question, the IRS wants to judge whether filing 5500 was the only thing you missed or if there were other important things you also missed during this time.

  • Were the circumstances beyond your control?

  • What corrective actions did you take after resolving the issue?

  • What happened, and when did it happen?

Reduced Penalty for Late Filing of Form 5500

Plan administrators, including cash balance TPAs, should make annual reporting an essential task. They should be retained until the plan is terminated and all funds are paid.

Failure to file subjects companies to significant yet easily avoidable penalties. You can form an internal department or hire an external service provider to oversee the filing activities accurately and promptly.


Verify your filing status with your administrator

The administrator (or TPA) will normally monitor compliance. If you received a penalty letter, send it first to your administrator so they can investigate.

Determine if there is a reasonable cause

Reasonable causes can take many forms. Essentially, the IRS wants to know that you did everything a reasonable person would do to file on time.

Review the Delinquent Filer Voluntary Compliance Program (FDVC)

Depending on whether you qualify or are a first-time offender, this may be your best option. The forms can be overwhelming, and you may need some help.

Document your position

Be sure to carefully review your position and document what happened. The IRS wants you to take responsibility for your filing problem but may be sympathetic.

File a timely response

Depending on the final resolution, respond promptly to the IRS. You don't want to be left behind.

Final Thoughts

You should only apply for a reduced sentence if you believe you qualify for one of the "reasonable cause" circumstances above. Another thing to remember is that when you write your application, you must explain how your situation prevented you from filing. Emphasize that the event was unexpected and out of your control.

You must also notify the IRS that you have taken reasonable steps and efforts to comply. Any claim you make to the IRS must be supported by evidence and documents. If you can afford it, hire a legal professional to ensure that your request for penalty relief is properly designed and structured.