Posted by Christopher J. Ciminera, CPA, QKA
A major change that comes with the passage of the SECURE (Setting Every Community Up for Retirement Enhancement) Act is a substantial increase in the penalty amounts imposed by the Internal Revenue Service (IRS) for a retirement plan’s failure to file a return. The increased penalty is part of a provision designed to bring in revenue to the government to offset the revenue loss of some of the other tax-friendly provisions of the Act.
The penalty increases are dramatic – a 10x increase over the previous rates. For late filings of 5500 information returns, the old penalty was $25/day up to a $15,000 maximum. The new assessment is $250/day up to a $150,000 maximum. For the 8955-SSA, the old penalty was $1/participant/day up to a $5,000 maximum. The new penalty is now $10/participant/day up to a $50,000 maximum. These changes will take effect for returns required to be filed after December 31, 2019.
The above IRS penalties don’t include the penalties that the DOL may impose, which include for late filers $50/day, with no limit, starting at the date the plan filing was due, without regard to extensions. Non-filers may be assessed a penalty of $300 per day, up to $30,000 per year until a complete report is filed. A 501(c)(3) organization sponsoring a 403(b) as a small plan may have reduced penalties of $10/day for each report, not to exceed $750.
As you see, it will now become even more imperative to timely and accurately file a return by the due date (with applicable extensions), because of the increased penalties. However, life happens, and for whatever reason, a return may not be filed timely or completely. Luckily, the Department of Labor (DOL) has the Delinquent Filer Voluntary Compliance Program (DFVCP).
DFVCP Filing Eligibility and Procedures
The one requirement to be able to file under the DFVCP is that the plan sponsor has not been notified by the DOL of a failure to file a timely annual report. Unfortunately, even if you are in the process of correcting through the DFVCP and you receive notice from the DOL, then the correction is too late. However, if the IRS sends a failure-to-file notice, but the DOL has not sent a failure-to-file notice, plan sponsors can still avail themselves of the DFVCP program to avoid penalties from both the IRS and the DOL.
- Electronically filing a complete Form 5500 or Form 5500-SF for each late filing. It is important to check the box on the 5500 that is labeled “DFVC Program” on the first page of the 5500 in Part I. If an 8955-SSA is required, then this information should be submitted directly to the IRS.
- Use the DOL’s online calculator tool to compute the reduced penalty amount. You may make the payment electronically when completing the penalty calculation. The DOL suggests electronically submitting the payment because at the time of payment, a receipt is given to verify the payment. Payment of the penalty may be made by check; however, a receipt is not given in this case. In the case that a payment is made by check, the check has to be made out to the Department of Labor and must be sent with a paper copy of the completed and filed Form 5500 to:
P.O. Box 6200-35
Portland, OR 97228-6200
Reduced DFVCP Penalties
The benefits of correcting the late filing through the DFVCP are reduced penalty amounts, as follows:
- Small plan filers (less than 100 participants at the beginning of the year) – $10/day after the date on which the filing was due, not to exceed $750. If a submission includes multiple years, then the maximum will not exceed $1,500 per plan.
- Large plan filers (more than 100 participants at the beginning of the year and not eligible for the 80/120 rule exception) – $10/day after the date on which the filing was due (not including extensions), not to exceed $2,000 for each report, or $4,000 per plan.
So, as you see, changes to penalty amounts made by the SECURE Act make it more imperative to file completely and timely. However, when a mistake happens, make sure to use the DFVC Program as soon as possible to benefit from the reduced penalties.