Double, Double Toil and Trouble: DOL and IRS Penalties for Failure to File Form 5500
Most employers or retirement plan administrators are required to file annual informational returns with the U.S. Department of Labor called Form 5500, Annual Return/Report of Employee Benefit Plan. For example, if your company sponsors a 401(k) plan, you must file a Form 5500 (or some variation of it). The return asks for plan information, such as the total number of active participants, financial information, and general investment information. For most calendar year plans, the return must be filed by July 31 of the succeeding year.
Why You Should Care
Failure to file Form 5500 with the DOL on a timely basis can result in substantial and highly burdensome penalties. The DOL can assess a penalty of $2,259 per day, with no maximum limit. And it is not just the DOL that may assess penalties for the same late-filed return. For returns required to be filed after December 31, 2019, the IRS is separately authorized to issue a $250 per day penalty for late filings, up to $150,000. These penalties are particularly burdensome on small businesses that offer retirement plans.
Depending on the type of filer and whether they have been notified by the DOL of their noncompliance, employers and plan administrators with late Forms 5500 may qualify for the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP). The DFVCP allows filers to avoid the substantial penalties discussed above in exchange for voluntarily paying a much lower penalty, in addition to filing the correct returns. In turn, if a filer follows additional IRS procedures, the IRS may also waive its late‑filing penalties, even when it has already notified a filer of an assessed penalty.
In short, the sanctioned penalties for late-filed Forms 5500 are draconian. But following the correct procedures and requirements can result in significantly reduced penalties and relief for employers or retirement plan administrators who find themselves in this troubling situation.