A Cautionary Tale for Retirement Plan Sponsors' Avoidable Late Filing Penalties

Do you remember the scene in the Wizard of Oz when Dorothy, the Scarecrow and Tin Man were walking into the forest chanting “lions and tigers and bears, oh my”?  I could not help but mutter “oh my” under my breath when I heard the following story, especially because of the concern that the smallest of small businesses would be hit the hardest by the increased late filing penalties for retirement plan sponsors enacted in the SECURE Act last December.

The plan sponsor of a one participant plan (i.e. a plan that covers only the self-employed (e.g., a sole proprietor (and spouse) or one or more partners (and spouses)) decides to close the business and terminate its profit sharing plan. The annual report on Form 5500-EZ for the final plan year of the plan is not filed.  The omission is not discovered until the plan sponsor receives an IRS CP 403 Notice regarding the missing Form 5500-EZ.  Following the filing of the delinquent Form 5500-EZ the plan sponsor is assessed a $150,000 late filing penalty!  Oh my.

It appears that the Internal Revenue Service (the “IRS”) may have been a bit hasty in assessing this penalty.  The missed return was due prior to 2020 and the increased late penalties were effective for returns required to be filed after December 31, 2019.  Nonetheless, this tale has many lessons for all plan sponsors of retirement plans required to file annual reports of retirement plan operations on Forms 5500, 5500-SF and 5500-EZ (each an “Annual Report”).

First Lesson

Missing a filing deadline for an Annual Report is a big deal that can trigger adverse financial consequences.  The IRS and the U.S. Department of Labor (the “DOL”) have long had the authority to impose separate civil penalties on late filers of Annual Reports.  The IRS can now assess a late filing penalty of $250 per day up to a maximum of $150,000 per Annual Report.  In 2020, the maximum late filing fee that the DOL can assess is $2,233 per day. Oh my, indeed.

Given this penalty scheme, plan sponsors and administrators literally cannot afford to:

  • willfully ignore  the reporting obligations for their retirement plans; or
  • rely solely on their advisors to ensure that all necessary action is being taken to maintain the plan’s tax-compliant status.

Second Lesson

Both the DOL and IRS sponsor relatively low cost programs to assist plan sponsors and administrators in avoiding these draconian penalties when a filing deadline is missed for any reason. Plan sponsors and administrators should be aware that these programs exist and be prepared to use them if a filing deadline is missed.

The DOL’s Delinquent Filer Voluntary Compliance Program (“DFVC Program”), first adopted in 1995, is a cost effective way for most plan sponsors to file delinquent Annual Reports on Form 5500 or Form 5500-SF and avoid huge civil penalties for a late filing. The minimum penalty under the DFVC Program is $10 per day late. There is a per filing cap and a per plan cap on the penalty which varies depending on the size of the plan. For small plans (under 100 participants) the per filing cap is $750 and the per plan cap is $1500 (i.e. if there are three or more delinquent returns submitted at the same time the penalty is $1500). For large plans, the per filing cap is $2000 and the per plan cap is $4000.

Since 2002, the IRS has provided administrative relief from the penalties it could also impose on small and large plan delinquent filers for plan sponsors who take advantage of the DFVC Program provided all the conditions in Notice 2014-35 are met.  In addition to satisfying all the requirements of the DFVC Program, to get the Notice 2014-35 relief the plan sponsor must file a paper copy of Form 8955-SSA for each delinquent return within 30 calendar days after completing the DFVC filing.

The DFVC Program is not available to one participant plans because the DOL lacks jurisdiction over one participant plans, including one participant plans that elect to file annual reports on Form 5500-SF.  Fortunately, the IRS maintains its own Penalty Relief Program under Rev. Proc. 2015-32 for one participant plans. Under the IRS Penalty Relief Program, the filing fee is $500 per return up to a maximum of $1500 per plan.

Third Lesson

According to the IRS’ Understanding Your CP 403 or CP 406 Notice Page, approximately 20 months will pass after the due date of a delinquent return before any formal notice regarding the missing return will be sent. By the time this notice is received, the maximum IRS penalty will be fully assessable and the amount of the DOL civil penalty that could be assessed will be staggering.

Sponsors of one participant plans should pay particular attention to the notice they receive from the IRS. Rev. Proc. 2015-32 provides that eligibility for the IRS Penalty Relief Program is lost if “a penalty has been assessed (that is, if a CP 283 Notice has been issued by the IRS to a plan sponsor or administrator) with respect to that delinquent return.”  If the sponsor receives a CP 403 Notice stating that a return has not been filed timely, the sponsor appears to retain eligibility to file the delinquent return through the Penalty Relief Program.  A CP 403 Notice requires a response to the IRS within 30 days of its receipt to avoid further action.

Sponsors of both small plans and large plans are still eligible to file delinquent Annual Reports through the DOL’s DFVC Program after the receipt of either IRS notice.  Eligibility for the DFVC Program is lost after receiving written notice from the DOL of a failure to file a timely Annual Report. These sponsors may have to walk the IRS through its own procedures under Notice 2014-35 to avoid imposition of the $150,000 penalty.

This blog/web site presents general information only. The information you obtain at this site is not, nor is it intended to be, legal advice, and you should not consider or rely on it as such. You should consult an attorney for individual advice regarding your own situation. This website is not an offer to represent you. You should not act, or refrain from acting, based upon any information at this website. Neither our presentation of such information nor your receipt of it creates nor will create an attorney-client relationship with any reader of this blog. Any links from another site to the blog are beyond the control of Pullman & Comley, LLC and do not convey their approval, support or any relationship to any site or organization. Any description of a result obtained for a client in the past is not intended to be, and is not, a guarantee or promise the firm can or will achieve a similar outcome.

Subscribe to Updates

About Our Labor, Employment and Employee Benefits Law Blog

Alerts, commentary, and insights from the attorneys of Pullman & Comley’s Labor, Employment Law and Employee Benefits practice on such workplace topics as labor and employment law, counseling and training, litigation, union issues, as well as employee benefits and ERISA matters.

Other Blogs by Pullman & Comley

Connecticut Health Law Blog

Education Law Notes

For What It May Be Worth

Recent Posts


Jump to Page