Plan sponsors made errors in majority of Form 5500 returns, EPCU found

During its Final Return with Assets project, the IRS’s Employee Plans Compliance Unit (EPCU) found errors in most of the final Form 5500-series returns it reviewed. The EPCU looked at plan sponsors who filed a Form 5500-series return marked “the final return/report” but listed assets at the end of the plan year to see if they had completed all the steps in terminating their plans.

The EPCU designed the Final Return with Assets project to determine:

(1) whether plan sponsors made an error by marking their Form 5500 as the final return/report,
(2) why sponsors marked their Form 5500 as the final return/report when the same return listed end of year plan assets, and
(3) whether there were Form 5500 processing errors that caused the return to show it was a final return/report with end of year assets.

Project results

Over 90% of the responses showed sponsors made one or more of the following errors on their Form 5500:

• Filed a Form 5500 marked the final return/report but had assets at the end of the plan year. For the final return/report box to be marked, sponsors must have distributed all plan assets.
• Filed more than one Form 5500 marked the final return/report. Only one Form 5500 should be marked as the final return/report and should be filed for a terminated plan after all plan assets are distributed.
• Distributed all plan assets after the end of the plan year but before filing the Form 5500.
• Filed a Form 5500 for a Simplified Employee Pension (SEP) plan or an IRA. Plan sponsors shouldn’t file a Form 5500 for a SEP plan or IRA. Instead, the entity that maintains the SEP or IRA files a Form 5498, IRA Contribution Information.
• Didn’t check the “short plan year return/report (less than 12 months)” box. Plan sponsors should mark the short plan year box when filing a return for a period of less than 12 months and show the short plan year dates just above item A in Part I. For example, if the plan assets weren’t distributed until after the end of a plan year in which the plan terminated, then the plan may have a short plan year for the year they’re actually distributed. For a short plan year, the return is due by the last day of the 7th month following the end of the short plan year.

Planning tips

The IRS suggests that plan sponsors review their terminated plans to see if all the termination steps have been completed, including filing of all current and prior Form 5500 returns and a final Form 5500 showing zero assets. Final Forms 5500 are required even where plans have been exempt from filing a Form 5500-EZ (the annual return of a one-participant retirement plan) in previous years. Sponsors should correct any errors and amend their returns. In addition, the IRS recommends that sponsors correct their plan administrative procedures so these mistakes don’t happen again. “It may be helpful to ask at least two people to review your Form 5500 before you file it,” the IRS suggests.
Source: IRS Employee Plans News, Issue 2014-8, May 16, 2014.

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