IRS Tax Form 5500-EZ
IRS Tax Form 5500-EZ

IRS tax Form 5500-EZ is usually required for one-participant plans like Individual 401k plans. This type of plan is often called a Solo 401k.

When a small business is considering a retirement plan for their employees, there can be some big obstacles to overcome. Small businesses are often short on time and money. A retirement plan will likely require both.

Administering a retirement plan and staying in compliance can be a significant burden for a small business.

Traditional 401k plans are required to file a tax form each year known as IRS Form 5500 or 5500-SF. Which form you file depends on the size of the plan. These forms require a skilled professional to ensure it is done properly.

Fortunately, there is some relief for small businesses that don’t have employees. Examples include consultants or independent contractors.

These folks can set up Individual 401k plans which are both low cost and easy to administer. You won’t need a pension accountant or third-party administrator to keep you in compliance with the rules and regulations.

However, if you’re not careful you might be in for a surprise. Those using an individual 401k may be required to file IRS tax form 5500-EZ. But don’t let the “EZ” part fool you. There’s more to it than you might think.

Who Should File The 5500-EZ

Owners of an Individual 401k plan are exempt from these annual tax filings until they reach $250,000 in assets. Once the individual 401k plan hits this level, you must file the IRS form 5500-EZ.

Most people start out in the Individual 401k plan thinking it will take a few years to hit $250,000. As a result, they don’t give much thought to the annual filing requirements.

However, since many plans allow for incoming rollovers from other retirement accounts, this threshold may be reached much sooner that initially anticipated. Some of these plans even allow Roth contributions and rollovers.

It’s important to know what the IRS considers a one-participant plan. It isn’t just Solo 401k plans. It includes a defined benefit pension plan or defined contribution profit-sharing plan (Individual 401k).

Here is the text directly from the IRS further clarifying the definition of a one-participant plan:

IRS Form 5500-EZ
IRS Form 5500-EZ

Who Is Exempt From Filing?

As mentioned above, you don’t need to file this tax form until the plan reaches $250,000 in assets. If you have a SEP IRA, you are in the clear. Because SEP IRAs aren’t technically qualified retirement plans, it is not subject to the tax filing rule.

However, the asset level is based on the last day of the plan year. So, if your assets during the plan year grow to $260,000 but drop below the $250k mark by year end, you are in the clear.

The IRS also provides exceptions for foreign plans so long as the foreign employer is not deducting contributions on a U.S. income tax return.

When To File Form 5500-EZ

The due date is the last day of the seventh month after the plan year ends. For calendar year end, this would be July 31. This is the last day of the 7th calendar month after the end of a plan year.

What if your tax deadline is 6/30? It’s not uncommon for some solo practitioners or independent consultants to incorporate. In this scenario, they set up a corporation and become the sole owner and employee of the corporation.

Corporations don’t have to use the calendar year as their plan year end. Many choose a fiscal or mid-year like 6/30. In this case, Form 5500-EZ would be due by 1/31. This is the last day of the seventh month after 6/30.

How To File

Filing via mail

The paper version of Form 5500-EZ can be accessed via the IRS site via this link: 2022 Form 5500-EZ

Completed forms must be received by the IRS by the due date. Unlike tax returns, the postmarked date won’t be sufficient. There is an exception if the due date falls on a weekend or holiday. In that case, the return is accepted next business day.

Filing via EFAST2

Plans that started after 2019 are allowed to use the EFAST2 filing system instead of the paper process. However, you may be required to use this system if you file multiple other tax forms with the IRS.

From the IRS Form 5500-EZ instructions:

“A filer must file the Form 5500-EZ electronically using the EFAST2 Filing System…if the filer is required to file at least 10 returns of any type with the IRS, including information returns (for example, Forms W-2 and Forms 1099), income tax returns, employment tax returns, and excise tax returns, during the calendar year…”

The IRS goes on to state:

“If a filer is required to file a Form 5500-EZ electronically but does not, the filer is considered to have not filed the form even if a paper Form 5500-EZ is submitted.”

As you can see, the IRS does not mess around. Remember, we are responsible for knowing the rules. The IRS doesn’t care if we weren’t aware of the tax regulations.

I’m reminded of the Latin expression from my days in pre-law in college: Ignorantia juris non excusat. In plain English, ignorance of the law is not an excuse.

Are There Penalties If I Don’t File?

Failing to file can cost time and money. If you find yourself in this situation, it may be time to reach out to a tax professional or CERTIFIED FINANCIAL PLANNER™ to assist. The penalty for late filings can be as high as $250 per day!

When you factor in the IRS penalties, professional assistance, and the time involved to deal with the situation, you may find yourself in a world of hurt.

Conclusion

As you can see, there is much more to the IRS Form 5500-EZ than meets the eye. Don’t assume that your investment provider or custodian is going to file these forms for you.

Additionally, don’t assume your tax preparer will know to do this either. It pays to be proactive and incorporate this as part of your tax planning.

If you’re not familiar with retirement plan accounting and various IRS rules on the subject, proceed with caution. Even better, consult a professional to assist you with the preparation. Be sure you know the filing rules and stay off the IRS’s naughty list.

Have you considered how a Certified Financial Planner™ can help you?

Schedule a call with me via this link!

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