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A recent call with a financial advisor in Minnesota is representative of a common question on correcting missed Form 5500 filings under the Department of Labor’s Delinquent Filer Voluntary Compliance Program (DFVCP).
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“My client is a small IRC §501(c)(3) organization with an ERISA 403(b) plan. We discovered they missed several years of Form 5500 filings. Money is tight for the organization. Can it correct the failed filings under the DFVCP without facing massive penalties?”
The answer is generally yes, provided the plan is eligible, and the Department of Labor (DOL) has not already notified the plan administrator in writing about the delinquent Form 5500 filings. Moreover, a lower cap on filing fees may apply.
A special rule applies to small plans sponsored by certain tax-exempt organizations. If the plan is “small” (fewer than 100 participants) and sponsored by an organization that is tax-exempt under IRC §501(c)(3), the DFVCP penalty is capped at $750 per plan. Importantly, this special $750 cap applies regardless of the number of late annual reports filed for that plan at the same time (see the DOL's FAQs).
For example, assume a small 501(c)(3) organization discovers that it failed to file Form 5500 for five prior plan years. If the plan otherwise qualifies for DFVCP relief, the organization may be able to file all five delinquent annual reports through the DFVCP and pay a total DOL penalty of $750.
There is an important limitation. The special 501(c)(3) small-plan cap is not available if, as of the date the plan files under the DFVCP, there is a delinquent annual report for a plan year during which the plan was large (i.e., with 100 or more participants). In that case, the plan would have to use the applicable large-plan DFVCP penalty cap instead (see the DOL’s Delinquent Filer Voluntary Compliance Program).
The plan administrator should also remember that DFVCP relief applies to DOL penalties for delinquent Form 5500 filings. It does not automatically correct every possible compliance issue related to the missed filing. The plan administrator should review whether any related IRS filings, such as Form 8955-SSA when applicable, are required. Form 8955-SSA is not filed through EFAST2 with the Form 5500 but is filed with the IRS instead. Form 8955-SSA is an annual registration statement used by retirement plan sponsors to report former employees who have left the company but still have vested benefits remaining in a qualified retirement plan.
A prudent correction process would include the following steps:
Confirm the plan’s filing obligation for each missed year.
Determine whether the plan was a small or large plan for each delinquent year.
Confirm the sponsor’s 501(c)(3) tax-exempt status.
Prepare and file each delinquent Form 5500 or Form 5500-SF through EFAST2.
Mark the DFVC Program box on each filing.
Use the DOL’s DFVCP penalty calculator and electronic payment system to calculate and submit the required payment.
Retain documentation of the filings, the DFVCP payment confirmation, and the analysis supporting use of the special 501(c)(3) cap.
Do not ignore missed Form 5500 filings. For a small 501(c)(3) organization, the DFVCP may provide a practical and cost-effective way to correct several years of missed filings with a maximum DOL penalty of $750 for the plan, assuming the plan satisfies the program’s requirements.