Retirement Plan “Quicksand”

A “gotcha” can happen to small plans – those exempt from filing a Form 5500 for a certain year. To qualify, a plan must be both (a) entitled to use Form 5500-EZ (“one-person” plan), and (b) have total plan assets which do not exceed $250,000 at the end of the plan year.

Problems can arise in part (b) for two different reasons.

  1. An otherwise exempt plan must file a Form 5500-EZ in its final plan year, even if it never was required to do so previously.
  2. The $250,000 threshold actually applies to the asset value of all one-person plans maintained by the same employer.

Consider this. A “one-person” employer with both pension and 401(k) plans often does not exceed $250,000 in the first plan year. Even when the assets are considered in total. So if the employer is entitled to use a Form 5500-EZ, it is possible to skip the first year filing. This also can be the case in the second year if the same is true. However, given enough years the total of the assets in both plans often exceeds $250,000 at some point.

But here’s the problem. If the Plan A year-end assets are $190,000 and Plan B year-end assets are $20,000, both plans no longer are exempt and must file a return for that year. However, if different professionals provide third party services for each of the plans, it is possible for both of them to miss the requirement. Each thinks his or her plan is still exempt. This is particularly shocking to the third party administrator of Plan B, who thinks of that plan’s assets as being far from the threshold.

For this reason, we generally file all years for all plans receiving our services, even when an employer qualifies for exemption. Even better is the strategy of permitting us to provide services for both plans.

If you would like to learn more about this subject, please let us know.

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