Employee Plans Compliance Unit (EPCU) - Completed Projects - Projects with Summary Reports - Final Return with Assets Project
The Employee Plans Compliance Unit (EPCU) Final Return with Assets project (Project) began in June 2012.
We sent contact letters to a sample of plan sponsors that filed Form 5500 series annual returns (Form 5500):
- Marked as ‘the final return/report’, and
- Showed over $5,000 in plan assets at the end of the plan year.
A Form 5500 marked as ‘the final return/report’ must show zero assets at the end of the plan year. In general, a plan sponsor must continue to file a Form 5500 for a terminated plan until a Form 5500 marked ‘the final return/report’ showing zero assets at the end of the plan year is filed.
We asked plan sponsors questions about their plans to learn whether they comply with their annual reporting and plan qualification requirements.
Over 90% of the responses showed that plan sponsors made errors when filing their Form 5500, mostly by:
- Checking the box indicating the return was ‘the final return/report’ when all assets were not distributed by the end of the plan year, or
- Not showing zero end of year assets when they had actually distributed all plan assets by the end of the plan year.
For most of the cases, the EPCU was able to obtain compliance at various levels including securing:
- Delinquent returns (those due but not filed), and
- Amended returns.
Responses showed sampled plan sponsors made these types of errors as part of their plan’s termination process:
- Filed multiple returns marked as ‘the final return/report’ over a period of years. Some plan sponsors said they misinterpreted the word ‘final’ to mean the return was finished and ready for submission rather than it being the last return that would be filed for a terminated plan after all the assets were distributed. Only one Form 5500 should be marked as ‘the final return/report’.
- Actually distributed all plan assets but did not reflect that in end of year assets. Some plan sponsors mistakenly showed plan assets at the end of the plan year on their Form 5500 when there were, in fact, no plan assets.
- Distributed all plan assets after the end of the plan year but before the filing date of the Form 5500. For example, a Form 5500 still showing assets was marked as ‘the final return/report’ for the December 31, 2011 plan year because the plan sponsor distributed all assets in 2012 but prior to the filing of the 2011 Form 5500. A Form 5500 marked as ‘the final return/report’ must show zero plan assets at the end of the plan year. If there are still plan assets at the end of the plan year, sponsors should not mark the Form 5500 as ‘the final return/report’.
- Did not distribute all plan assets in accordance with IRC section 401(a)(9) related to required minimum distributions (RMDs). Plan participants cannot keep retirement funds in the plan indefinitely. In general, participants have to start taking withdrawals from a retirement plan beginning at age 70½.
Other errors included the following:
- Form 5500 filed for a simplified employee pension (SEP) plan. A Form 5500 does not apply to SEP plans. Instead, the entity that maintains the SEP-IRA files a Form 5498, IRA Contribution Information.
- Form 5500 filed for IRA. A Form 5500 does not apply to IRAs. Instead, the entity that maintains the IRA files a Form 5498, IRA Contribution Information.
The EPCU designed the Project to learn whether plan sponsors who marked their return as ‘the final return/report’ and still showed plan assets at the end of the plan year comply with certain annual information reporting and plan qualification requirements.
If not, the potential exists for:
- Plan disqualification,
- Discrimination in favor of highly compensated employees, and
- Administrative penalties.
The Project goals were to determine:
- Whether plan sponsors made errors by marking their Forms 5500 as ‘the final return/report’ when there were still plan assets at the end of the plan year,
- Common reasons, if any, why sponsors marked their Forms 5500 as ‘the final return/report’ yet showed end of year plan assets, and
- Whether there were processing errors of Forms 5500 that showed the return was ‘the final return/report’ with end of year assets.
As long as a qualified retirement plan and related trust are in existence, the plan sponsor needs to take certain actions in order to keep their plan qualified. These actions include ensuring that the plan complies with all of the plan qualification requirements of Internal Revenue Code (IRC) section 401(a) and related Regulations.
These actions are necessary until the plan sponsor terminates the plan and all trust assets are distributed and/or transferred to another plan. As soon as administratively feasible after the date of termination, the sponsor must distribute all plan assets to satisfy those liabilities. Generally, the IRS views this to mean within one year following the date of plan termination specified by the employer (Rev. Rul. 89-87, 1989-2, C.B. 810). If all assets are not distributed as soon as administratively feasible, based upon the facts and circumstances of the particular case, the plan is considered an ongoing plan and must meet the requirements of IRC section 401(a) in order to continue its qualified status.
The plan sponsor must also file a final Form 5500 upon plan termination and the distribution of all plan assets. This is required even if the plan sponsor was exempt from filing a Form 5500-EZ (the annual return of a one-participant retirement plan) in previous years because the:
- Total of the plan's assets and the assets of all other one-participant plans maintained by the sponsor at the end of the plan year does not exceed $250,000.
- Plan provides deferred compensation solely for an individual or an individual and his or her spouse who wholly own a trade or business, whether incorporated or unincorporated.
- Form 1099-R not filed. Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is generally filed for each person to whom a distribution of $10 or more is made.
- Processing errors in which three amended Forms 5500-EZ were not processed or posted properly to our system.