Article by Larry Goldstein and Mark Raymond
In a press release earlier this month, the Department of Labor (DOL) and the Internal Revenue Service (IRS) announced a joint project to locate employee benefit plans which may not have been filing Form 5500 annual return-reports. The two agencies are conducting research of various databases to identify potential non-filers. Beginning in December 2002, the agencies will mail letters of inquiry to those identified as potential non-filers.
Most employee benefit plans are required to file Form 5500, a major exception being fully-insured and/or unfunded welfare benefit plans (such as health and life insurance plans) covering less than 100 participants at the start of the plan year. DOL can assess penalties of up to $1,100 per day for each day that Form 5500 is not timely filed; its authority extends to both welfare and retirement plans subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA). In addition, IRS may assess penalties of up to $25 per day (up to a total of $15,000) in the event certain Form 5500's for retirement plans, including pension, profit-sharing and 401(k) plans, are not timely filed.
Two developments earlier this year will greatly assist plan administrators faced with filing compliance problems. Since 1995, DOL has maintained a Delinquent Filer Voluntary Compliance Program (DFVC), which encourages the filing of overdue Form 5500's by permitting reduced penalties to be paid. DFVC was revised this past March (60 Fed. Reg. 15052) to reduce the penalties which are payable in connection with filings made under the program. The new basic penalty has been reduced from $50 to $10 per day. In addition, the maximum penalty for a single late Form 5500 has been reduced from $2,000 to $750 for a "small plan" (generally a plan with fewer than 100 participants at the beginning of the plan year) and from $5,000 to $2,000 to a "large plan." In addition, there is now a per-plan cap on penalties of $1,500 for a small plan and $4,000 for a large plan, regardless of the number of late Form 5500's for the plan which are filed at the same time.
Also, for certain tax-exempt organizations, a special per-plan cap of $750 applies under DFVC, regardless of the number of late annual reports filed for the plan at the same time. However, this limitation is not available if, as of the date the plan files under the program, there is a delinquent Form 5500 for a plan year during which the plan was a large plan.
Notice 2002-23 issued by IRS will also encourage filing compliance. Before this notice was issued, one who filed under DFVC as to a retirement plan took the risk that IRS might nevertheless assess its own late-filing penalties. In the notice, IRS has formally indicated that it will not impose penalties on a person who is eligible for and satisfies the requirements of DFVC as to the filing of a Form 5500. Once the late filer satisfies the requirements of DFVC, including paying the reduced penalties under the program, IRS relief will apply; the late filer need not file a separate application for relief with IRS.
The IRS filing relief is not available to plans which are not covered by Title I of ERISA but are still required to file Form 5500's under the Internal Revenue Code of 1986. This category includes retirement plans covering only non-employees, such as sole proprietors and partners. DOL cannot assess late-filing penalties in connection with these types of plans and therefore DFVC relief is unavailable. Consequently, IRS is not waiving any penalties for the late filing of Form 5500 by these entities.
Plan administrators contemplating filings under DFVC should do so as soon as possible in light of the new enforcement effort by DOL and IRS. Under its terms, DFVC is available only to a plan administrator which makes the appropriate filing prior to the date on which it is notified by DOL of the failure to file a Form 5500 under Title I of ERISA. Thus, if an administrator receives a notice under the new enforcement program, it may then be too late to obtain penalty relief under DFVC.
This Legal Update is published by Ross & Hardies to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation.
