How To File Form 5500-EZ: A Guide
A Solo 401(k) is a retirement plan geared specifically toward the unique needs of self-employed individuals and micro-business owners. One of its most appealing features is that it permits an enrollee to wear two contributor’s hats: one as an employee and another as an employer. Under the right circumstances, even the spouse of a participant can contribute to a Solo 401(k) since the spouse of the owner is considered an owner as well.
Author
Eddy Martinez
May 22, 2023
A Solo 401(k) is a retirement plan geared specifically toward the unique needs of self-employed individuals and micro-business owners. One of its most appealing features is that it permits an enrollee to wear two contributor’s hats: one as an employee and another as an employer. Under the right circumstances, even the spouse of a participant can contribute to a Solo 401(k) since the spouse of the owner is considered an owner as well.
But as with any retirement plan , certain requirements under a Tax Law called ERISA must be strictly followed, and this potentially includes filing Form 5500-EZ. The consequences of failing to comply with this requirement can be severe, so here is everything you need to know about filing Form 5500-EZ for your Solo 401(k), including whether you need to start filing this form
What Is Form 5500-EZ?
To protect the financial interests of future retirees, Congress enacted a series of laws and regulations (including ERISA - the Employee Retirement Income Security Act) to provide crucial oversight on how contributions made by and for plan participants are handled and investments safeguarded .
To this end, the Form 5500 Series (of which Form 5500-EZ is a part) is an annual filing requirement that applies to all company-sponsored retirement plans. Form 5500-EZ is the version that applies to a Solo 401(k) which is designed for owner only types of plans.
Breaking Down Form 5500-EZ
Filing Form 5500-EZ is a matter of understanding this document’s requirements and providing the requested information fully and accurately. There are five parts to Form 5500-EZ and they seek different types of information from the filer:
Part I - Annual Return Identification Information
The first part of Form 5500-EZ addresses basic preliminary issues about the filing status of the plan, including:
The plan year, including the beginning and end dates, and whether it operates on a calendar or fiscal year
Whether this is the first year for the plan
Whether this is the final return for the plan
Whether this is an amended return
Whether this return is being filed under an extension
Although no financial information is entered in this section, Part I plays an important administrative purpose in ensuring that the current status of the plan is kept up-to-date.
Part II - Basic Plan Information
Part II of Form 5500-EZ seeks vital information relating to the plan participant, namely:
The plan’s name and its start date
The employer’s name, address, and telephone number
The employer’s EIN
The six-digit business activity code that best describes the primary activity of the business
The name of the plan’s administrator
Information on the plan’s participant(s)
Essentially, this section identifies the key parties to the plan (i.e., the employee and employer) and documents their pertinent information.
Part III - Financial Information
A Solo 401(k)’s financial information is the focus of Part III, particularly:
The total value of the plan’s assets at the beginning and end of the plan year
The plan’s total liabilities, including payables and outstanding debts
Total contributions made to the plan during the plan year, such as those from employees and the employer, as well as those rolled over from other investment products
Part III essentially amounts to a balance sheet of sorts laying out the current value of a Solo 401(k) plan.
Part IV - Plan Characteristics
Another required input is providing plan descriptors in Part IV. These are two-digit codes that help define the characteristics of your Solo 401(k) plan. Examples include:
Code 1A - benefits are primarily pay-related
Code 1B - benefits are primarily flat dollar (including dollars per year of service)
Code 2B - target benefit plan
Code 2E - profit-sharing plan
Code 3B - the plan covers self-employed individuals
There are 25 codes in all and you are instructed to enter all that apply. Code 2E and 3B applies for Solo 401(k) plans since they are considered owner only profit sharing plans.
Part V - Compliance and Funding Questions
Closing out Form 5500-EZ is Part V, which solicits information about the funding attributes of a solo 401(k) and whether the plan is currently in compliance with applicable regulations. These are the types of entries you will be required to make:
You must indicate whether the plan has any loans outstanding to participants
Indicate whether this plan is a defined benefit plan (i.e., fixed, pre-established monthly retirement benefits) - for a solo 401(k), the answer to this question is no
To provide accurate dollar amounts, it may be necessary to work with your broker or plan administrator.
Filing Form 5500-EZ
One of the key things to recognize about Form 5500-EZ is that it does not need to be filed unless (1) the plan’s assets exceed $250,000 for the filing year, or (2) the filing year marks the end of the solo 401(k) plan. Other than these two scenarios, you need not be concerned about filing this document, although other recordkeeping requirements still apply.
If you are obligated to file form 5500-EZ, there are two methods for submitting your return:
The fastest, and preferred, way to file form 5500-EZ is electronically through the Department of Labor’s EFAST online platform
Alternatively, you can complete a paper return and mail it to the IRS (certified or express mail is highly recommended)
As far as the filing deadline, Form 5500-EZ must be filed by the last day of the seventh month following the end of the plan year. Thus, for a Solo 401(k) that operates on a calendar year (i.e., ending on December 31st), the filing deadline is July 31st of the following year. What Happens if You Fail To File Form 5500-EZ?
Because a solo 401(k) is a retirement plan intended to provide financial security for the participant, it must comply with clear-cut rules regarding set-up and governance. This includes filing Form 5500-EZ when required (e.g. if the valuation of the planś exceeds $250,000 or the plan is in its final year of operation).
Failing to file Form 5500-EZ in on time can result in stiff monetary penalties:
For filing deadlines up to December 31, 2019, the IRS assesses a daily penalty of $25 (up to a maximum of $15,000), and for deadlines thereafter, the daily penalty rises to $250 with a cap of $150,000
In addition to the IRS, the Department of Labor also levies a penalty for not filing Form 5500-EZ, amounting to $2,529 per day, and unlike the IRS penalty, there is no cap
Given the potential scale of monetary penalties for delinquent filing, it is imperative that you timely file Form 5500-EZ to avoid taking a serious financial hit and getting on the bad side of the IRS and Department of Labor.
Final Thoughts
Complying with federal regulations is a part of maintaining a Solo 401(k), and submitting Form 5500-EZ is a process that all employers must go through at some point. While filing a return with the IRS or Department of Labor may seem like a daunting task at first, with a bit of knowledge and preparation, it can be a straightforward, worry-free process. Just mind those deadlines.
SOURCES:
https://www.irs.gov/pub/irs-pdf/i5500ez.pdf
https://www.fidelity.com/retirement-ira/small-business/form-5500