IRS Form 5500 is an information only return that must be filled out by 401(k) administrators. Many small business owners are also de facto 401(k) administrators and may be required to fill out this form. I have been recommending that physicians use Individual 401(k)s instead of SEP-IRAs for a long time. That allows them to max out the account ($55K for 2018) at a lower income and doesn't mess up their Backdoor Roth IRA. However, if they are making substantial contributions to the 401(k), or have had it for a long time, they are likely going to have to fill out some version of the 5500 each year. For most of us, that's the 5500-EZ. I just filled mine out in literally 5 minutes. It's not a big deal and in my opinion not worth paying hundreds of dollars to a tax preparer to do. So in this post, I'm going to show you how to fill out IRS Form 5500-EZ for the typical physician using an individual 401(k). First, some helpful links:
- IRS Form 5500-EZ
- Here are the IRS Instructions: 5500-EZ Instructions
- Here is the helpful booklet that Vanguard sends you in March if you have an individual 401(k).
- Here is a helpful tutorial from The Finance Buff. However, it's 6 years old and the form has had some changes. My tutorial today is based on the 2017 form.
Do You Have To File Form 5500?
The good news is you don't have to file this form at all if your individual 401(k) has less than $250K in it at the end of the year. If you're only putting a few thousand into the plan each year, it may be decades before you have to do this form. If you're maxing it out each year, it'll probably still be 4-5 years before you have to do it. If you are maxing it out for you and your spouse, however, you may have to start filing after just 3 years or so. We started our plan in 2013 and the first year we had to file the 5500-EZ was for tax year 2016.
Can You Use Form 5500-EZ?
5500-EZ is for a one-participant plan. That means, in the words of the IRS:
A retirement plan (that is, a defined benefit pension plan or a defined contribution profit-sharing or money purchase pension plan), other than an Employee Stock Ownership Plan (ESOP), which:
1. Covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (which may be incorporated or unincorporated); or
2. Covers only one or more partners (or partners and their spouses) in a business partnership; and
3. Does not provide benefits for anyone except you (or you and your spouse) or one or more partners (or partners and their spouses).
As you can see, that means if it only covers you or your spouse, you get to use Form 5500-EZ, which must be filed on paper and sent to Ogden, UT.
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0020
When Does Form 5500-EZ Have To Be Filed?
According to the IRS:
Form 5500-EZ must be filed by the last day of the 7th calendar month after the end of the plan year that began in 2017 (not to exceed 12 months in length).
What does that mean? If you're on the calendar year like most, it means you need to get it in by July 31st of the next year. I make a habit of filling it out the same week Vanguard sends me their little 5500 packet, usually late March.
What Does The Form Look Like?
There are two pages. Here is the complete form for your reference:
How To Fill The Form Out
Let's take it section by section and fill out the form.
If you're on the calendar year and this isn't the first time you've done this form, then you can probably ignore all of Section I. If this is the first time, check box A1.
Section II is pretty easy. If this isn't your first year, pull out last year's form and you can probably mostly just copy it. Your plan has a name, be sure to use it. Vanguard sends me paperwork in March each year with the name of my plan. It's “The White Coat Investor, LLC Individual 401K Plan.” Since this is the first plan this business has ever had, it's three-digit number (1b) is 001. It first became effective 1/1/2013. Fill out the name, address, and the EIN of your business. (You do have one, they wouldn't have let you open an individual 401(k) without one.) The “business code” is used on other forms as well. For a business like WCI, it's 519100. The list starts on page 9 of the IRS instructions.
You can probably ignore lines 3 and 4.
Line 5 for us reads: 2, 2, 2, 2, 0. If your spouse isn't in the business, then yours probably reads 1, 1, 1, 1, 0. “Active participants” are basically those who are still working.
The form starts to get more interesting here. Your individual 401(k) provider probably sent you a form with the information needed to fill this section out. Vanguard sent me a ten-page form (don't be intimidated, most pages are blank or boilerplate), and page 5 looks like this:
In those ten pages, only four numbers are actually needed to fill out 5500-EZ. Two of those numbers are the assets in the plan on December 31, 2016 and on December 31, 2017, in our case, $293,701 and $471,720. (You can see those at the bottom of the page). Those go on line 6a column 1 and 2 respectively. 6b is zero for us (since we don't have any outstanding 401(k) loans), so 6c just equals 6a.
Line 7 lists this year's contributions. I can get the other two numbers I need from page 7 of what Vanguard sent me:
See those two numbers under the “contributions” section? That's what we're looking for. Line 7a is the employer contribution ($72,000 in our case) and Line 7b is the participant contribution ($36,000 in our case.) If you rolled an IRA into your plan like many docs trying to do Backdoor Roth IRAs, that would go on 7c.
This section seems a little bit mysterious. You'll likely need to refer to your instructions to get this one right. It's helpful to look at both the Vanguard and the IRS instructions. The Vanguard instructions say:
Vanguard says enter codes “2E, 3D, and 2J” for individual 401(k)s. If you go to the IRS instructions, you'll see the following list:
Clearly, Vanguard is right about 2E as we have a profit-sharing component, about 3D as we have a pre-approved plan (the standard Vanguard one), and 2J as we have a 401(k) feature. As I scan the rest of the list, the only other one I see that applies to our plan is 3B, since we're self-employed, so I include that one with the three others.
Part V was very easy for us. Lines 9, 10, and 11 are all “No.” Sign the bottom, drop the mike, and walk off stage.
What do you think? Have you filled out 5500-EZ? Was it as easy as I make it out to be? Have you paid someone to do it for you? What did they charge? Do you have any questions on the form? Comment below!