By Steffan Weiner, Guest Writer
This post is intended as an addendum to Dr. Jim Dahle’s 2018 post on How to Fill Out IRS Form 5500-EZ for those who have solo 401(k)s. As Jim stated:
“The good news is you don't have to file this form at all if your individual 401(k) has less than $250,000 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.”
Therein, lies the problem. We are supposed to remember to complete annual 5500-EZ filings that typically initiate at a date years in the future, and we don’t even know which year it will be. When I initiated my solo 401(k), I learned about having to fill out Form 5500-EZ and didn’t worry about it since it would be years before it became relevant. Eventually, that day came . . . and went.
Nearly two years after the deadline, I stumbled across an article about solo 401(k) screw-ups and was reminded. I determined the penalty for failing to file is severe (Per the IRS, “No penalty is imposed under these sections if it is shown that such failure to timely file is due to reasonable cause.”). If you’re anything like me, you either forgot about Form 5500-EZ or you were unaware of it and now you have to correct the oversight. Otherwise, you could be liable for hundreds of thousands of dollars worth of penalties.
How Do I Know If My Solo 401(k) Is Delinquent?
- Your solo 401(k) had more than $250,000 in it at the end of the plan year; and
- You failed to complete a 5500-EZ “by the last day of the seventh calendar month after the end of your plan year” (July 31 if you’re on the calendar year), per the IRS.
What Is Form 14704?
Fortunately, the IRS recognizes how difficult it is to remember to initiate annual 5500-EZ form filings many years in the future and the Penalty Relief Program (Revenue Procedure 2015-21) is available to save your retirement plan. For a relatively small payment, you can avoid a potentially catastrophic hit to your solo 401(k).
To apply:
- If you have more than one delinquent 401(k), each 14704 is submitted individually (along with the accompanying 5500-EZs), but all delinquent filings from a particular plan may be sent together.
- A 5500-EZ must be completed for every delinquent year. If the delinquency is prior to 1990, use the 5500-EZ from the current year. If you're delinquent from 1990 to the present, use 5500-EZ forms that correspond to the delinquent years.
- On the 5500-EZ Part 1, check box D (only for delinquent years, not the current one if timely). For 5500-EZ years prior to having box D, write “Delinquent Return Filed under Rev. Proc. 2015-32, Eligible for Penalty Relief” in red.
- Give the IRS money. As of this writing, the fee is $500 for each delinquent return maxing out at $1,500 per plan.
- Attach Form 14704 to the front of the oldest delinquent return in your submission.
- Mail in paper returns since returns filed electronically are ineligible for penalty relief.
IRS instructions for late filers can be found here: Penalty Relief Program for Form 5500-EZ Late Filers
If you believe you do have a reasonable cause for the late 5500-EZ filing, the IRS offers guidance to avoid penalties. Your reason must show “you used all ordinary business care and prudence to meet your Federal tax obligations.” Example reasons include fire, casualty, natural disaster, lack of access to records, death, severe illness, and incapacitation. Typically, you will be required to provide supporting documentation and to establish facts substantiating your claim of reasonable cause.
The IRS instructions to apply for a reasonable cause can be found here: Penalty Relief Due to Reasonable Cause
If you make a request to waive the penalty due to a reasonable cause and that request is denied, you are no longer eligible to use form 14704. Being that the worst scenario payout using Form 14704 is $1,500 and late 5500-EZs can result in hundreds of thousands of dollars worth of penalties, you should scrutinize this option carefully.
What Does Form 14704 Look Like?
What Are the Penalties for Failing to Complete a 5500-EZ?
As of this writing, the penalty is $250 per day up to $150,000 for every late 5500-EZ, plus interest.
If I just realized I owe the IRS for late 5500-EZ filings, should I risk skipping out on it?
No, not even if you owe for 20 years or more. You’ll never be able to legitimize your solo 401(k) (if it's valued over $250,000) if you don’t start filling out 5500-EZ forms annually, and you risk serious penalties. The annual payment using Form 14704 is $500 per year, and it maxes out after three years (Note that this payment increases over time to account for inflation.). Even if you have missed 20 years of 5500-EZs that have to be completed, you only pay $1,500 max if you fill out Form 14704. Furthermore, if you receive a penalty assessment notice (Form CP 283), you will be ineligible to participate in the program.
Fortunately for me, I discovered my 5500-EZ oversight in late June, just a month shy of the second year of delinquency. I owed $500 for failing to file in 2020 and narrowly avoided an additional $500 for 2021. I did feel the penalty was excessive for failing to file an informational form. But I was glad to have the Penalty Relief Program available as opposed to facing a potential 401(k) penalty nightmare.
This article is about fixing an oversight. However, if you made this mistake as a DIY investor, don’t despair. You still likely came out way ahead compared to someone paying a financial advisor.
Besides, making these mistakes is one way we DIY investors learn. For the future, I suggest adding the 5500-EZ Form to your tax to-do list so you don't repeat this problem down the road.
Do you know how much money is in your solo 401(k)? Have you heard of the 5500-EZ form and that you needed to fill it out if you're above $250,000? If you messed up and didn't know about it, did you have to pay a penalty? How did it all work out? Comment below!
[Editor's Note: Steffan Weiner is a Psychiatric-Mental Health Nurse Practitioner and a financial hobbyist (featured on the Milestones to Millionaire podcast #30) living in the state of California. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]
My strategy is to roll part of my solo 401k into an IRA on a regular basis to keep below the 250K threshold. Pay fewer fees and continue the main advantages of having a solo 401K. The 5500EZ form is not complicated but, as you said, easy to forget.
The problem with that is it exposes you to the pro-rata issue with your Backdoor Roth IRA.
*Reads first paragraph*
*checks account balances to find Solo 401k value of $255,000*
Put me in that category of having completely forgotten about this form. Thanks so much for the incredibly timely post!
You’re most welcome! Learning from each other’s mistakes is a great way to become educated through WCI.
I have a plan with pre tax 401k, Roth 401k and after tax 401k options (which is then rolled into the Roth for mega backdoor). I just started the plan so am below threshold by all accounts. When it comes to the 250k limit is this for all subtypes (Roth/pretax etc) combined or for each sub account?
Hey Noah, it is for combined. Hopefully you get to have to fill out soon!
My wife and I each have our own solo 401k accounts. Is it once each of our own accounts reach $250k or when our combined total equals $250k?
Hey Creeker, I actually have to disdegree on Jim on this one. (Shocking!) A solo 401(k) is as it says “solo” so each separate plan gets 250 K limit one for you and your plan and one for your wife and her plan. I think Jim is getting confused because a solo 401(k) can include your spouse if she works for your company. That will mean only one solo 401(k) plan and one 250 K limit to file the 5500.
Not sure what you’re thinking of, but the IRS is pretty clear on this.
https://www.irs.gov/pub/irs-pdf/i5500ez.pdf
Who Must File Form 5500-EZ
You must file Form 5500-EZ for a retirement plan if the plan is
a one-participant plan or a foreign plan that is required to file an
annual return under section 6058(a).
A one-participant plan means 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 (treating 2% shareholder of
an S corporation, as defined in IRC §1372(b), as a partner); 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).
A one-participant plan must file an annual return unless the
plan meets the conditions for not filing under Who Does Not Have
To File Form 5500-EZ below.
Who Does Not Have To File
Form 5500-EZ
You do not have to file Form 5500-EZ for the 2021 plan year for a
one-participant plan if the total of the plan’s assets and the assets
of all other one-participant plans maintained by the employer at
the end of the 2021 plan year does not exceed $250,000, unless
2021 is the final plan year of the plan.
A little confused because I also have a solo cash balance plan. So based on this you would also have to file a 5500-EZ if the combined assets of 401k+cash balance is greater than $250,000? I looked at the form and it starts by asking name of plan. How would that work if I have the two plans?
Good questions. Not sure I know for sure. The safest thing to do is just file it (or two if you want to put the name of each plan on a separate form). There’s no penalty for filing when you don’t have to, only for failing to file when you have to.
I haven’t had a personal DB/CB plan so I don’t have personal experience with this.
This website says you combine the amounts to see if they total $250K:
https://www.emparion.com/form-5500-ez-example/
I think if I were you and my total were $250K+ I’d file two separate 5500 EZs.
Each plan has to file a Form 5500 EZ, even when they have less than $250k individually (but greater than $250k combined, as of the end of the plan year). So for 2022, you will want to look at the balance as of 12/31/2022 to determine whether you need to file.
DB/CB plans must also have a Schedule SB, but this is not filed with the Form 5500 for the plan since it is masked in filing. It is purely kept locally in your files.
The entire plan (including amounts for your spouse if any), sorry.
If I’m reading correctly, if they are in different plans, then two spouses would get two $250k limits.
Yea, if the plans are totally separate plans from two totally separate employers, then two $250K limits. If just one employer, then it’s one $250K limit. If it’s just one plan, it’s one $250K limit.
This isn’t a huge deal though. It’s not hard to file this form.
https://www.whitecoatinvestor.com/irs-form-5500-ez/
Stefan excellent article man and luckily I have not fallen victim to this but in case I miss in future years this would be incredibly helpful. Do you have any insight to why the IRS makes us do this for a solo 401(k)? Any reason that the quarter million mark is the threshold to fill out form 5500? if I didn’t know any better, it almost seems like a gotcha type scenario for the IRS to make money!
Congrats on your solo 401(k) superseding the quarter million mark by the way! Dominating dude, simply dominating.
Hey Rikki. Thank you! I have no idea why they do this. I didn’t run across the “why” during my research on it. My best guess is that they use it to keep track of peoples’ retirement capacity. The penalties are excessive for an informational form IMO. I’m guessing they use 250K because that means you have a substantial start towards retirement savings but I have no idea since everybody’s needs in retirement are going to be different. Maybe they just want to know how much money to expect with regard to taxes. Who knows…
my guess: The government wants your money!!! 🙂
I posted a question about this same issue recently on the forum and I feel this article may have been written because of my own recent delinquency with filing this form. Cost me $1500 for 2019-2021. I won’t miss it again.
I don’t think it’s a bad idea to encourage others to start filing this form from the beginning of their 401k since it only takes a few minutes even though it’s not required. It is easy to forget 4-5 years down the road especially with all the other things we have to keep up with opening and running a business.
Most solo 401(k) providers will remind you, which helps.
I’m pretty sure ETrade does not send out reminders, or I completely missed it for 2 years. anyway, this was a good article, but still cost me $1000.
Sorry to hear that. I know Vanguard did.
I can confirm that E*Trade does not remind you. I’m both sorry and not sorry my article cost you $1K! Better to be safe with your retirement money though.
Just to be sure, I don’t have to worry about it if all my 401(k)s are employer sponsored, yes?
(I tallied up my 401(k)s and I have 300k in them! Go me!)
Yea, it’s a solo 401(k) thing. Your employer also has to file forms for their plans, but that’s not your responsibility.
This is totally on me as a DIY investor (Emergency Physician, in practice since 2004, using WCI for years, which I’ve always appreciated!), but I completely failed to realize I had to file a 5500-EZ with the IRS for my solo 401k, which passed the $250,000 threshold in 2019. Reading this article is the first I ever heard of it, which is unfortunate as I would have hoped it would have been mentioned by at least one of the following: –the WCI article on establishing a solo 401k (which I looked over again, and see no mention of needing to file a form with the IRS);
–Fidelity (where my account is located);
–my workplace financial advisor, who also recommended a solo 401k (I’m less surprised they failed to tell me about this than the WCI article on the topic);
–Turbotax.
I don’t know how this never came up before, but it sounds like I’m going to owe $1,500 now!
Jim: please consider adding a line to your post (https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/) mentioning the need to file with the IRS after the account reaches $250,000 — so that others don’t also fall prey to this situation (where apparently ignorance is not bliss!).
Thanks for all the other advice over the years, BTW!
Sorry about that, but I did publish this post:
https://www.whitecoatinvestor.com/irs-form-5500-ez/
In 2018.
And added a line to that other post.
You must file 5500-EZ if you terminate the solo 401k plan. This is true even for plans smaller than $250,000.
Final Return
All one-participant plans and all foreign plans should file a return for their final plan year indicating that all assets have been distributed.
Check box A(3) if all assets under the plan(s) (including insurance/annuity contracts) have been distributed to the participants and beneficiaries or distributed or transferred to another plan. The final plan year is the year in which distribution of all plan assets is completed.
I assume this applies to the total balance of your solo 401k, regardless of how it got there. For example, I rolled my 403b from residency into my solo 401k, which more than doubled the value of my solo 401k. I guess this is a warning to anyone planning to roll any type of retirement plan into a solo 401k.
That’s right.
Thanks for the article. I may already have the answer to this, do I still have to file this form if most of the funds in the solo 401k are from an old plan rolled over and not direct contribution to the plan? Ty
Yes.
Ok, so what “reasonable cause” did you (columnist) cite? Because unless I’m missing something, I don’t see one.
And for those of us who simply forgot to do the 5500-ez and don’t have a “reasonable cause” (and can’t provide documentation for one), is it still worth filing a late 5500-ez?
Yes, you’re missing something. I mentioned several stating, “Example reasons include fire, casualty, natural disaster, lack of access to records, death, severe illness, and incapacitation.” This was sited from the IRS examples and can be verified by the IRS like provided.
As stated, “If I just realized I owe the IRS for late 5500-EZ filings, should I risk skipping out on it?
No, not even if you owe for 20 years or more.”
I went on to explain the reasoning.
Another victim to this, having not been told my my 401k custodian nor my CPA. Im really annoyed about it because Im so diligent with everything. I reached out to my custodian and was told that its not their responsibility for letting me know this. I said how about just adding a simple reminder just to help people out. They’re so rude. So Since its December of 2022, would that make me delinquent for 2019,2020 and 2021? And then just file for 2022 by June?
Unfortunately, yes.
I forgot to file my 2021 form until August 2, 2022 (2 days after it was due). I filed it, but haven’t heard anything from the IRS. Should I just wait to receive a letter from the IRS indicating it was filed two days late and will owe $500 or should i do anything else proactively?
I’d wait. Maybe they won’t notice or will just forgive it.
I filed my 5500 for 2020 late. Also had NO idea this was a requirement because my balance had always been below $250k in the past and had never heard of it.
Once I found this out and orking with my custodian, I filed this form 5500EZ in June of 2022, signed and requesting penalty relief under Rev. Proc. 2015-32.
Just received a letter from the IRS for a Late Filing Penalty of over $80k!
I do recall I filed a Form 14704. It’s possible that I didn’t send a $500 check, not sure here.
Is this an oversight by the IRS, or is there something else I had to do in addition to filing my 5500EZ for 2020 and requesting penalty relief? Or can this be corrected by sending the $500 check now? If that’s what tripped me up here, it’s an honest mistake that seems absurd to cost me over $80k.
I found my $500 cashiers check made out to DOT and the USPS certified mail receipt. So I did pay the $500 fee in conjunction with filing the 5500EZ. So is this an IRS oversight to send me a penalty notice for over $80k? Or can they just randomly decide to not grant penalty relief?
$80K is enough that I’d retain the services of a tax attorney to help.
You should have received notification verifying payment and a statement indicating no further action is necessary after filing Form 14704. If you don’t receive that notification that should be a red flag indicating something is wrong. The IRS does provide information on how to contact them with further questions on that form.
If you received a delinquency form, I imagine there is also contact information for further questions.
Here is the IRS Help Line for the 5500-EZ: 877-829-5500. I’m not certain this is the best number, but I’ll bet they can get you contact with whomever specifically deals with correction your issue.
Note: Following Jim’s advice to contact a tax attorney still sounds like a good idea.
Some closure here. The IRS sent a follow up letter that was dated a day or two after the first one was sent. They acknowledged the $500 I had paid the 14704 form I sent in and said no further action would be taken on this matter. So I did it right this past summer, they just made a mistake in sending out the penalty and quickly corrected it. Creates a lot of uncertainty and work – the IRS would serve us better if they individuals making these mistakes had a negative consequence.
Glad it seemed to work out for you.
Imagine having to work at the IRS and you’ll have a lot more compassion for IRS employees!
Has anyone had experience filing the 5500-EZ form electronically using EFAST2 through the Department of Labor? Is one method preferred over the other (paper vs. electronically)?
From the EFAST2 page on the Department of Labor:
Beginning January 1, 2021, the Form 5500-EZ can be filed electronically using certain EFAST2-approved third-party software or using this website’s IFILE tool.
I bet the IRS prefers the electronic version, but I’ve only ever personally done it by hand.
Why do this by hand? The efile form is easy and allows for confirmation of submission. Any advantage to paper forms?
Not really. It’s absolutely fine to do the efile version.
Just want to clarify – this 250k threshold applies to the total balance in the solo 401(k) only, correct? Even if I have over 250k in an employer sponsored 401k, all that matters here is the amount in the solo 401k?
That’s right.
I also succumbed to this pit fall. Wish I had known about this through my tax advisor or had ever heard about it until now.
I’m now about to submit my (wife’s) 2019, 2020 and 2021 delinquent 5500-EZ’s along with Form 14704 (and a check for $1,500) — and now another question has come up!
There is mention in various places (IRS documents) of Schedule SB (Form 5500) “Single-Employer Defined Benefit Plan Actuarial Information”, which until now I have not heard mention of. Does this form (Schedule SB) need to be completed by everyone who has an Individual 401k plan every year, and “kept on file”? (The IRS is clear it does not need to be submitted with the 5500-EZ.) Or can we just ignore this if it’s not relevant to a 1-participant individual 401k plan?? Thanks!
I never did a Schedule SB when I was filling out my own 5500-EZ. The internet is telling me it is for defined benefit plans. Do you have one of those?
https://www.emparion.com/schedule-sb-form-5500-what-is-it/#:~:text=This%20is%20an%20IRS%20form,found%20in%20the%20valuation%20report.
No, I don’t have a defined benefit plan, my wife just has an individual 401k at Fidelity, which covers herself only (I have a 401k through my full-time EM job, so I’m doing this for my wife who is a private practice solo practitioner clinical psychologist).
If you have never done a Schedule SB for your individual 401k, then I won’t worry about it!
(I’m just paranoid now, since I missed the whole 5500-EZ thing and we now have to pay a big penalty, so I don’t want to mess anything else up.)
The IRS does seems vague about this — which is why I asked — and that website you linked is confusing too …. It says “In some instances, the Schedule SB does not have to be filed with the Form 5500. This applies to one-participant plans in conjunction with filing the Form 5500-EZ. The Schedule SB must still be completed, signed by the plan actuary and retained in plan sponsor’s plan records.”
(It seems to be saying that the Schedule SB “still must be completed” and kept on file.)
But I’m not going to worry about it (unless you or someone else on this forum say otherwise).
Thank you again!
The top of the form says: “Single-Employer Defined Benefit Plan Actuarial Information”
The instructions for the form say:
Who Must File
As the first step, the plan administrator of any single-employer
defined benefit plan (including a multiple-employer defined
benefit plan) that is subject to the minimum funding standards
(see Code section 412 and Part 3 of Title I of ERISA) must
obtain a completed Schedule SB (including attachments) that
is prepared and signed by the plan’s enrolled actuary as
discussed below in the Statement by Enrolled Actuary section.
The plan administrator must retain with the plan records the
Schedule SB that is prepared and signed by the plan’s actuary.
I have no idea why you think it applies to you though!5500 EZ is just two pages. That’s it.
Hi, a bit late to the party here, but thankfully just stumbled upon this post. Was hoping to clarify something based on my situation. So I have been at over the 250k mark since 2020; my CPA was to help me file the 5500 form for 2020 but didn’t (I think he basically forgot) and I didn’t realize that I should be on top of it, so basically it is now delinquent for 2020 and 2021. I assume I do not have “reasonable cause” for the relief program. So should I NOT be sending the 14704 form when now sending the 5500 form for the two delinquent years and for 2022?
I am not sure I understand this sentence: “Being that the worst scenario payout using Form 14704 is $1,500 and late 5500-EZs can result in hundreds of thousands of dollars worth of penalties, you should scrutinize this option carefully.” What is the downside of sending in the 14704 form with a letter? If they deny, does it mean the chance of having to pay the big bucks penalty is higher?
Also, does anyone know if having to pay the 150k a year penalty basically a slam dunk or do they usually waive it anyway as long as one finally made the effort to send the forms? Obviously I am a little nervous here so want to make sure I do this right to minimize the chance of having to pay hundreds of thousands of dollars. Thanks!
Sorry, I just re-read the post and I think I was misreading it initially. In think that where it says “If you make a request to waive the penalty due to a reasonable cause and that request is denied, you are no longer eligible to use form 14704” it refers to the $500 (max $1500 penalty), NOT the 150k penalty. So then, I assume one should definitely include the 14704 with delinquent 5500 forms, right? If I understood my CPA correctly, he was suggesting for us to just send the 5500 forms and if they then assess a penalty, he would follow up with a letter. I am thinking that is NOT the best strategy and the 14704 is a no-brainer. I will GLADLY pay $1000 for my late 2020/2021 forms. Thoughts?
Your second reading is correct. Your asking if I think you could file late 5500-EZs without triggering IRS penalties and, if they were triggered, if you could get around serious penalties with a CPA letter. If your CPA says the odds are in your favor he’s probably right. If you’re a tax cheat the odds are in your favor any given year as well. However, I don’t think your going to find anyone around here who is going to support you playing chicken with the IRS. The program is in place so you can pay the fine to correct your error and be done with it without incurring further risk or worry. I don’t know about you but that’s worth $1.000 to me. I have no interest in IRS threats of portfolio decimation even if my account thinks I can avoid it in the end.
Thanks! Yes, I think my CPA and I have figured this out and are on the same page, will use the 14704 form. I think what was initially confusing is when reading “If you believe you do have a reasonable cause for the late 5500-EZ filing, the IRS offers guidance to avoid penalties” I wasn’t clear if that refers to the $500/year voluntary penalty or the big bucks penalty. Bottom line: if you forgot to file the 5500EZ form, file it ASAP and definitely use the 14704 form. Just need to sweat trying to avoid the $500-$1500 penalty.
I was late with filing 5500-EZ a few years back and paid the penalty and had been filing yearly on time. However, I closed my solo 401k (technically at year end 2021), completed distribution (rollover to IRA) and my account balance was $0 as of 4/1/22. I thought I had until 7/31/23 to file for 2022, but only recently realized I might be late again since the deadline is 7 months after account closure and not after the calendar year ends. My 2 questions are:
1) Will the IRS consider the date of termination when my account became $0 (4/1/22), or can I choose to document the termination date to be 12/31/22 and file the 5500-EZ now and not be considered late?
2) If no to the above, can I use the penalty relief program again for the 2nd time and pay the $500 fee?
Thanks so much to anyone who can clarify.
Via email:
When I left my private group and became employed by my hospital in 2019, I took advantage of 1099 income for call pay and started an individual 401k with Fidelity in 2019- opening the account with about $120.
I chose fidelity because I already had accounts with them, and because I wanted to take advantage of incoming 401k rollover. I was then able to roll my employee 401k from my old corporation. I did this in 2020 (about 300k) making the 2020 year the first year in which I SHOULD have filed form 5500-EZ.
I did not file 5500-EZ in 2020 or 2021. Then, based on an article of yours I read in December 2022, I filed exemption/amnesty form 14704 for 2019, 2020, and 2021. Because 2019 was the first year of the plan I mistakenly thought I had to file for that year. However, I only included $1000 with my 14704 application (because I was obligated to file 2020 and 2021 but not 2019 based on low balance)
I received a letter from IRS in April 2023 letting me know they didn’t know how to apply the $1000. I called and a very helpful gentleman spent about 20 minutes researching my 14704 issue. He stated that, because I included 2019 on my 14704 and filed a 5500-EZ for that year, I would need to send an additional $500 as soon as possible.
$74 and a overnight envelope to Ogden later, they have deposited my additional $500.
I have not received confirmation that they’re accepting the exemption.
My feedback is simply this: be very careful when filling out 14704 and don’t send a 5500-EZ for any year you don’t owe! I’m calling this my DIY tax.
I’m starting to see how you were feeling when you had to write, “17 Backdoor Roth IRA Mistakes to Avoid.”
Yea, it’s amazing how many different ways people can screw up a single tax form eh?