The IRS’s Employee Plans Compliance Unit (EPCU) conducted a series of Form 5500 reviews as part of its Final Return with Assets project. EPCU auditors looked at plan sponsors who filed a Form 5500-series return marked “the final return/report” but listed assets at the end of the plan year to see if they had completed all the steps in terminating their plans. When errors were founds, auditors sought to determine why sponsors marked their Form 5500. They also examined whether there were common Form 5500 processing errors that caused returns to be unintentionally filed as a final return/report with end-of-year assets.
Over 90% of the responses showed sponsors made one or more of the following errors on their Form 5500:
- Sponsor filed a Form 5500 marked the final return/report but still had assets in-plan at the end of the plan year. The IRS points out that, for the final return/report box to be marked correctly, sponsors typically must have distributed all plan assets.
- Plan officials filed more than one Form 5500 marked the final return/report. The IRS explains that only one Form 5500 should be marked as the final return/report for any given plan, and it should be filed for a terminated plan only after all plan assets are distributed.
- Sponsor distributed all plan assets after the end of the plan year but before filing the Form 5500. For example, sponsors often marked the 2011 Form 5500 as the final return/report for the plan year ending December 31, 2011. However, their plans still had assets on December 31, 2011, which were then distributed in 2012 before the filing deadline for the 2011 Form 5500 (July 31, 2012). Even though the plan distributed all plan assets before the due date of its 2011 Form 5500, the distribution was made in the 2012 plan year and not in the 2011 plan year. Therefore, the IRS says these sponsors should have filed and marked the 2012 Form 5500 as the final return/report.
- Sponsor filed a Form 5500 for a Simplified Employee Pension (SEP) plan. Plan sponsors shouldn’t file a Form 5500 for a SEP plan, the IRS explains. Instead, the entity that maintains the SEP-IRA files a Form 5498.
- Plan officials didn’t check the “short plan year return/report (less than 12 months)” box. Plan sponsors should mark the short plan year box when filing a return for a period of less than 12 months and show the short plan year dates just above item A in Part I.
Less common errors occurred when the plan sponsor didn’t file a Form 1099-R for final plan distributions. The IRS requires plan sponsors to file Form 1099-R to report all plan distributions. Form 1099-R is generally filed for each person who received $10 or more from an employer-sponsored retirement plan. Sponsors also commonly failed to ensure three amended Forms 5500-EZ were processed and posted properly to the IRS’s monitoring system.
The IRS urges sponsors and plan consultants to review terminated plans to see if they have finished all the termination steps, including filing all current and prior Form 5500 returns, as well as a final Form 5500 showing zero assets (see “Fiduciary Liability and Form 5500 Reporting”).
Final Forms 5500 are required even if a plan is considered exempt from filing a Form 5500-EZ. The IRS says plan officials should take action to correct any errors and amend returns as necessary. Plan governance processes should be improved so the mistakes don’t happen again.
Questions about the final Form 5500 and the Final Return with Assets project can be emailed to firstname.lastname@example.org and should include “Final Return with Assets” in the subject line. The IRS also urges plan officials to consult its Form 5500 Corner, the Form 5500 instructions and the Form 5500-EZ instructions to fix and avoid errors.