Changes have been made to the penalties that may be assessed against employers since our last article on Form 5500 filings. As a reminder, Form 5500 is the information return that must be filed by most employee benefit plans subject to ERISA (unless an exception applies), and failure to file this annual return for a plan can result in assessment of penalties by both the IRS and DOL. Recently, the SECURE Act has given the IRS more teeth by increasing the maximum permitted penalties tenfold, but it still remains the case that the DOL penalties are more severe.
The IRS has the authority to impose penalties on qualified plans, funded deferred compensation plans, and fringe benefit plans that file late or materially incomplete returns. The IRS penalty before the SECURE Act was $25 a day, up to a maximum penalty of $15,000 per plan year. The SECURE Act has increased the IRS penalty, and effective after December 31, 2019, the penalty for late filers is $250 a day, up to a maximum penalty of $150,000 per plan year. Also increasing under the Act is the penalty for failure to file Form 8955-SSA (Annual Registration Statement for Deferred Vested Participants). That penalty has increased from $1 per participant multiplied the number of days the failure occurred (maximum of $5,000) to $10 per participant multiplied the number of days the failure occurred (maximum of $50,000).
Even with the increase in the IRS penalties, they still pale in comparison to the penalties that can be assessed by the DOL. The DOL has the authority to assess penalties on all plans under Title I of ERISA, with the penalty for a late filer being $2,194 per day (adjusted for inflation for penalties assessed after January 23, 2019), with no maximum.
Because of the severity of the penalties, it is important to know what steps can be taken if you have missed a filing deadline. To be eligible to reduce potential penalties through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP), a taxpayer must comply with the requirements of the program and must not have been notified in writing by the DOL of a failure to file a timely report. Because correction under the DFVCP cannot be started once notified by the DOL, time is of the essence when an error has been made.
The DOL penalties under DFVCP are reduced from $2,194 to $10 per day. Further, penalties for small plans (generally under 100 employees) are capped at $750 for a single late Form 5500 and $1,500 for multiple years per plan. Penalties for large plans (generally 100 employees and over) are capped at $2,000 for a single late Form 5500 and $4,000 for multiple years per plan. To comply with DFVCP, the plan administrator must first file all late Forms 5500 for which relief is sought and should indicate on the Form 5500 that it is filing under DFVCP. A separate submission must be made for DFVCP penalty relief. If more than one plan is involved, a separate DFVCP filing must be made for each plan. Filing under DFVCP not only reduces the DOL penalties, but IRS penalties will also be automatically waived (but if Form 8955-SSA is required to be filed, it must be separately filed with the IRS for penalties to be waived).