As our firm has stated for years, the best retirement plan for a business trader is a defined-contribution employer 401(k), as this plan allows up to a maximum tax-deductible contribution of $53,000 ($59,000 if age 50 and over) based on 2015 IRS limits. As the majority of business-trading entities are owned 100% by the trader or jointly with his/her spouse, a Solo 401(k) plan is the preferred structure.
A Solo 401(k) plan, also referred to as an Individual 401(k), Mini 401(k) plan, Owner-only plan or One-participant plan (the legal name), is a “qualified” retirement plan that:
a) provides benefits to the 100% business owner only (or the 100% owner and his/her spouse); or
b) provides benefits to one or more partners in a business partnership only (or partner(s) and spouse(s) only in a partnership).
This applies to all business entities including: C or S Corporations, Sole Proprietorships, Partnerships, LLCs, or LLPs. (In our content, we also use the term “employer 401(k)” plans for S-Corp trading businesses and C-Corp management companies.)
Typically a Solo 401(k) plan does not have annual filing requirements unless the plan balance exceeds $250,000 in assets (including all liquid cash and non-liquid assets). If this is the case, an information return (Form 5500-EZ) is required to be filed with the Internal Revenue Service (IRS).
Form 5500-EZ must be filed on or before the last day of the seventh month after the end of the plan year. However, Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns) can be filed with the IRS on or before the normal due date to receive an automatic two-and-a-half-month extension. For calendar-year plans, the due date is July 31. By filing a Form 5558, the due date is extended to Oct. 15.
The following significant penalties will be accessed for not timely filing a Form 5500:
· Failure to timely file with the IRS — $25 per day
· Failure to timely file the return with the Department of Labor (DOL) — $50 per day
· Failure to timely file with the Pension Benefit Guaranty Corporation (PBGC) — $1,100 per day. Note that one-participant plans and plans “without employees” fall under the PBGC coverage exemption.
The IRS recently provided some penalty relief. Per http://www.irs.gov/uac/Newsroom/Small-Businesses-Can-Get-IRS-Penalty-Relief-for-Unfiled-Retirement-Plan-Returns, ”Small businesses that fail to file required annual retirement plan returns, usually Form 5500-EZ, can face stiff penalties — up to $15,000 per return. However, by filing late returns under this program, eligible filers can avoid these penalties by paying only $500 for each return submitted, up to a maximum of $1,500 per plan. For that reason, program applicants are encouraged to include multiple late returns in a single submission. Find the details on how to participate in Revenue Procedure 2015-32 on IRS.gov.” This is a good opportunity to catch up with 5500-EZ compliance for late years so speak with us about it soon.
Outside administrators often prepare 5500-EZ for clients but many traders act as their own administrator which means they need to deal with 5500-EZ on their own. Brokers often send annual guidance on filing 5500-EZ to their clients who have self-directed Solo 401(k) plans. Benefit plan information tax filings are not part of our firm’s income tax compliance engagement letters. IRAs are not qualified plans and therefore don’t have a 5500-EZ filing requirement.
If the Solo 401(k) plan balance is less than $250,000 by Dec. 31st, the IRS Form 5500-EZ normally does not have to be filed. However, we suggest considering the following:
· Filing the Form 5500-EZ starts the statute of limitations regarding plan qualification (three-year vs. no statute regarding taxes and penalties due if the plan is disqualified). We recommend filing Form 5500-EZ regardless of this allowable exclusion; starting the statute of limitations running is a good idea.
· Whether the plan has in excess of $250,000 or as little as $5,000, the owner-only business or self-employed individual plan sponsor is required to file a Form 5500-EZ for the year in which a plan is terminated. When a trader exits their trading business they need to deal with this filing requirement.
· If the trust assets are not reconciled annually, how would the eventual preparer of the Form 5500-EZ timely determine if the owner-only business or self-employed individual “operated” the plan in accordance with the applicable rules under the law and permitted by the particular plan relative to the use of plans funds? For example:
o Were contributions made timely?
o Were there any distributions during the plan year? If yes, for what? Does the plan permit loans? If yes, was it properly documented; repaid timely?
· If the plan assets are held at multiple institutions, who monitors when the assets achieve the $250,000 threshold?
If you have a Solo 401(k) plan during 2014, even if assets are less than $250,000 within the plan, we strongly suggest you file Form 5500-EZ.
We can help:
We are happy to assist you with the preparation and filing of the 2014 Form 5500-EZ. Given that we are less than two weeks away from the filing deadline, we suggest that we file for an extension of your plan’s filing requirement for tax year 2014 from July 31st to Oct. 15, 2015.
To get started, please purchase our Form 5500 retirement plan tax compliance – advance payment. After your advance payment is made, our admin team will follow up with you with an engagement letter and information request for your Solo 401(k).
Robert A. Green, CPA contributed to this blog post.