Most new clients come to us with a retirement plan already in place. Usually this is a SEP or a solo 401(k).
SEPs do not combine well with cash balance or defined benefit plans. But solo 401(k) plans work great, even though the profit sharing is limited to 6%.
But are you aware of the IRS form 5500 filing requirements for solo 401(k) plans? In this post, we discuss the filing requirements and give you a few tips.
Some Background
The IRS Form 5500-EZ is required for solo 401(k) plans with total assets exceeding $250,000. This form reports plan financial details. It ensures compliance with IRS regulations and prevents penalties for non-filing. Solo 401(k) owners must file annually if assets exceed the threshold.
The $250,000 threshold includes all plan assets at year-end, including contributions and earnings. If assets exceed this amount, filing is mandatory. Plans with assets under $250,000 are exempt unless terminated. A terminated plan must always file a final return regardless of assets.
Form 5500-EZ is due by July 31st of the following year. Filers can request an automatic extension until October 15th using Form 5558. Late filings may result in IRS penalties, which can be substantial. Electronic filing through EFAST2 is not required but is available for convenience.
Failure to file can result in daily penalties up to $250, with a maximum of $150,000 per form. Plan owners should maintain accurate records to ensure compliance. Consulting a tax professional can help avoid errors and penalties. Proper filing ensures continued tax advantages and plan legitimacy.
Combination Rules
But there is an additional concern when considering the $250,000 threshold. This threshold is calculated combining the 401(k) plan and a cash balance or define benefit plan. So, while individual amounts could be less than $250,000, if the combined balance of both plans exceeded $250,000, you would have to file a 5500 for both plans.
As an example, if you had a 401(k) plan that had $200,000 in assets, you would not have to file form 5500. But if in the subsequent year you made a $100,000 contribution to a cash balance plan, you would have to file form 5500 for both plans for that year. This rule often trips up clients.
The good news is that you do NOT have to file form 5500 for a SEP or SIMPLE IRA. If you have one of these plans, you do NOT need to combine it with the 401(k) or defined benefit plan to determine the $250,000 threshold.
How is the Threshold Determined?
But what happens when you contribute in a subsequent year for a prior plan year and exceeded the $250,000 threshold? Does the 5500 get filed for the prior year or the current year?
While the IRS has not issued specific guidance on this issue, the common practice is to file the 5500 for the prior year. This is because the contribution made in the subsequent year actually related to the prior plan year.
For example, let’s assume that as of 12/31/24 you had a balance of $200,000 in your 401(k) plan, but you have not made contributions for 2024. Let’s assume that in 2025 you make a $60,000 contribution to your 401(k) plan for 2024. In this case, the common practice would be to file the form 5500 for 2024 and not wait until 2025. Presumably, you would still be also filing a 5500 for 2025 to reflect contributions for that year.
Filing Questions and Concerns
Many people have not filed a form 5500-EZ for their 401(k) plan. Often this is because the plan assets are less than $250,000 and no 5500-EZ is required. Sometimes the form was not filed because the client was not aware of the filing requirement or just assumed that the custodian was taking care of it.
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The reality is that if you have a plan set up with a custodian (Schwab, Vanguard, Fidelity, etc) they will typically make you sign a disclaimer that states that you are in charge of the administration of your plan. This would include filing the 5500-EZ. So it is quite possible that a 5500-EZ has never been filed.
When people come to use with a 401(k) that we did not set up, we do not take over the administration of it unless it is expressly requested, and the appropriate administration fee is paid. When we set up new cash balance plans or defined benefit plans, we tell clients that we will only handle administration of the plan if the client requests.
When you set up a new defined benefit plan or cash balance plan with us, we do not automatically take over the administration of your 401k plan. We do have to cross test the plans and review compliance. But that doesn’t mean that we are doing your 5500-EZ. You may have not even filed a 5500-EZ before for your 401k plan because your balance was less than $250,000. But when you add a defined benefit plan you will normally quickly be over the $250,000 threshold and you will now be faced with filing the return.
Contact Your 401(k) Custodian
You should contact your current custodian to verify what services they are providing for you. Below are the phone numbers for the main three custodians that most clients use.
Vanguard at 1-800-992-7188
Fidelity at 1–800-544-5373
Charles Schwab at 1-800-435-4000.
Is a Cash Balance or Defined Benefit Plan Right For You?
Final Thoughts
Understanding Form 5500-EZ filing requirements is crucial for solo 401(k) plan owners. The $250,000 asset threshold determines filing obligations. Plans exceeding this amount must file annually to avoid penalties. Terminated plans require a final filing, regardless of asset value.
Timely filing ensures compliance and maintains tax advantages. Late submissions can result in significant penalties. Keeping accurate records helps prevent errors and missed deadlines. Consulting a tax professional can provide guidance and peace of mind.
