Is a Cash Balance Plan Reported to the IRS? Surprising Answer

Cash balance plans have been a favorite retirement structure for many years. But many people wonder if a cash balance plan is reported to the IRS?

This is an important question. While on its face it might not sound that important, people often think these plans can get them audited. They are sometimes very surprised that they can make such a large tax-deductible contribution.

In this post, we will take a look at 4 specific ways that the IRS is notified of your cash balance plan. Let’s get started.

Is a Cash Balance Plan Reported to the IRS?

But the truth is that they’re only tax deferrals. At some point down the road, you’re going to pay tax on the money. So, the IRS is going to get paid, but it’s just going to have to wait a while.

Your third-party administrator isn’t going to directly notify the IRS that your plan is set up. But there will be several ways in which the IRS is notified.

When the administrator gets the EIN

When you set up your plan, you gave the administrator likely a limited power of attorney. This was enabled on form SS-4 them to go directly to the IRS and obtain a tax ID number for the plan. This is also called a plan EIN

The administrator submitted an online application for the EIN. They told the IRS the name of the plan, the company that is sponsoring the plan (you), the company address, and also the fact that you were setting up a tax-exempt retirement trust.

So, in theory the IRS is aware of the plan. I’m just not so sure they do a good job of reconciling EINs back to tax returns filed or other information they may have. Remember that if a balance in a cash balance plan (or combined plans) is less than $250,000 they’re not required to file a form 5500-EZ with the IRS. So, the IRS doesn’t really do a good job of reconciling EINs to plan tax returns filed.

Preapproval document

Some people believe that the IRS is notified when the actual cash balance plan is established. This is often the assumption because during the set-up process, they may have received an IRS preapproved plan document letter.

Well, most cash balance plan administrators use a preapproved prototype plan. In essence, this plan has been approved by the IRS as an acceptable template to create a cash balance plan. But the IRS is not approving information input into the form like pay credits, interest credits and other technical aspects of the plan design.

So even though you may have a custom, tailored plan. It is still generated on the IRS approved template. The IRS will typically issue the document provider a preapproval form which is then often distributed to companies they set up plans for.

chart with finance, tax and debt

As such, many companies confuse this IRS approval letter with the actual filing of the cash balance plan document. But this is simply not the case. The TPA and the company are not required to notify the IRS when the cash balance plan is established.

Of course, the company is required to maintain all applicable documents, forms, and supporting documents in case of an audit. So of course, there needs to be an actual legal document. 

On the tax return

When the tax return is filed there is an IRS prescribed category called pensions, profit-sharing and other qualified plans. As such, if there is a number on this line (on the Schedule C, S-corp, Partnership or C Corp tax return) you would assume the IRS is notified.

But this line encompasses a lot of other retirement plans. In fact, most of which are defined contribution plans.

So, the IRS isn’t really able to break out the components of this line and tie it directly to a cash balance plan. Presumably, the higher the deduction is the more likely it is for a defined benefit plan or cash balance plan structure.

When a 5500 is filed

As we’ve stated before, a plan is required to have a 5500 filed each year if it is a group plan. But if it is a solo plan it only needs to be filed if it meets the $250,000 threshold.

Even though you have a plan EIN, it is not actually reported on the form 5500. However, you’re required to report the EIN for the business itself. So the IRS is being told that this specific company has a cash balance plan.

Bottom line

So there you have it. We have outlined 4 specific ways that a cash balance plan is reported to the IRS.

Don’t feel like the IRS is going to audit you because you have set up a plan. The reality is that the plans are a tax deferral and not tax avoidance. The IRS will get it’s tax revenue at some point. They may just have to wait awhile.

Paul Sundin

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