You may already know that solo 401(k) plans are great starter retirement structures. But there are a few compliance issues to be aware of.
The one question we get asked often is: When do I have to file Form 5500-EZ for my solo 401(k) plan?
In this post, we will address when a 5500-EZ is required and provide a few examples. Let’s get started.
Some background
The IRS requires Form 5500-EZ to be filed by certain retirement plans, specifically one-participant plans like Individual 401(k) plans. These plans are also known as “solo” 401(k) plans.
The primary purpose of Form 5500-EZ is to satisfy the annual reporting requirements under the Internal Revenue Code for these types of retirement plans. It provides essential information on the qualification of the plan, its financial condition, investments, and the operations of the plan.
By mandating the filing of Form 5500-EZ, the IRS ensures compliance with regulations for these retirement plans, helping to monitor their financial health, adherence to tax laws, and overall operation.
In addition, this requirement allows the IRS to track and oversee retirement plans to safeguard the interests of plan participants and ensure that these plans are being managed appropriately within the legal framework set forth by the Internal Revenue Code.
When do I have to file Form 5500-EZ for my solo 401(k) plan?
If you have a solo 401(k) plan, you need to file Form 5500-EZ if the total value of your plan assets exceeded $250,000 at any point during the previous tax year (from January 1 to December 31). The deadline to file Form 5500-EZ is July 31st of the following year, or the first business day of August if the 31st falls on a weekend.
If your solo 401(k) plan had less than $250,000 in total assets at the end of the previous year, you don’t need to file any annual report. However, if you’re terminating your solo 401(k) plan, you must file a final Form 5500-EZ, regardless of the plan’s asset value.
What if I also have a cash balance or defined benefit plan?
To determine the total value of your plan assets, you need to include the value of all investments, cash, and any outstanding participant loans. If you have multiple solo 401(k) plans, you must add up the values to see if the $250,000 threshold is met.
The Form 5500-EZ is a simple informational filing that provides basic details about your solo 401(k) plan. It doesn’t require the complex reporting or audits associated with the standard Form 5500.
If the total value of your solo 401(k) plan and defined benefit plan assets exceeded $250,000 at any point during the previous tax year (January 1 – December 31), you are required to file Form 5500-EZ for each of those plans.
How is the $250,000 asset value calculated?
If the combined value of your plans was less than $250,000 at the end of the previous year, you don’t need to file any annual report.
However, if the combined value of your plans exceeded $250,000 at any point during the year, even if it was below $250,000 at the end of the year, you still need to file Form 5500-EZ for each plan.
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Additionally, if you are terminating either your solo 401(k) or defined benefit plan, you must file a final Form 5500-EZ regardless of the plan’s asset value.
To determine the total value of your plan assets, you need to include the value of all investments, cash, and any outstanding participant loans for both the solo 401(k) and defined benefit plan. You must aggregate the values of all your one-participant plans to see if the $250,000 threshold is met.
Form 5500-EZ is a simplified, informational filing that provides basic details about your one-participant retirement plans. It does not require the complex reporting or audits associated with the standard Form 5500.
The $250,000 threshold does not include SEPs, Simple IRAs or Traditional IRA. This is because these plans do not have any 5500 filing requirement.
Can you give me an example?
Example #1
Here’s an example of when a 5500EZ is required:
| Plan | Balance |
|---|---|
| 401(k) | $80,000 |
| Cash Balance Plan | $70,000 |
| Total | $150,000 |
As you can see in this example, the combined account balances are less than $250,000. So, no 5500s are required for either plan. But please remember that in the final year if a plan is terminated then you must file a 5500.
Example #2
| Plan | Balance |
|---|---|
| 401(k) | $40,000 |
| Cash Balance Plan | $220,000 |
| Total | $260,000 |
In this situation, a 5500-EZ is required for both plans. This is because the combined balance succeeds at $250,000.
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Example #3
| Plan | Balance |
|---|---|
| 401(k) | $30,000 |
| SEP | $90,000 |
| Cash Balance Plan | $150,000 |
| Total | $270,000 |
In this example, you can see that the company also has a SEP. Because the SEP is part of the IRA family, it does not have a form 5500 requirement. As a result, you can exclude it from the $250,000 contribution threshold.
Once you exclude it, you can see the combined balance in the cash balance plan and 401(k) plan is only $180,000. As such, there is no 5500 filing requirement.
Does it make sense to file a 5500 even if you are below the $250,000 threshold?
In some situations, it might make sense to still file Form 5500-EZ even if the plan(s) is below the $250,000 threshold. The IRS statute of limitations is three years, so it might make sense to file it just to let the statute of limitations start.
At Emparion, we often file 5500-EZ’s when they might technically not be required. This is because at least it reconciles the beginning and ending balances, starts the clock on the statute of limitations, and covers us in case there’s a 401(k) plan that we’re unaware of that has assets that push the threshold above the $250,000.
In some situations, clients also recommend that we file the 5500. But each situation is different.
Final thoughts
ERISA requires administrators of certain retirement plans, such as one-participant plans (plans that cover only the owner or owner and spouse of a business), to file an annual return/report (Form 5500-EZ) to provide information on the operation, funding, and administration of the plan.
The IRS, DOL, and PBGC use the information provided on Form 5500-EZ to ensure compliance with various laws and regulations governing retirement plans, including tax laws and ERISA. The form helps them monitor the financial health of retirement plans and protect the interests of plan participants and beneficiaries.
