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Errors in Final Form 5500 Filings Common, IRS Says

More than 90 percent of the plan sponsors that filed their final Form 5500 filings the IRS Employee Plans Compliance Unit (EPCU) examined in its “Final Return With Assets Project” had at least one error, the IRS reports. Final Forms 5500 are required even if a plan has been exempt from filing a Form 5500-EZ (the annual return of a one-participant retirement plan) in previous years.

EPCU looked at plan sponsors that filed a Form 5500 marked “the final return/report,” but listed assets at the end of the plan year, to see if they had completed all the steps in terminating their plans. The errors, and why they are errors, include the following:  

Error: Filing a Form 5500 marked as the final return/report, but had assets at the end of the plan year. 
Mistake: For the final return/report box to be marked, sponsors must have distributed all plan assets.

Error: Filing more than one Form 5500 marked as the final return/report. 
Mistake: Only one Form 5500 should be marked as the final return/report and should be filed for a terminated plan after all plan assets are distributed.

Error: Distributing all plan assets after the end of the plan year but before filing the Form 5500.
Mistake: For example, a sponsor marked its 2011 Form 5500 as the final return/report for the plan year ending Dec. 31, 2011. However, the plan still had assets on Dec. 31, 2011, which it distributed in 2012 before the filing deadline for the 2011 Form 5500 (July 31, 2012). Even though the plan distributed all plan assets before the due date of its 2011 Form 5500, the distribution was made in the 2012 plan year and not in the 2011 plan year. Therefore, the sponsor shouldn’t have marked its 2011 Form 5500 as the final return/report. Instead, the sponsor should have filed and marked its 2012 Form 5500 as the final return/report.

Error: Filing a Form 5500 for a Simplified Employee Pension (SEP) plan. 
Mistake: Plan sponsors shouldn’t file a Form 5500 for a SEP plan. Instead, the entity that maintains the SEP-IRA should file a Form 5498, “IRA Contribution Information.”

Error: Filing a Form 5500 for an IRA. 
Mistake: Plan sponsors shouldn’t file a Form 5500 for their IRA. Instead, the entity that maintains the IRA files a Form 5498, “IRA Contribution Information.”

Error: Didn’t check the “short plan year return/report (less than 12 months)” box.
Mistake: Plan sponsors should mark the short plan year box when filing a return for a period of less than 12 months and show the short plan year dates just above item A in Part I. For example, if the plan assets weren’t distributed until after the end of a plan year in which the plan terminated, then the plan may have a short plan year for the year they’re actually distributed. For a short plan year, the return is due by the last day of the 7th month following the end of the short plan year.

To avoid these errors, the IRS suggests that plan sponsors review a terminated plan to see if all termination steps have been followed, including filing all current and prior Form 5500 returns and a final Form 5500 showing zero assets. 

It also suggests that a plan correct its administrative procedures so such mistakes do not recur, and that it may be helpful to ask at least two people to review a Form 5500 before filing.

John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net portals.