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Retirement

Form 5500-EZ: Why All Solo 401k Plan Owners Should File One

Overview

  • What is Form 5500-EZ? An annual tax return required for all solo 401k plan owners with over $250,000 in plan assets.
  • When is the deadline for 2022? 7 months after your fiscal year ends. If you use the calendar year, the due date is July 31, 2023.
  • What are the late penalties? $250 per day that you're late, capped at $150,000.
  • What if my assets don't exceed $250,000? It's still best practice to file Form 5500-EZ annually even if you're not required to. In certain instances, it can save you a lot of money in taxes and penalties owed.
  • How do I file Form 5500-EZ?? You can print out this form and mail it to the IRS or file it online here.
  • How long does it take to file? Filing the Form 5500-EZ only takes around an hour, and it can be done completely online.

The IRS requires solo 401k account owners to file Form 5500-EZ each year their plan assets exceed $250,000.

The good news is, it's fairly simple to fill out, only takes about an hour each year, and you could do everything online - not bad considering all the perks and tax advantages the solo 401k gives you.

This guide will explain what the Form 5500-EZ is, important deadline dates, penalties for missed filings, and why you should consider filing one even if you might not be required to.

What is Form 5500-EZ?

Form 5500-EZ is an annual tax return specifically for solo 401k account holders who have over $250,000 in assets in their accounts.

Think of it as a yearly summary of your solo 401k account.

The IRS uses it to keep track of your assets and make sure that you're in compliance. The form asks for simple information like your contributions, rollovers, loans, and the value of the assets you have in your plan. It does not ask for the specifics of what assets you invested in.

Who needs to file a Form 5500-EZ?

You are required to file the return if:

  • Your solo 401k plan has over $250,000 in assets for the year.
  • You are closing your solo 401k account and rolling over or distributing all cash/assets out of it.

If your plan's assets do not exceed $250,000 for the year, and you're not officially closing your account, then you're not required to fill one out.

However, there are some strong reasons why it could be a good idea to file one anyways, regardless of your plan's value.

File anyways if your plan's assets are close to $250,000

You should file a Form 5500-EZ if your assets are almost $250,000, but not over it. For example, if your assets are valued at $245,000, it doesn't mean you're off the hook and you shouldn't file one.

The late-filing penalties are so ridiculously high for missed filings that you don't want to leave any room for errors.

File anyways if you used to file in the past

If you used to make annual Form 5500-EZ filings, you should continue to file one each year, even if your plan value drops below $250,000.

For example, let's pretend your plan's value was over $250,000 for the past several years. Unfortunately, due to market downturn this year, your assets have dropped to a value of just $180,000. Technically, you wouldn't be required to file Form 5500-EZ this year, but you should still file it anyways.

Why? Because it's a pain if the IRS comes asking why you didn't file this year. Obviously, you did nothing wrong and you have a legitimate reason. But it's still best to avoid situations where you're getting questioned by the IRS.

File anyways to keep an IRS approved log of your account activity

Remember that a solo 401k has no annual tax filing requirements other than the Form 5500-EZ. If your account assets don't exceed $250,000, you're not required to file anything.

However, it's still a good idea to send the Form 5500-EZ to the IRS each year to keep an approved record of your account activity and compliance.

You're telling the government, "Here's a summary of my account in good standing. And here are all of my contributions, loans, rollovers, and assets I hold."

Filing the form doesn't take much time, and there are no restrictions that say accounts with assets under $250,000 can't file one.

File anyways to start the statute of limitations

There are cases in the past where the IRS has disqualified a solo 401k plan for minor violations. For example, if you're unaware of any official rule changes to the solo 401k plan set by the government, you could be disqualified for not complying with the updated regulations.

It's a very rare event, but there can be huge unexpected tax consequences for plan disqualifications.

  • Participants of the plan could be required to pay taxes on the value of their vested benefits.
  • Any contributions and earnings after the disqualification are not tax-free.
  • Tax deductions made to the plan could also be reassessed.
  • Withdrawals from your account after the disqualification date are not eligible for rollovers into another retirement plan.

To reassess your taxes and disqualify your plan, the IRS has a 3 year statute of limitations. They will not assess income taxes for periods later than the limitations periods. Filing a Form 5500-EZ officially starts the 3 year statute of limitations.

While it's not always a get out of jail free card, it's yet another reason why it's a good idea to file Form 5500-EZ.

How is the $250,000 balance determined?

This is where it gets a little tricky.

The $250,000 is determined by ALL plan participants using EVERY solo 401k plan you have.

  • If you're the only plan participant and you only have one solo 401k account, you just need to check the balance at the end of your fiscal year.
  • If you have multiple solo 401k plans, the total balance of all accounts is taken into account.
  • If you and your spouse have two accounts in one solo 401k plan, then the total balance of both of your accounts is used.

How do I determine the value of assets like real estate or private equity?

You'll need to get a close estimation on their fair market value.

For real estate, you can use websites like Zillow. It may not be the most accurate compared to getting a proper appraisal on your property, but the form just needs a close estimation of their values.

For something like private equity, you would want to get a third party, like a general partner in the business, to give you a close estimation of their fair market value at the end of your fiscal year.

What if I took out a solo 401k loan?

If you took out a solo 401k loan, then the amount of the loan you took out would be considered as an asset and you would have to include it into your calculations.

For example, if your plan's balance was $220,000 at the end of the year, but you also took out a loan for $50,000, it would need to be added to your balance. As a result, your plan value would be $270,000 ($220,000 balance + $50,000 loan) and you would be required to fill out Form 5500-EZ that year.

When is the deadline to file a Form 5500-EZ?

The due date for filing your Form 5500-EZ is exactly 7 months after the end of your company's fiscal year.

It can be different depending on if you're incorporated or not.

  • If you're not incorporated and you use the calendar year as your fiscal year, your due date would be July 31, the following year. For example, the Form 5500-EZ for 2022 would be due on July 31, 2023.
  • If you're incorporated and you have your own fiscal year, then you would need to file Form 5500-EZ 7 months after the end of your fiscal year. For example, if your fiscal year ends on May 1, you would have until December 1 to file your Form 5500-EZ.

Can I get an extension?

Yes. You're allowed to request an extension of up to 2½ months by filing Form 5558 with the IRS.

You must request the extension early enough to give the IRS time to make a decision, and to file your Form 5500-EZ on the normal due date, if they reject it.

Penalties for late filings

The IRS charges extremely steep penalties for late or missed filings of the Form 5500-EZ. The late fee is $250 for every day past the due date, capped at $150,000.

This is not a typo.

$250 per day is $91,250 per year. It can literally deplete your entire retirement account if you're not careful.

Fortunately, you can request for penalty relief. It'll cost you $500 to submit the application, but it can be a saving grace if you're several weeks, or months, late.

The other option would be to file for penalty relief due to a reasonable cause. You get to save your $500 application fee, but it's a lot stricter in who gets approved. And if you get rejected, it automatically forfeits you from applying for the regular penalty relief program.

Some example of valid reasons are fires, natural disasters, death, system issues, or any legitimate reason that prevented you from obtaining your records on time.

Forgetting about it, filing mistakes, or lack of funds are not considered as reasonable causes. Even if your accountant was the one who made the error, you'll have to pay for their mistake.

How do I file Form 5500-EZ?

You have two options. You can either print the form, fill it out, and mail it the IRS.

Mailing address:

Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0020

Or, you can submit it electronically. The IRS introduced an online filing gateway called EFAST2 on January 1, 2021 to make filing the Form 5500-EZ faster and easier.

Unless you love snail mail, you should just go to the website and file it online.

Alternatively, you can ask your plan provider for help with it.

Wrapping Up

Solo 401k account holders with more than $250,000 in assets are required to file Form 5500-EZ each year. It's due 7 months after your fiscal year ends, and the penalties are extremely steep for missing the deadline.

Plan holders with less than $250,000 in their accounts are not required to file. However, there are several strong reasons why it's a good idea to file one anyways. It only takes about an hour of time each year, gives you an overview of your solo 401k account, ensures your activities are in compliance, and, in some instances, can save you a considerable amount in taxes owed.

The Ocho Solo 401k Plan makes setting up a solo 401k simple, with managed Form 5500-EZ tax filings, compliance monitoring, and zero fees on your assets under management. Learn more here.

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