Statute of limitations if plan assets < $100k

[Guest helpmewithtaxes]

It is well known that the 3-year statute of limitations starts when form 5500 or schedule P is files, and never starts when it is not filed.

However, what if there is no requirement to file as assets are <$100k?

When is the start date, what is the statute of limitations, if any?

I can't believe it would never start, as then it would be extremely (unnecessarily) risky to follow the advise not to file if assets <$100k?

Thanks for your insights.

[Guest mjb]

I dont understand why a taxpayer would want to file a 5500 for s/l purposes if 5500 is not required. Please explain.

[Appleby]

However, what if there is no requirement to file as assets are <$100k?

Just an FYI that the threshold has been increased to $250,000 under PPA

[Guest helpmewithtaxes]

I thought I explained the possible reason in my post: There are numerous possible reasons and issues why a qualified plan can be attacked, nullified, etc. (which fill up this forum!). Timing of contributions; formal mistakes; ... You never know if there is a rule that you were not aware of. Thus it would be desirable to have a statute of limitations get running rather than leave the plan open for attack forever. From what I understand, that is accomplished by filing a 5500 and/or schedule P (for earlier years). My question was if this also has to be done to get the statute of limitation to start, if there is no filing requirement when assets are under $100k/$250k.

I hope my question is clear?

Thanks!

I dont understand why a taxpayer would want to file a 5500 for s/l purposes if 5500 is not required. Please explain.

[Guest mjb]

You didnot provide an explaination in your post. Filing a 5500-ez form will not make operational problems go away by S/l. The s/l only applies to information filed on the 5500-ez, not a failure to operate the plan in accordance with the IRC or adopt amendments. Failure to make contributions on time is subject to penalites in the IRC and the deduction is claimed on the owner's 1040 which has a separate s/l. Schedule P filing was discontinued last year. If plan assets are less than 100k the IRS will not accept a 5500-ez filing.

[WDIK]

If plan assets are less than 100k the IRS will not accept a 5500-ez filing.

This statement was surprising to me. Are you sure? Are such filings just not processed, shredded, or what?

[Guest mjb]

The IRS returns the 5500-ez with a letter stating that it cannot accept the filing until plan assets exceed 100k. The basis is statutory. Under authority in Reg 301.6058-1©(5) IRS exempts plans with no more than 100k from filing annual report. PPA directs IRS to exempt one participant plans with no more than 250k from 5500 reporting

[Guest CharlieLaur]

We have on occasion filed the Form 5500-EZ for a defined benefit plan with less than $100,000 in assets.

On one or two occasions, we have received a letter from the IRS noting that the filing may not be required due to the amount of the assets but they have never returned the filing.

We have a plan that currently has less than $100,000 in assets but in a prior year had more than $100,000 in assets and is, therefore, required to file the 5500-EZ. Unless they track the past history of this plan, the IRS would not know if the filing was required or not.

[WDIK]

I have never had such a filing returned.

[Guest mjb]

I know of several 5500-ezs that were returned for failure to initially list 100k in assets. However, once a plan has 100k in assets it is required to file 5500-ez in subsequent yrs even if the assets are <100k. Also DB plan must file 5500 if it covers non owners and spouses regardless of assets. Will you please explain the benefits of filing a return for which no filing is required, other than that the s/l may expire for the information listed on the return. Are you planning on listing a PT on the 5500-ez?

[WDIK]

Will you please explain the benefits of filing a return for which no filing is required, other than that the s/l may expire for the information listed on the return.

In the situations I am familiar with, the filings were not made because of any particular benefit that might have been reaped. Several years ago, some felt there was ambiguity (which has more recently been clarified) about the necessity to file a Schedule B, even if plan assets were below the threshhold. The parties involved took the conservative approach of filing because of that uncertainty.

[Guest mjb]

I wasn't aware that there was any ambiguity since the IRS explicity exempted plans if the assets did not exceed 100k. The only rationale for filing a 5500-ez was to start the s/l for UBIT taxes due if a sked p was included. No ubit, no need to file 5500.

[Belgarath]

I don't think that was the real reason for filing. (Mind you, we never recommended that EZ eligible clients file when it wasn't required.) But the REAL reason that some practitioners advised filing in this circumstance is that by filing a Schedule P, a 3-year S/L applies to the income on an exempt trust. This would be all trust income, not just UBTI. If the IRS were to disqualify a plan retroactively, the 3 year S/L could be a big deal.

Since the IRS had, in Announcement 80-45, stated that a Schedule P could only be filed as an attachment to a 5500 form, some practitioners had their clients file a 5500EZ even when not required just to add an extra layer of protection in the event of plan disqualification.

[WDIK]

I wasn't aware that there was any ambiguity

The 1996 instructions for the Schedule B added the following phrase:

"The Schedule B does not have to be filed if Form 5500-EZ is not required to be filed (in accordance with the instructions for Form 5500-EZ);"

Since such phrasing did not exist in the 1995 instructions, I would propose that there was some reason the IRS felt it important to clarify this matter.

[Guest helpmewithtaxes]

But the REAL reason that some practitioners advised filing in this circumstance is that by filing a Schedule P, a 3-year S/L applies to the income on an exempt trust. This would be all trust income, not just UBTI. If the IRS were to disqualify a plan retroactively, the 3 year S/L could be a big deal.

So it would be useful to file, to protect the interest and realized capital gains incurred in the year, in case of later retroactive disqualification?

Also, is there any statue of limitations for operational problems (e.g. amount of contribution, timing of contributions)? In the case I have in mind it's a 1-person plan from Fidelity with a "canned" document which I assume has no problems as Fidelity presumably had good lawyers if the plan be used by 1000's of self-employed; and I'm not aware of any failures, but could it be that...

The IRS comes along in 2027, determines that contributions in 2007 were made too early (like before salary was paid or work perfomed)/too late (just as example), or something was not in accordance with the +-30page fineprint plan document, disqualifies plan or the contributions in question, penalties, back taxes, 6-8% interest p.a., could easily be a multiple of plan assets. Would kinda defeat the purpose of a retirement plan.

Is there any risk limitation in case you overlooked a regulation?

[Belgarath]

I contacted one of the authors of IRS Notice 2007-63, and asked this question. The individual was not sure of the answer, and is going to check and get back to me - was also quite honest in acknowledging that this issue has been floating around for a long time, and that they (IRS) may not have an answer.

I'll report back on whatever I hear.

[Guest mjb]

Isnt this covered by the general s/l under the tax law which prevent collection of taxes more than 3 yrs after income is paid or made available (6 yrs when the amount of income omitted from a tax return exceeds 25% of AGI). Under the constructive receipt rules if a disqualfiying event occurs in 2007 the s/l for collection of taxes for taxable income would expire in 2013 (assuming the plan sponsor and participants file a tax return). Also a plan can requalify for a subsequent yr after disqualfication occurs by correcting the defect. Why anyone would keep records of the date contributions were made for 20 yrs is beyond me since ERISA requires plan administrators to keep participant records for a maximum of 6 yrs. The bigger problem is that the plan sponsor must keep records of each document and all determination letters indefinitely to prove qualified status.