The owner and sole participant/employee of a profit sharing plan that has been filing 5500-EZs every year recently got divorced and now his ex-wife is an alternate payee with a segregated account balance in the plan.

A colleague tells me that the plan can still file an EZ. I'm thinking that since the alternate payee is afforded the status of a beneficiary (e.g., getting copies of SPDs, SARs, a certificate showing her balance) a 5500 should be filed until the year after she is paid out. Who is correct?

Two points that may help confuse the issue further:

1) The instructions for Form 5500-EZ indicate in part that you can only file this form if "[t]he plan does not provide benefits for anyone except you,
or you and your spouse, or one or more partners and their
spouses."

2) The instructions for Form 5500 indicate in part that "'alternate payees' entitled to benefits under a qualified domestic relations order are not to be counted as participants for [lines 6 and 7]".

I think (2) is the correct reference.

I would take the position that they must file the 5500. As WDIK pointed out, the instructions for the EZ indicate that you can only use the EZ if the plan does not provide benefits for anyone except the owner, or the owner and their spouse. In this case, the plan provides benefits to the owner and their ex-spouse, so I interpret that to mean they cannot file the EZ.

Now we move to the 5500 instructions, which specifically state that for purposes of the participant counts (i.e. lines 6 & 7), you do not count alternate payees. All that means is that you file the 5500 showing 1 participant in the plan.