Delinquent 403(b) 5500s

[Guest jim williams]

We have a NFP client who hasn't filed Form 5500 for the past 5 years for its 403(B) plan which is subject to Title I of ERISA. The DOL recommends filing under the DFVC program which charges $2000 per return. Instead of costing the client $10,000 up front, wouldn't we be better to file the returns with Form 4571 (Explanation for filing late return) and wait to see if the DOL & IRS assess penalties? Since 403(B) returns require only limited reporting, what are the chances penalties will actually be imposed?

[jpod]

I have three comments.

First, there is also exposure to a penalty under the Internal Revenue Code which the IRS can assess, independent of the DOL/ERISA penalty. Paying the DFVCP sanction won't get you out of the IRS penalty, technically.

Second, I believe the exposure to significant IRS and DOL penalties, if any, is much less if the plan is a "first time filer;" another words, no 5500s were ever filed, and the obligation to do so was just discovered, as opposed to a plan that had been filing and then dropped the ball for a few years.

Finally, whether it's a first time filing situation or not, one cannot be certain that the IRS and/or DOL will or will not impose penalties and in what amount if the plan does not take advantage of DFVCP.

[Carol V. Calhoun]

You may want to contact both the DOL and the IRS in advance of filing, without identifying your client, and see whether you can work out an arrangement with them. In the old days, the agencies used to be pretty lenient with people who did this, figuring it was best to encourage them to file late than to have them to concerned about penalties to file at all. It's not clear whether now that DOL has the DFVCP program, it will simply expect everyone to use it. But your client does not lose anything by having you explore this on a no-names basis. And having some idea of how the agencies are likely to react may help your client to assess its options.

[Guest Tom Geer]

The DOL and IRS penalties can both be abated for reasonable cause. This should include the "kindness of strangers" defense of reliance on advisers. Somebody needs to look at the fact pattern to determine if the penalties can be avoided before you throw in the towel.