Single Participant (Sole Prop) Plan, about 10 years of "missed" 5500-EZ's and failure to amend for GUST

[Guest CSTS]

We were approached by an investment company to assist a client of theirs that failed to amend for GUST. In addition, we've learned that they have never filed a Form 5500-EZ with assets near $1M currently.

We considered VCP for the document correction. Any ideas on the settlement costs with the IRS? Are they reasonable, considering it's an owner-only plan.

Trying to correct the failure to file 5500-EZ's is problematic. The DFVC program does not apply to the Sole Prop because he's not covered by Title I of ERISA. Considering that the DFVC program has a cap of $750 per year, it would be nice to know our correction wouldn't be more expensive than that. Any suggestions on how we might correct this process and minimize the Sole Prop's exposure with both the DOL and IRS?

[WDIK]

A couple of good prior discussions:

http://benefitslink.com/boards/index.php?showtopic=17954

http://benefitslink.com/boards/index.php?showtopic=23926

[Guest CSTS]

Thank you for those references, that's exactly what I needed.

[Guest RobO]

Just a hypothetical question regarding the DFVC program as it relates to scenarios like the one presented here....If the individual in question was a sole prop for, say, eight of the years that filing was missed, and then hired employees for the last two (thus making him subject to Title I)--would he be able to take advantage of the program for all 10 years that were missed? Or, would he have to address the first 8 years with the IRS? Likewise, what would happen if he was covered under ERISA during earlier years, but then "downsized" to a sole prop for the last few?

I don't deal too much with correcting plan defects (other than recognizing when someone should get themself some qualified counsel), so I apologize if my question is overly simplistic!

[Belgarath]

I think it's a very good question. Probably because I am actually waiting for a call back from someone at the DOL on this very same question! When (or if) I receive an answer, I'll post it here.

Personally, I am expecting a negative response. And even if someone says, "Yes, you can do this" it doesn't necessarily mean that if you file on this basis it will be accepted. They might just say "oops - someone gave you a wrong answer."

But if allowable, it would be well worthwhile to amend the plan to immediate eligibility, hire a part time person and contribute a few bucks for them, then file under DFVC. I just don't think it'll be allowed for those years that there were no employees.

I did note that if you have several years of delinquent forms, with only 1 year as a large plan, that you must pay penalties under DFVC as a large plan for ALL years. While that has nothing to do with the question at hand, it does indicate to me that there's perhaps an inclination to hit you with the worst while still remaining within the DFVC parameters. If so, seems even more likely that they wouldn't allow the proposed solution. But I'm making a pretty tenuous connection! Anyway, we'll see what they say.

[Belgarath]

Ok, here's what the DOL said. And by the way, this was from their Washington office - the local district office bumped my question up to them. Very pleasant lady, who sounded like she knew what she was talking about.

For illustration, assume 4 years where an EZ should have been filed, and 2 years for a "regular" 5500.

The DOL said you could not file all 6 under DFVC - only the 2 years of "regular." No surprise to that.

However, I further inquired as to what would happen if he filed all 6 years using a "regular" 5500 form, instead of filing an EZ, even though he is eligible to file an EZ. She said that the DOL WOULD accept a DFVC filing for all 6 years in this situation.

Now, that makes no sense to me, but that's what she said. She also said that this might only work if the employer had NEVER filed an EZ, because it would cause "confusion" with the EFAST system.

So there's what I was told - take it for what it is worth!

[WDIK]

that makes no sense to me

Ditto.

[Belgarath]

On the other hand, as I think about it a bit more - given that you have to file regardless of whether under DFVC or not, are you any worse off by attempting this approach? I mean, if they accept it, great. If they don't, you have to give them the usual sob story and hope for the best - at least you've demonstrated an attempt at compliance. Is there a potential downside that I'm overlooking?

[Guest RobO]

Thanks for the insight, Belgarath. I'm surprised that the DOL got back to you so quickly; not at all surprised that the EFAST system would become "confused".

Regarding her reply that "the DOL WOULD accept a DFVC filing for all 6 years in this situation" (if a 5500 was filed even if the individual was eligible to use the EZ), I have my doubts.....I was looking through the EBSA DFVC page, and it states that Form 5500 filers for plans without employees (as described in 29 CFR 2510.3-3(b) and ©) are not eligible to participate in the DFVC Program because such plans are not subject to Title I. Seems a bit inconsistant with her answer, but I guess that supports your opinion that its worth a shot to attempt the approach--You always have the chance that it would be reviewed by someone that would let it fly!

[SoCalActuary]

We have had a few instances like yours, although ours were caught sooner and with lower dollar amounts.

Since no filings were done, you will need to complete all past trust accounting reconciliations since the 100k asset threshhold. You can also expect the IRS to deny the claim vigorously. With $1m in assets, you probably won't get the sympathy you will get from a smaller plan.

Expect to spend some time corresponding with the IRS, who also may pretend they never got your appeal letters and go directly to collection.

If the client does not even open the can of worms with the IRS, rolled the account into an IRA, and closed the plan, would the DOL or IRS even know? The gov't might not ever find out, but I dislike this thought process of ignoring scofflaws.