deliquent 5500 filing: DFVCP or not?

[Guest cbev]

I'm a partner in a small s-corp (4 ee), and we terminated a 401K plan in 2004. Unfortunately, our plan management firm didn't make clear to us (or we just missed it) that if someone covered in the plan kept funds in their account, we would need to file a 5500 for each year funds remained. We just learned of this requirement thanks to a "Request for Information About Your Form 5500" letter from the IRS, requesting a reason and/or filing of our 2004 5500. We're also, then, deliquent in filing the 2005 5500.

Here's my question, which I can't seem to get an answer on from the few CPA's we've contacted. The lack of 04/05 filings was due our misunderstanding of what "terminated plan" meant and our total lack of experience in retirement plans, so it was completely benign and unintended. If we state this in a letter accompanying our response, can we expect leniency from the IRS and DOL? Or, are we better off just filing using the protection of DFVCP and just swallowing the $1,500 max penalty that triggers? And if we use DFVCP, can we be reasonably assured that the IRS won't pursue additional penalties?

Input from anyone who's had a similar experience would be hugely appreciated.

[WDIK]

As you continue your "risk analysis" you may want to consider some of these prior discussions.

http://benefitslink.com/boards/index.php?showtopic=22218

http://benefitslink.com/boards/index.php?showtopic=21707

And if we use DFVCP, can we be reasonably assured that the IRS won't pursue additional penalties?

If the DFVCP is correctly used, there will be no additional penalties.