Delinquent for ten years in filing 5500sf

[sadiegirl]

 Our advisor at Edward Jones really has no idea what she's doing and the advice she has given is so far off base. In 2007 she opened up a owner 401k plan for us. At that time our only employee did not want to participate in it. In fact he signed a paper declining too. My husband and myself each contributed $15,500. That was our only contribution until she rolled over this account into a Safe Harbor on December 28, 2015. Now our employee wanted to participate, so he and my husband did and I did not for 2016. 

We found out from Edward Jones that they could not offer the plan and we would need a tpa and find another place to have our Safe Harbor. After talking with a tpa I learned that we needed to have been filing back 5500sf for all those years dating back to 2007. Of course, Edward Jones totally denies this.

Going forward, does Edward Jones have any accountability for not knowing the law and putting us in this predicament?
Could they be responsible for the late fees?

When I talked to the tpa and her advice for us was to not file anything for 2016. Is that even possible? She is also giving us false information by thinking we can still open a simple ira and roll it over for this year and pretend it never happened.  We have never received anything from the IRS because we have never filed anything before. Her advice was to not file any 5500 form and open up a simple IRA. Now I know that this is not possible until Jan. 2018. Can you not file anything for this year?

Do you believe it's in our best interest to file a 5500ez even tho we don't qualify for it? I think it would accomplish terminating the safe harbor once and for all and allowing us to move forward. But on the other hand It is flat out lying. Being put in this situation is very difficult and I have no idea how to proceed.

I appreciate you feedback and thank you,

[Mike Preston]

Perhaps somebody on this bulletin board will reach out to you privately and offer a solution.  Publicly I'd be surprised if anybody suggests anything other than you need to file back to as far as 2007.  It may not require quite that many filings, however, because it is unclear from the facts that you recited that you needed to file a 5500-SF for all years.  Whoever you engage should get the relevant information regarding your employee (date of birth, date of hire, hours worked in each calendar year, compensation information [probably a copy of the W-2 would suffice]) and carefully comb through the plan documents that you signed and their related master documents to see whether you were exempt from filing for one or more years.  You may be pleasantly surprised.

Again, regarding your questions as to any liability that Edward Jones or your advisor have in this circumstance I doubt that anybody can give you that information based on what you have recited and, even if they could, they wouldn't do so publicly.  

The advice you are getting from the tpa is probably rooted in the fact that the correction (filing 9 years of past Forms 5500 (sf or ez)) is prohibitively expensive when viewed in the light of how much money you have in this plan.  Unfortunately, the IRS doesn't take that information into account in determining late filing penalties, which can also be prohibitively expensive.

Hopefully, you have the records to allow a tpa to definitively analyze what you can and should do at this point. At the least, copies of annual account statements for all years going back to 2007 and source documents to determine contribution amounts for years where those might have been required for your employee that you are unaware of.

Good luck.

[BG5150]

The "penalty" for filing late wouldn't be that severe.  $1,500 to file all those years under the DOL Delinquent Filer program.  What the TPA would charge to prepare all those forms, I'm not sure.

Like Mike said, depending on the employee's status, a 5500 might not be needed at all for some years.

Suggesting to open up a Simple IRA and "pretend" the previous nine years never happened, in my opinion, is a violation of professional ethics.

Another concern is that the owners were making deferrals, while an eligible non-highly compensated employee was not (declining to make deferrals does not remove participant status from the employee).  In the non-Safe Harbor years, there is an ADP test failure and some, if not all of the deferrals (plus earnings) need to be refunded, and/or contributions need to be made tot he employee's account.

I would not file anything until you are satisfied the advice you are given is correct.

 

[CuseFan]

That's the bigger issue - failing ADP testing every year. The plan would never have qualified for EZ filings. Filing a false EZ return now under penalty of perjury is not recommended and likely why the TPA says not to file. Terminating and rolling to an IRA and pretending like the plan never existed carries its own risks as well - how do you demonstrate to the IRA custodian that the rollover comes from a qualified plan? How do you as plan administrator certify that when you know the truth? Anything you do that is not a "legal fix" will keep you awake at night for at least the next three years while the tax return audit statute of limitations to run out.

I would contact an ERISA attorney, have your service agreements with EJ all reviewed to see if they were in breach of contract and explore malpractice. IRS and DOL correction programs can help chart the required fixes - which in addition to filing all past returns, includes either making corrective QNEC contributions for your employee for all those prior years and/or distributing your excess contributions and interest thereon. You can even have the IRS approached anonymously on behalf of your plan with a proposed solution before committing. Not doing the correct fix and then getting caught will be far more painful than fixing it right.

Good luck

[Mike Preston]

BG, what you referred to as a "penalty" I talked about in terms of "correction". If I understand what the OP wrote, the plan has recieved about $30,000 in contributions circa 2007 and some unspecified amounts for 2016, with nothing in between.

The most agressive position I would expect to see from a reputable service provider would be to suggest that the Plan Sponsor treat the plan as owner-only from 2007 through 2015 because that *is* the way it was administered.  It is most certainly a chicken-egg scenario, at the least. This combined with an EPCRS filing might just do the trick.

[BG5150]

Well, they said their only employee declined to participate in 2007.  So unless that EE was statutorily excludable, they did not have an owner only plan.  Then in 2016, the EE wanted to participate.

I missed the part about the first year being the only contribution.  But, still, if that EE was indeed eligible that first year, there was an ADP failure.  (So either a QNEC to participant or (pretty much) full refund PLUS that amount in a QNEC to the EE.  I'd probably choose the former.)

Would this plan be a candidate for "let's just disqualify this plan right now"?  What would be the consequences other than paying taxes on the deferrals in 2007?  Would that be cheaper than trying to fix the plan?

[BG5150]

I think a very important question is:  was that employee eligible for the plan in 2007?  If not, then when (if ever)?  That answers 5500-SF/5500-EZ question.