2021 EZ filed but no SB done

[Jakyasar]

Hi

Looking at a potential takeover for 2022.

Although 5500EZ was filed for 2021, no valuation was done and no SB signed. Forget the AFTAP for a sec.

Looks like some contribution was made, not sure if satisfies MRC.

As I have never seen this before, what are corrective steps to be taken? If anyone has experience with this and can share it, would appreciate it.

Thank you

[Paul I]

Ultimately the filing needs to be completed correctly.  The pathways to get there could be submitting an amended filing (hopefully) or submitting a late filing after taking corrective actions.  Technically an incomplete filing could be rejected and plan considered not to have filed, so you would want to determine if a good-faith effort was made to file a complete and accurate form.

If this is not a new plan, I suggest asking for copies of the last 2-3 years' filing and actuarial reports.  Review them to see if the filings are completed correctly, and see if there is anything in the actuary's report that signals funding, timing of funding or other issues.

Since this is a prospective client, you do not want to help fix problems due to a prior service provider without being fairly compensated for your services.  If it seems the prospect is the cause of the problems (no census or bad census, ignoring funding instructions, being unresponsive...), respectfully decline the engagement.  Some relationships are just not worth the time and frustration.

[Calavera]

For 5500EZ, SB is not attached but should be provided to the client. Does "no SB signed" mean client doesn't have it, or does it mean the prior actuary never did it?

[Lou S.]

If you take on the client outline the scope of your work and let them know what some of the pitfalls may be and estimated costs.

When is the last good valuation and Schedule B?

From there you can probably map out a strategy for the client.

Assuming 2020 was "good" you'll need to match that valuation and work forward.

You may find that the 2021 contribution is more than the MRC and less than the max deductible when you do the 2021 valuation. That would probably be your best case scenario.

But you may find they did not meet the MRC in 2021 or they contributed more than the max deductible for 2021 in which case you have a different set of problems for the client to correct.

 

[truphao]

I would recommend stepping back and understand why this is a takeover situation in a first place.   If it is a client who is uncapable of following directions, walk away.   If it is a client who needs a lot of handholding (aka babysitting), charge the premium price.  If it is a prior vendor issue, have an open candid conversation with the client to get him to understand that the takeover issues will be billed separately as OOS work.

Whatever time you think you are going to pend multiply by at least 150%.

[Jakyasar]

Thank you for all your comments.

SB was not done/signed i.e. never provided to the client. Not sure what happened. Still waiting to hear.

My question is basically is this a self-correctable issue without any penalties i.e. the val/SB is done now and signed by the actuary now. Any late filing related penalties?

Thanks

[truphao]

Just rambling....

1) Reproduce and match 2020 results

2) Do 2021 val and prove that the actual contribution made is good i.e. between min and max

3) Add a robust indemnification language to your engagement agreement with respect to 2021 plan year.  Communicate clearly the process, result for 2021 and not being responsible for post-factum valuation.

4) Charge for the all above

5) Proceed forward to 2022.

Not sure it feels entirely comfortable but might be OK based on no harm-no fault approach?

 

[Paul I]

Under the circumstances, you cannot assure the plan sponsor that this is self-correctable without any penalties. Just above signature line on the paper version of the form, it reads:

"Caution: A penalty for the late or incomplete filing of this return will be assessed unless reasonable cause is established.
Under penalties of perjury, I declare that I have examined this return including, if applicable, any related Schedule MB (Form 5500) or Schedule SB (Form 5500)
signed by an enrolled actuary, and, to the best of my knowledge and belief, it is true, correct, and complete."

Point out to the plan sponsor that no one else can relieve them of the liability should the IRS determine that the filing is incomplete, and let them know the penalties are exceptionally punitive ($250 per day up to $150,000 per plan year).  If the issue looks to extend to years earlier than the 2021 filing, then the more years involved, the worse the situation can be if it is not addressed now.

If the issue is limited to just the 2021 year, then the $500 late filing fee is pocket change compared to the daily penalty that could be assessed.  The plan sponsor can decide if they want to avoid the exposure by using the late filing program.  One would think they would consider it is like buying insurance, but it is their call.  The additional downside for the plan sponsor is, if caught, they will have a difficult time claiming reasonable cause.

If the issue goes back further in time, then there is a much, much bigger issue that the plan sponsor needs to address. 

If you wish to assist them, then keep in mind that corrections often take more time than recurring work, the fees for the correction are not-recurring, and the time commitment can disrupt the delivery of services to other clients.

[Bird]

I don't get it, there is no error in the filing itself; what is to be corrected? Are you all saying that an amended, but exact same EZ should be filed, to somehow correct the fact that the SB wasn't on hand at the time?

There are red flags and questions to be answered here, like who prepared the EZ but didn't know or care enough to provide a full val report and SB? I would ask and have those questions answered before jumping to conclusions and talking about corrections. Some things can't be corrected and then you have a business decision to make about whether to take on the client, with a full and clear explanation of the problems inherent with the 2021 val that may come back to bite later.

[truphao]

This is exactly my point - there is nothing to correct here since the SB is not filed with 5500-EZ (assuming the actual contribution is between MIN and MAX).  Therefore I am thinking the proper documentation of the process and indemnification by the client might do.

[Jakyasar]

Ok, a bit of confusion with what I am trying ask and getting a bit out of context. I am aware of all the walk away, it is client's responsibility stuff etc etc etc.

Simply, if 2021 SB was not done/signed and will be done today, other than signing it and putting in the file, anything else needs to be done with the IRS so that when/if an audit happens, there are no issues?

Hope this is clear now.

Thanks

[truphao]

I do not believe so.

[Lou S.]

Well what some folks are saying is that if the IRS Audits the Plan they "might" disallow the original filing since the client does not have a timely signed SB that goes with the original filing.

As I see it if you do take the engagement there are 3 possible ways to proceed (assuming everything checks out at the contribution is in the right range).

1. Sign SB, put in the file. Be done with it. Argue with the IRS IF they challenge that position.

2. File and amended 5500 that has no change but is signed by the client after the date you sign the SB.

3. File using the IRS late filer program on the theory that the original was not a complete filing.

How you proceed and what level of risk both you and the client are willing to accept will determine which path you chose.

 

[Jakyasar]

Thank you Lou but none of the options answer my question on a theoretical level.

I want to tell the client, there is a problem and you need correct it with the IRS with an approval from them.

I am not leaving anything to chance if they want me to take over. I will only take it if corrected properly and safely with no issues.

I guess no one had this issue before, hmmmmmm

 

[Lou S.]

I'm not sure if you'll get consensus on the item. I would say the most conservative is to file on the late filer program with a new 5500-EZ but as others have noted the only change on the filing you have is a new date on the signature line. 

I think it will come down to if you believe there never was an original SB or the client just can't find it. I'm assuming you've contracted the prior actuary?

[Jakyasar]

Late filer is not the solution, IMHO. some may say, Sb not signed is as good as not filed, I heard of that one.

There never was a prior SB.

Contacting prior actuary not an option, let's leave it at that.

Thanks anyway for your time. Cannot believe there is no corrective measures for this. Will continue with the search.

[truphao]

would you, please, post what you find and/or the resolution?  It is a good one.

[Lou S.]

You can always recommend they consult qualified ERISA counsel.

[Jakyasar]

I always do.

If I find/resolve anything, will post.

[thepensionmaven]

Pardon my asking, but why is this considered a late return if the SB is not required to be filed; with the suggestion here to file an amended return?

[Jakyasar]

One option I got is that better to file with the $500 late filing fee as the most conservative approach. This was by an ERISA attorney.

There is no right/wrong way of doing this as no corrective measures are provided, ay least none that I could fine.

I am not sure if I agree with thepensionmaven as not signing the SB timely possibly considered a late filing, IMHO. It is not an amendment in any form, again, IMHO.

I simply did not deal with this particular client so anything from this point is a discussion in theory.

[thepensionmaven]

I was saying that the fact an SB was not attached (not even questioning at this pint, whether one was prepared or not), why would an "amended return" be necessary, when the SB is not required to be attached initially?

[Jakyasar]

SB was not prepared/signed and I am not talking about amended return, just late filers.

Thank you

[david rigby]

Is it possible this client is "in play" (ie, a takeover for you) because the plan sponsor is not good at paying the actuary's invoices?

[Jakyasar]

I would not know about the invoices but I have been told that the client did not want the 2021 work done but now desperate for 2022 deduction.