Need to file an initial extension for a plan with a participating employer (husband/wife) - couple questions

Husband and wife each have their own wholly owned business and they are the only employees of their respective companies - Company A and Company B. The retirement plan is setup under Company A.

Her company (Company B) is a participating employer in his retirement plan. I have not come across this situation yet so I had a couple of questions. Together their 401k balances exceeded $250k for 2021 (Company A $160k, Company B $140k), but they did not file a return or extension for 2021. Fast forward to 2022 and they are still above $250k so I would like to file an extension to help prevent an additional $500 late filer penalty for 2022.

Before I proceed I had a couple of questions.

1) I assume both of their retirement values is used in determining if they meet the filing threshold. Is this correct?

2) If the wife's company is a participating employer can we still file Form 5500-EZ since all they have are retirement assets? I noticed 5500-SF has a box to indicate a mulitple-employer plan. Not sure if that applies here.

3) Do any special schedules or attachments need to be included in a situation like this?

4) We are not ready to file the 2021 Form 5500. Will filing an extension for 2022 potentially tip off the IRS/DOL that 2021 was not filed and lead to severe penalties? We would like to pursue late filer relief for 2021 and file 2021/2022 ASAP once the extension is mailed in.

Thank you

Here is my take, assuming the husband and wife companies A & B are a control group:

1) Yes, it's plan assets from all plans of the employer/control group.

2) Plan covers only owners and spouses, so yes, EZ still appropriate for now. In 2024, under new rules they may no longer be a control group and I do not think you can file an EZ for a multiple employer plan, which you would then have.

3) No other schedules or attachments.

4) Filing and extension should not trigger anything because the extension would be the first filing of any kind for the plan, so neither IRS nor DOL would have any knowledge of the plan's prior existence or when its assets exceeded $250,000. So I would file the extension, then get 2021 filed under EZ delinquent filing program and then filed 2022 extended return.

Note, if the companies are not a control group - not in community property state, no minor children, no involvement in the other's business - then you have a multiple employer plan and all bets are off and you likely have many more delinquent returns (SFs) to address.

Come 12/31/2023, you may want to spin off B into its own separate plan if/when the control group goes away. That way each has their own $250,000 threshold and EZ filing requirement. Assuming you can show less than $250,000 as an ending balance for A at 12/31/2023 and 12/31/2024 it shouldn't trigger a letter for a delinquent 2024 filing.

In addition to everything CuseFan said - which I wholeheartedly agree with - my opinion is that the mere fact that they adopted a plan together shows some coordination between their businesses and likely invalidates the spousal attribution exemption. So you probably have a controlled group on that alone.

I don't know if this is a "red flag" per se, but it would look suspicious to me to see a plan filing its first 5500-EZ and showing an opening balance greater than $250,000. I would try to get the delinquent filing submitted before the 2022 5500-EZ is filed.

20 hours ago, aaronb26 said:

Together their 401k balances exceeded $250k for 2021 (Company A $160k, Company B $140k), but they did not file a return or extension for 2021.

I agree with prior responses. I know it isn't likely, but if those assets included accrued contributions, and the balances were under $250K without the accruals, then a return was not required since you may file on a cash basis.

Piping in on the comment regarding Delinquent Filer Program . . .

EZ filers have a separate program for failure to file called the "Penalty Relief Program."  It's slightly less costly, but slightly more a pain in the neck because it's a paper filing.  See Form 5500-EZ, Delinquent Filing Penalty Relief Frequently Asked Questions | Internal Revenue Service (irs.gov)