How Does a 401(k) Work?

Nearly every company offering a retirement benefit plan must fill out Form 5500 by the last day of the seventh month following the end of the plan year – unless an extension or exemption is granted. Plans that may qualify for a Form 5500 exemption (but are not guaranteed to do so) include:

  • Solo 401(k)s
  • Tax-Sheltered Plans
  • Unfunded Plans
  • Welfare Plans
  • Top Hat Plans

Form 5500 was jointly developed by the Department of Labor, the IRS, and the Pension Benefit Guaranty Corporation to satisfy annual reporting requirements under the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA).

Who is exempt from filing Form 5500?

Plans not covered by ERISA are exempt from filing Form 5500, which may include:

A Solo 401(k) or “Business Owner Only” Plan

Retirement plans covering only a business owner (and, potentially, a spouse) are usually exempt from filing Form 5500. However, if there are eligible employees improperly excluded from the plan, then the form must be filed. If the assets of the one-participant plan go above or below $250,000 from one year to the next, or if other employees are added on, the exemption may not apply.

Section 403b Tax-Sheltered Annuities

Not all 403b plans are exempt, but yours may be if you are naturally exempt from ERISA and have limited employer involvement. Churches and government institutions frequently sponsor retirement plans that are exempt from Form 5500 filing requirements.

Small – Unfunded Welfare Plans

ERISA welfare plans with less than 100 participants at the start of the year can be exempt from Form 5500 if they are fully insured or “unfunded” — meaning paid from the general account. Even large plans can qualify for exemption if they are unfunded. However, if the cost of the plan is deducted from a trust where participant contributions are separated from general assets, the exemption won’t be granted. Plans subject to Form M-1 filing requirements under Multiple Employer Welfare Arrangements will need to file as well.

Top Hat Plans / Specified Benefit Plans

Tax-exempt employers sponsoring deferred compensation plans under Code Section 457 may meet Form 5500 exemption requirements. Daycare centers, apprenticeship and training programs, union plans, and plans for a select group of elite management or Highly Compensated Employees can be exempt when there are only certain specified benefits, even if the plan has a large number of participants.

What are the penalties for failing to file Form 5500?

Failure to comply with ERISA filing requirements and file on-time can result in:

  • An IRS penalty of $250 per day, up to a maximum of $150,000.
  • A DOL penalty of up to $1,100 per day, with no maximum.

These penalties also apply to situations where Form 5500 is rejected by the government.
Most commonly, plan sponsors miss the deadline because:

  • They don’t understand they are required to file
  • They fail to leave enough time for the large plan audit requirement
  • Their audit identifies major problems they can’t fix in time
  • A change of personnel causes a communication breakdown

Stay on top of Form 5500 filing with Ubiquity

As a 401(k) plan administrator, Ubiquity ensures that Form 5500 is prepared appropriately when necessary. We can explain why a particular exemption does or does not apply to your case. Our team of retirement planning experts proactively handles recordkeeping responsibilities to keep your company on track.

Check out our extensive 401(k) resources to have your retirement savings plan questions answered, and call Ubiquity to start setting up your low-cost plan today!