“My client who sponsors a 401(k) plan received a notice from the Department of Labor (DOL) that the DOL rejected the plan’s Form 5500 filing because it lacked certain required information. My client is now facing a $75,000 penalty.  Is there any way to correct this error and reduce the penalty?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Illinois is representative of a common inquiry regarding faulty Form 5500 filings.

Highlights of Discussion

Unfortunately, since the plan sponsor has already received a formal notice from the DOL, the DOL’s Delinquent Filer Voluntary Correction Program (DFVCP) is not available to the sponsor to correct the failure with a minimal penalty. But—there still may be an option to correct the error and pay a lesser penalty using the “reasonable cause” argument.

The DOL is authorized to waive all or part of the civil penalty for a faulty Form 5500 filing if the plan sponsor demonstrates reasonable cause for its failure. The IRS has a similar waiver provision. Reasonable cause is based on all the facts and circumstances in the situation. The plan sponsor must establish it exercised all ordinary business care and prudence to meet the annual filing obligations but, nevertheless, was unable to comply with the duty within the prescribed time.

According to the IRS’s Delinquent Filing Penalty Relief Frequently Asked Questions, reasonable cause may include the following:

• Fire, casualty, natural disaster, or other disturbances,
• Inability to obtain records,
• Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family,
• Other reasons that establish the plan sponsor used all ordinary business care and prudence to meet its filing obligations but, despite its best efforts, failed to meet the file standards.

RLC regularly works with a plan service provider who has had success using the reasonable cause argument when applicable. One example involved a plan sponsor that received a DOL notice rejecting its Form 5500 filing because the plan sponsor had not included the necessary audit report. According to the notice, the DOL was going to assess a $50,000 penalty. The plan service provider helped the plan sponsor draft a letter of reasonable cause, assisted with getting the audit done and refiled the Form 5500 within the prescribed 45-day correction window. As a result, the DOL lowered its penalty to $5,000.

Conclusion

Even in situations where the DFVCP can no longer be used because the plan sponsor has already received a DOL notice regarding a faulty Form 5500 filing, there still may be ways to lessen the penalty assessment by utilizing the reasonable cause argument.