Tag Archive for: penalty

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Faulty Form 5500 Filings and “Reasonable Cause”

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“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.

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Failure to Fulfill PTE 2020-02’s Requirements

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“When relying on PTE 2020-02 to provide investment advice for a fee, what are the penalties for failing to fulfill the requirements?” 

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 Massachusetts is representative of a common inquiry regarding Prohibited Transaction Exemption (PTE) 2020-02.

Highlights of Discussion

PTE 2020-02 is the Department of Labor’s (DOL’s) newest PTE which, when followed, allows financial institutions and investment professionals to provide investment advice to retirement investors for a fee. Failure to comply with the PTE’s requirements could result in a variety of penalties, depending on the severity of the breach. Adopting the PTE is optional.

The most severe penalty is the imposition of a 10-year ineligibility period in the following scenarios.

  1. Financial institutions and investment professionals who are convicted of certain crimes arising out of their provision of investment advice to retirement investors will be ineligible to rely on the exemption for 10 years. “Crimes” are described in ERISA Sec. 411 (e.g., embezzlement, fraud, perjury, etc.). A financial institution with such a criminal conviction may submit a petition to the DOL to seek a determination that would allow it to continue to rely on the exemption. Petitions must be submitted to the DOL within 10 business days of the conviction.
  2. Financial institutions and investment professionals also will be ineligible to rely on the exemption for 10 years if they engage in systematic or intentional violations of the PTE’s conditions or provide materially misleading information to the DOL in relation to their conduct under the exemption. The DOL will first issue a warning and provide a six-month cure period. But without correction, the DOL will issue a written “ineligibility notice.”

Parties found to be ineligible to rely on PTE 2020-02 are permitted to rely on an otherwise available statutory exemption or administrative class exemption, or they can apply for an individual prohibited transaction exemption from the DOL.

With any misstep of the PTE’s requirements, the DOL has the right to transmit information to the IRS regarding the party’s violation of the prohibited transaction provisions of ERISA Sec. 406. IRC Sec. 4975 imposes a 15 percent tax on disqualified persons participating in prohibited transactions involving plans and IRAs.

Participants, beneficiaries, and fiduciaries with respect to plans covered under Title I of ERISA have a statutory cause of action under ERISA Sec. 502(a) for fiduciary breaches and prohibited transactions under Title I. The exemption, however, does not expand to IRA owners. ERISA Sec. 502(a) provides a cause of action for fiduciary breaches and prohibited transactions with respect to Title I Plans (but not IRAs) (see DOL FAQ #21).

Note the nonenforcement period that applies through June 30, 2022, for the rollover disclosure and documentation requirements of PTE 2020-02. (See an earlier Case of the Week for more details.)

Conclusion

Those who take advantage of the protections offered under PTE 2020-02 should be aware that failure to uphold the requirements could result in penalties and, potentially, loss of the PTE’s shield for a decade.

 

© Copyright 2024 Retirement Learning Center, all rights reserved