In our continuing series of FAQs on EFAST2, we are addressing the issues and procedures with which the 5500 preparers and plan sponsors will need to familiarize themselves to make the transition to electronic filing.

Has the DOL and the IRS changed the definition of one-participant plan for purposes of the 2009 5500 filing?

Yes. The instructions for Form 5500 and Form 5500-SF reflect a new definition of one-participant plan for the 2009 plan year. Furthermore, the IRS official responsible for drafting that one-participant portion of the instructions has confirmed to us that the IRS will make the same change to the Form 5500-EZ instructions.

What is the change in the definition of a one-participant plan for 2009?

For purposes of 5500 filing for 2009, a one-participant plan is:

1. A plan that covers only an individual or an individual and his/her spouse who wholly owns a trade or business (incorporated or unincorporated); or
2. A plan for a partnership that covers only the partners or the partners and the partners’ spouses.

In previous years, a one-participant plan was eligible to file the Form 5500-EZ (rather than the Form 5500) if, in addition to satisfying the requirements described in the previous sentence, the plan: (1) satisfied the coverage requirements without being combined with another plan of the employer; (2) did not cover an employer that was part of a controlled group; and (3) did not cover an employer for which leased employees performed services.

Example. Ted owned a sole proprietorship and 100% of an incorporated business. The sole proprietorship maintained a retirement plan. The sole proprietorship had no employees other than Ted’s wife. The incorporated business also had no employees. Because the sole proprietorship was part of a controlled group, Ted was required to file Form 5500 instead of Form 5500-EZ for 2008. If the plan assets do not exceed $250,000, Ted is still required to file Form 5500.

Example. Assume the same facts as in the previous example except the plan year is 2009 instead of 2008. Ted can file Form 5500-EZ.

Under EFAST2, is a one-participant plan required to file electronically?

No. A preparer may not file Form 5500-EZ electronically. The preparer must file the return on paper directly with the IRS. However, a sponsor of a one-participant plan may elect to file Form 5500-SF electronically with the DOL in lieu of the paper Form 5500-EZ. In order for a one-participant plan to qualify to file Form 5500-SF, the only restriction with which the one-participant plan need comply is the “no employer securities" requirement. The other 5500-SF requirements are not applicable. Comment: If in the very rare situation, the one-participant plan has 100 or more participants (e.g., 100 partners and their spouses), the plan only may file a Form 5500-EZ and not a Form 5500-SF.

May a one-participant plan elect to file Form 5500 instead of Form 5500-EZ or 5500-SF?

No. The option to file Form 5500 is not available to a one-participant plan.

Is Form 5500-EZ subject to public disclosure?

No.

If a one-participant plan elects to file Form 5500-SF instead of Form 5500-EZ, is the form subject to public disclosure?

Yes. A one-participant plan that files Form 5500-SF should be aware that the DOL will publicly disclose the form on the DOL website. Therefore, a sponsor of a one-participant plan who is concerned with others being aware of the benefit in his/her retirement account should take the public disclosure into consideration in deciding whether to file Form 5500-SF or Form 5500-EZ.

If the plan assets of a one-participant are $250,000 or less at the end of the plan year, does the plan need to file Form 5500-EZ?

No. In fact, the plan does not need to file Form 5500-EZ even if the plan assets exceeded $250,000 in a previous plan year, so long as the assets are less than $250,000 at the end of the current plan year. The employer aggregates all plans it sponsors in determining whether the employer must file. Comment: The IRS apparently is aware that a one-participant plan can simply stop filing when its assets fall below $250,000 without filing a final return. However, we are concerned that the DOL may not be prepared for a plan which ceases filing because it has dropped below the $250,000 threshold. Therefore, we recommend that a one-participant plan which may file an annual return in one year but not in another year because its assets have declined below the $250,000 threshold, use Form 5500-EZ (not Form 5500-SF) until the DOL specifically indicates they are prepared for such a situation. Otherwise, the plan may find itself confronted with a penalty letter for non-filing.

If a one-participant plan has been filing Form 5500 because it did not meet the 5500-EZ requirements (e.g., part of controlled group) but is now required to file Form 5500-EZ, may the plan cease filing if its plan assets at the end of the plan year are less than $250,000?

Yes. However, we are concerned that the DOL may not be prepared for such situations and the sponsor may receive a late filing penalty letter. Of course, the one-participant plan could file Form 5500-EZ or 5500-SF and avoid the risk of the DOL sending out such a letter. One advantage of filing a 5500 series form is that it starts the statute of limitations, thereby limiting the potential penalties for disqualification or sanctions under Audit CAP. The statute never starts to run for a plan which does not file (even if there is no legal requirement to file).

Is a one-participant plan eligible to correct late filings under the delinquent filing voluntary compliance (DFVC) program?

No. The DFVC program is not available to a one-participant plan even if it files Form 5500-SF. A one-participant plan which files late should include a letter requesting an abatement of the IRS penalty.

EFAST2 Workshop. EFAST2 will no doubt be the most significant reporting change that has affected retirement and welfare plans during the past decade. Our Workshop will prepare you to make the transition to mandatory electronic filing. We also have scheduled two other seminars to follow the EFAST2 Workshop – Plan Forms, Notices and Amendments and the ERISA Workshop. For more information on the seminars, click here.