The Internal Revenue Service has announced a new one-year pilot program, beginning on June 2, 2014, that gives small businesses that have retirement plans relief from penalties if they have failed to file required annual reports for their plans in prior years.  This could be of tremendous value to a small business plan sponsor who could face fines of up to $15,000 for each return, exclusive of interest, for not filing.

Every small business owner should evaluate whether he or she has complied with all reporting requirements for their retirement plan and, if not, use this pilot program (or other voluntary compliance programs that may be available) as soon as possible to avoid the hefty penalties that have been assessed in other cases.

The penalty relief is available to only a “one-participant plan,” which is either a plan that covers only an individual, or an individual and his or her spouse, who are 100% owners of the business, or a plan for a partnership that covers only partners, or the partners and the partners’ spouses.  (A 2% shareholder of an S corporation is treated as a “partner” for this purpose.)  It is also available to certain foreign plans covering nonresident aliens.

Penalty relief applies to small business retirement plans that are required to file either:

  •  Ÿ    Form 5500-EZ, Annual Return of One-Participant (owners and their spouses) Retirement Plan, or
  •  Ÿ    For years prior to 2009, Form 5500, Annual Return/Report of Employee Benefit Plan.

To be eligible for the relief, a small business must not have already received a penalty notice concerning a delinquent return.  There are certain specific requirements for filing delinquent returns under the program, and small business owners should discuss this with their benefits consultant to ensure proper filing.

The program runs from June 2, 2014 to June 2, 2015.  There is no fee to use the pilot program.

by Theresa Joswick, Member, Dawda, Mann, Mulcahy & Sadler, PLC