There’s much good for retirement plans and those who work with them in the SECURE Act, but there are a couple of nuggets of “coal” in there as well.
One such provision that retirement plan advisors, administrators and sponsors should be mindful of is a significant increase in the penalties for late filing of retirement plan returns and related notices. These changes are set to take effect in less than two weeks, applying to returns, statements and required notices to be provided after Dec. 31, 2019. The provision is designed to help “offset” the underlying “cost” (to tax revenues) of the legislation – often referred to as “pay fors.”
The logic behind the increase, according to an earlier House report, is that the penalties for failing to submit these returns and notices have not increased in many years. Congressional tax writers contend that the present law penalties are “too low to discourage noncompliance” and that increasing these penalties “will improve overall tax administration.”
Form 5500
In response, Section 403 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes a tenfold increase in the penalty for a failure to file Form 5500 from $25 for each day the failure continues to a maximum penalty of $15,000 to $250 per day up to a maximum of $150,000.
Form 5500 is, of course, the annual report that employers that maintain a pension, annuity, stock bonus, profit-sharing or other funded deferred compensation plan (or the plan administrator of the plan) are required to file annual returns addressing the qualification, financial condition, funding requirements and operation of the plan.
Registration Statements
The legislation also includes tenfold increases in the failure to file a registration statement and notification of changes. In this case, the penalty for a failure to file a registration statement as required will increase from $1 for each participant with respect to whom the failure applies, multiplied by the number of days during which the failure continues, to $10 per participant per day. In addition, the maximum penalty for this type of failure will increase from $5,000 with respect to any plan year to $50,000.
Plan administrators for plans subject to ERISA’s vesting requirements are required to file a registration statement with the IRS with respect to any plan participant who separated from service during the year and has a deferred vested benefit under the plan.
Similarly, a failure to file a required “notification of change” will result in a penalty of $10 per day (up from $1), not to exceed $10,000 for any failure (up from $1,000). Here, plan administrators are required to notify the IRS if certain information in a registration changes, such as any change in the name of the plan or the plan administrator, the termination of the plan, or the merger, consolidation or division of a plan.
Withholding Notices
Failure to provide a required withholding notice will also increase tenfold, resulting in a penalty of $100 for each failure (up from $10), not to exceed $50,000 for all failures during any calendar year (up from $5,000).
Withholding requirements apply to distributions from tax-favored employer-sponsored retirement plans and IRAs, but, except in the case of certain distributions, payees may generally elect not to have withholding apply. To that end, a plan administrator or IRA custodian is required to provide payees with notices of the right to elect no withholding.
As noted at the start of this post, the penalties for failure to file these returns and notices are set to increase dramatically and are set to be implemented a few days from now, so it is incumbent for advisors and administrators to be aware of and ready for these changes.
