The SECURE Act created many new ways to help both individuals and employers save for retirement, including creating extra flexibility for safe harbor plans, extending the deadline to initially adopt a qualified plan, eliminating the maximum age for IRA contributions, and delaying the age at which required minimum distributions commence. However, from Congress’ point of view, each additional dollar that is saved in a qualified retirement plan or IRA represents lost tax revenue. Therefore, the SECURE Act also includes some revenue raisers to offset the cost of the expanded retirement benefits. One of these provisions is Section 403 which increases (by a factor of 10) the penalties for several types of failures related to retirement plans.
Form 5500
The first and most notable increase comes under section 403(a) of the SECURE Act, regarding the penalty under IRC section 6652(e) for failure to file Form 5500. Form 5500 is the annual return for employee benefit plans which is due 7 months after the end of the plan year (July 31 for a calendar plan year). The deadline can be extended by an additional 2½ months (to October 15 for a calendar plan year) if an extension request is filed with the IRS. If the Form 5500 is not filed by the deadline, the IRS imposes a fine on the plan administrator for each day that the filing is late. If an extension was filed, it is disregarded when applying this penalty; the fine is calculated retroactive back to the original due date of the Form 5500. Prior to the SECURE Act, the fine was $25/day, with a maximum of $15,000 for a single Form 5500. After the SECURE Act, the penalty is now $250/day, with a maximum of $150,000 for a single Form 5500.
Of course, IRS penalties alone do not tell the whole story when it comes to Form 5500. The Department of Labor imposes its own fines on top of those levied by the IRS. The DOL can charge a plan administrator who fails to file a Form 5500 up to $2,233 per day, with no maximum. This fine was not increased under the SECURE Act, but is adjusted annually for inflation. Fortunately for plan administrators, the DOL offers a way to get plans caught up at a much lower cost. Under the Delinquent Filer Voluntary Compliance Program (DFVCP), a Form 5500 can be filed late at a cost of $750 per filing, or a maximum of $1,500 per plan when filing multiple forms at once, as long as the plan has fewer than 100 participants. Higher fees apply for larger plans. The DVFCP may only be used for a voluntary submission by a delinquent filer; if the filing is in response to a government notice regarding the delinquency, the DVFCP may not be used.
Form 8955-SSA
Section 403(b) of the SECURE Act increased the penalties for failing to register or report certain changes in status under IRC section 6652(d). This actually includes two separate penalties. The first, under section 6652(d)(1), is for failure to file Form 8955-SSA. This is the form used to report terminated participants with a deferred vested benefit. Previously the penalty was $1 per day for each participant required to be reported on the form, with a maximum penalty of $5,000. Now the penalty is $10 per day per participant, with a maximum of $50,000.
Plan Changes Reported to the IRS
The second increase added under SECURE section 403(b) is the penalty under IRC section 6652(d)(2), for failure to notify the IRS of a change in the name of the plan, a change in the name or address of the plan administrator, the termination of the plan, or a merger or division of the plan. These changes do not require a separate form to notify the IRS; they are noted on the Form 5500. However, if a plan administrator fails to file a Form 5500, and any of the required items apply, they could be subject to both the penalties under 6652(e) and 6652(d)(2). Prior to the SECURE Act, the penalty was $1 per day with a maximum penalty of $1,000; the penalty has increased to $10 per day with a maximum of $10,000.
Participant Distribution Notice
Finally, section 403(c) of the SECURE Act increased the penalty under IRC 6652(h) for failure to provide the notice required under IRC 3405(e)(10)(B). This section describes the notice that is required to be given to anyone receiving a distribution which is not an eligible rollover distribution, informing them that they may elect to waive federal income tax withholding. The notice must be provided no earlier than 6 months before payments commence, and not later than the time that would give the payee reasonable time to make an election without delaying payment. Prior to the SECURE Act, the penalty for failure to provide this notice was $10 for each failure, not to exceed $5,000 for a single payor in a calendar year. The penalty has been increased to $100 for each failure with a calendar year maximum of $50,000. Note that the penalty for failure to provide the section 402(f) notice for eligible rollover distributions was already $100 per failure with an annual maximum of $50,000 under SBJPA 1996; SECURE brought the penalty for non-rollover eligible distributions into line with the penalty for rollover eligible distributions.
While the SECURE Act opened many new opportunities to save for retirement, the increased penalties mean it is more important than ever to make sure your plan is operated in strict compliance. If you have any questions about your compliance requirements, please contact us.
Summary of the Changes Made by Section 403 of the SECURE Act
Failure: Did not file Form 5500
Old penalty: $25 per day, maximum $15,000
New penalty: $250 per day, maximum $150,000
Failure: Did not file Form 8955-SSA
Old penalty: $1 per day per participant, maximum $5,000
New penalty: $10 per day per participant, maximum $50,000
Failure: Did not notify IRS of change in plan name or sponsor address, plan merger or division, or plan termination
Old penalty: $1 per day, maximum $1,000
New penalty: $10 per day, maximum $10,000
Failure: Did not provide the required notice to a participant receiving a distribution not eligible for rollover regarding their right to waive federal income tax withholding
Old penalty: $10 per failure, maximum $5,000
New penalty: $100 per failure, maximum $50,000