Key Takeaways
Late or missing Form 5500 filings can trigger steep IRS penalties that add up quickly and may reach $150,000 per return. Plan sponsors can often reduce or eliminate those penalties by using the DOL Delinquent Filer Voluntary Compliance Program and filing before the DOL initiates contact. Acting early can potentially turn a six-figure assessment into a manageable resolution cost.
Few things get a retirement plan sponsor’s attention faster than an IRS notice assessing penalties for a late Form 5500 filing. When those penalties reach six figures, it’s easy to assume the damage is done.
However, all hope is not lost. Retirement plan sponsors often have a powerful and frequently overlooked option for relief that can save the company thousands, and in some cases hundreds of thousands of dollars.
Understanding the Form 5500 Penalty Framework
Form 5500 is an annual reporting requirement for most retirement and welfare benefit plans. When a filing is late or missed entirely, penalties can be assessed by both the Department of Labor (DOL) and the Internal Revenue Service (IRS).
While DOL penalties are often discussed, IRS penalties typically cause the most alarm and are the most costly. IRS penalties accrue at $250 per day, up to a maximum of $150,000 per Form 5500. By the time a company becomes aware of the issue, often through an automated IRS notice, the assessed penalties may already be well into six figures. When multiple years are involved, the exposure can escalate quickly.
The Delinquent Filer Voluntary Compliance Program
The Delinquent Filer Voluntary Compliance Program (DFVCP) is a DOL program designed to encourage voluntary correction of late or missing Form 5500 filings. One of the most significant benefits of the DFVCP is its impact on IRS penalties. Although the IRS and DOL assess penalties under different statutory authority, the IRS has long recognized DFVCP as an approved compliance program for delinquent Form 5500 filings.
As a result, when a plan sponsor properly completes the DFVCP:
- The delinquent Forms 5500 are treated as voluntarily corrected
- IRS late‑filing penalties are commonly waived or abated
- Even large assessed penalties may ultimately be reduced to zero
In other words, paying a relatively modest DFVCP fee to the DOL can resolve six‑figure IRS exposure.
This program is great news for plan sponsors with unfiled 5500 returns or those who have received IRS penalties notices.
Timing is of the Essence
The DFVCP is a voluntary program. While it may be available years after a missed filing, eligibility depends on the plan sponsor not having been contacted by the DOL regarding the delinquent returns.
The Bottom Line for Plan Sponsors
A $150,000 Form 5500 penalty is alarming, but it is often not the final word.
For many plan sponsors, the combination of the DFVCP and IRS penalty relief allows years of delinquent filings to be resolved for a fraction of the assessed penalty amount. The key is understanding how the DOL and IRS programs interact, and taking corrective action before the problem grows larger.
When it comes to Form 5500 penalties, inaction is usually the most expensive option.
If your company is facing Form 5500 compliance issues or IRS penalties for late filings, Windham Brannon can help. Our team can assess the situation and guide you through available options to reduce exposure and resolve the issue efficiently. For questions or support, please contact Tomika Bullet or your Windham Brannon advisor today.
FAQs
What triggers an IRS Form 5500 penalty? Penalties are assessed when a required Form 5500 is filed late or not filed for a plan year.
How large can IRS penalties get? They generally accrue at $250 per day and can reach up to $150,000 per Form 5500.
How can DFVCP help with IRS penalties? When delinquent filings are corrected through the DFVCP, IRS late filing penalties are commonly waived or abated.
When should a sponsor act? As early as possible and before the DOL contacts the sponsor about the delinquent returns.
