Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

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Springskier
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Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

So, spouse asks if he was obligated to file 5500EZ notice of termination of his i401K after he internally transferred all assets in kind to Vanguard Tira in mid-August of 2019. His i401K assets were approximately 50K so never filed 5500EZ previously.

Spouse opened the Vanguard i401K in 2016 and just received a notice from Vanguard titled “Action needed to restate Vanguard i401K.” Apparently every 6 years Plan sponsors need to update Plan. He believes the Plan is still open with 0 assets. In fact, he still sees the account online with 0 assets and presumes this is why he received the letter.

Spouse called Vanguard’s Small Business to discuss whether this might be a time to terminate Plan, and whether with 0 assets he was obligated to restate and such. Vanguard suggested contacting our accountant. He has reached out to the accountant but has not yet received a return call.

But he asked me my opinion. I started researching here and am alarmed to find he might have been obligated to file a 5500EZ once all the assets were transferred out. Spirit Rider and others mentioned this — if I read it correctly — must be within 7 months of asset transfer?? :shock: (The penalty is greater than the assets in the account.)

Neither Vanguard Small Business at the time of transfer — 8/8/19 — nor our accountant, who was informed in writing in 2/20 of all our tax info, and specifically of this transfer with the supporting documents, and a general “let us know if we overlooked anything” mentioned filing a 5500EZ.

Have I researched this correctly? What is the best way to proceed? Feeling in a state of growing panic….
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langelgjm
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by langelgjm »

Short answer: yes.

Long answer: Yes, you were required to file a Form 5500 in your final plan year, regardless of the amount of assets. Since the only way to get the money out of a Vanguard i401k and into an IRA was through plan termination, by moving the money, you effectively terminated the plan, but neglected to file the required paperwork. Start reading up on the penalty relief program.

Others here are more knowledgeable about all the ins and outs, and there are several other threads of folks who missed the filing deadline, etc. Search and read about their experiences. You'll want to straighten this out before the IRS contacts you.

Note that the account being visible in Vanguard doesn't have a bearing on whether the plan is terminated or not. I terminated my plan and the account is still visible in Vanguard. In fact, I could probably add funds to it if I tried. These plans (at least through Vanguard) are very much a "we assume you know what you're doing" kind of deal.
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retiredjg
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by retiredjg »

From the penalty relief link....."However, if the request is denied, you will receive a penalty notice (CP 283) and the return will no longer be eligible for this delinquent filer program."

Ouch!
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Springskier
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

Thanks, langelgjm. Appreciate your response. I’ve been researching -- that’s why I noted SpiritRider’s comment.

It looks like:
1) There’s a $500 penalty if he sends the check with his 5500EZ filing of termination of the Plan.
OR
2) He takes a chance and writes a TSL (tear stained letter) apologizing for the oversight/mistake; sole proprietor, no employees; never required to file previously; (he thought he should leave it open with $0 assets in case he was offered a project he wouldn’t want to turn down); penalty would be double the assets contributed etcetera.

Anyone out there in a similar spot who decided to write the TSL and ask for forgiveness??? What was the outcome?

Obviously, taking the chance is not for the faint hearted or risk adverse…

Also, there seemed to be some suggestion that the DOL isn’t currently as forgiving as in years past?

Thanks to any who might assist.
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BolderBoy
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by BolderBoy »

Springskier wrote: Wed Jun 16, 2021 11:36 amSo, spouse asks if he was obligated to file 5500EZ notice of termination of his i401K after he internally transferred all assets in kind to Vanguard Tira in mid-August of 2019.
How old was your spouse in mid-August 2019 when he made this transfer?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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Springskier
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

retiredjg, that's what I meant that writing the TSL is not for the risk adverse. Perhaps DOJ has received too many TSLs. It seems like increasing the daily fine from $25 to $250 and adding that notice that if we don't forgive you're on the hook for the entire amount and have lost the opportunity to
pay the fine...might mean DOJ may not be in a forgiving mood.

Ouch indeed!
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Springskier
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

Boulderboy, he was 69-about to turn 70 at the end of 2019.

It was a direct in-kind rollover internally to a Vanguard Tira. Separate Tira; no mingled funds. He still hasn't withdrawn from it. Took his first RMds this year from a separate and distinct Tira. (He rolled the i401k to Tira in 2019 because he was turning 70 1/2 in 2020. RMD requirement changed to 72 after he did this.)
HomeStretch
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by HomeStretch »

What does the Vanguard Solo 401k Plan Agreement say about in-service distributions? The Fidelity Solo 401k Plan allows in-service distributions in the event of a Triggering Event (as defined), which includes Normal Retirement at age 59-1/2+.

If spouse (who was age 69 at full distribution) was eligible for an in-service distribution, then it seems to me that spouse’s 401k Plan is still active. The plan could be terminated by spouse now and a final Form 5500-EZ filed timely. If spouse does not terminate the plan before 7/31/2022 (IRS deadline for Solo 401k restatements), spouse should restate the plan to avoid penalties or the plan losing its tax-advantaged status. I posted about this restatement requirement for my Fidelity Solo 401k here:
viewtopic.php?f=1&t=351383

If spouse was not eligible for an in-service distribution, then the plan was very likely terminated in 2019 by the full distribution. Spouse should consider paying the $500 with the (late) final Form 5500-EZ as the penalties are quite steep.

The OP in this recent thread had a similar situation with a Vanguard Solo 401k inadvertently terminated:
viewtopic.php?f=1&t=350700

Here is a link to Fidelity' web page about how to properly terminate a Solo 401k Plan. Perhaps Vanguard has something similar.
https://www.fidelity.com/bin-public/060 ... nation.pdf
Last edited by HomeStretch on Thu Jun 17, 2021 8:30 am, edited 1 time in total.
drzzzzz
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by drzzzzz »

While not related to the question asked by the oringal poster --- How does the IRS know that a 401K plan was terminated? If the account balance is zero (because of a rollover of the assets to an IRA for example), and the account is still open at the custodian, how does that mean it was terminated since the account holder might have left it available to contribute to it in the future?
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Springskier
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

Thanks, homestretch, he will call Vanguard Small Business tomorrow. Hoping that he was entitled to in-service distribution.

The link you posted was helpful. Husband was also getting account statements but it appears that does not mean the account wasn't terminated.

I will post outcome so that others in a similar situation in future might be helped.

Playing phone tag with our accountant too. Will report on that as well.
Topic Author
Springskier
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

My husband actually wanted it to remain open in case he continued consulting but from the research I've done it is whether the IRS considers the Plan terminated because all of the assets were rolled out (distributed). However, as homestretch noted, if the Plan documents allow an in-service distribution, it may not be considered a termination-because he is over 591/2.

I'll report back after he speaks to Vanguard Small Business.

Thanks everyone for your help.
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Springskier
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

So, our accountant returned our call. Basically, he said he would check IRS regulations to determine if rolling out all the assets from the i401k to Tira terminated the Plan. He also said to call Vanguard Small Business to determine the status of the account. He said if account was closed, to ask DOJ for forgiveness and usually they give it or fine a $100 or so. Not sure when he last dealt with the DOL , if ever, on an issue like this. Will drill down later on that with him, after spouse speaks with vanguard. Not sure I trust that DOJ will be forgiving or lenient. Given recent penalty increases and warning if they don't forgive you're not entitled to $500 penalty.

Does anyone have an opinion on this?? Spirit Rider??

Hoping per HomeStretch's suggestion, that in-service rollover allowed and that spouse can terminate Plan now in a timely manner.
Although SpiritRider did note in another thread that it might be best to never terminate a solo401k plan, given the 5500EZ termination filing requirement.
Anyway, spouse kept it open in case he ever wanted to work/contribute in future. Seems highly unlikely that he'll do that ever again, so I say terminate
now . If not, if he is fortunate enough to have been eligible for in-service rollover, he at least needs to restate by 7.31.22.

Will report back.
HomeStretch
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by HomeStretch »

https://www.vanguard.com/pdf/s578.pdf
The 401k plan document and Vanguard should be able to guide you. Assuming this is Vanguard’s current Solo 401k plan document, see p.19 regarding in-service distributions to see if spouse qualifies. Vanguard should be able to confirm your conclusion. Don’t spend a lot of fees having your accountant research IRS/DOL regulations.
SuzBanyan
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by SuzBanyan »

HomeStretch wrote: Thu Jun 17, 2021 12:18 pm https://www.vanguard.com/pdf/s578.pdf
The 401k plan document and Vanguard should be able to guide you. Assuming this is Vanguard’s current Solo 401k plan document, see p.19 regarding in-service distributions to see if spouse qualifies. Vanguard should be able to confirm your conclusion. Don’t spend a lot of fees having your accountant research IRS/DOL regulations.
As I read the Vanguard Plan document, in-service distributions of the employee deferral (and associated earnings) are allowed at age 59.5 per 5.01A(2)(c). And in-service distributions of employer contributions (and associated earnings) are allowed after 5 years participating in the plan under 5.01C(1) or, if less than 5 years, the amount of employer contributions that have been in the accounts for at least 2 full plan years.
jimhend1
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by jimhend1 »

Springskier wrote: Wed Jun 16, 2021 7:57 pm retiredjg, that's what I meant that writing the TSL is not for the risk adverse. Perhaps DOJ has received too many TSLs. It seems like increasing the daily fine from $25 to $250 and adding that notice that if we don't forgive you're on the hook for the entire amount and have lost the opportunity to
pay the fine...might mean DOJ may not be in a forgiving mood.

Ouch indeed!
TSL works. Even though my account was small enough to avoid annual 5500EZ for years, I got nailed for not filing a proper termination. BE SURE to check the little FINAL box. I explained it was a confusing regulation, had never filed previously. I requested relief for a $13K penalty for not finalizing a $62K account and attached the TSL to the final 5500EZ checked FINAL. IRS relented, penalty avoided. That said, do not knowingly risk not finalizing TSL or not!
drzzzzz
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by drzzzzz »

jimhend1 wrote: Thu Jun 17, 2021 12:39 pm
Springskier wrote: Wed Jun 16, 2021 7:57 pm retiredjg, that's what I meant that writing the TSL is not for the risk adverse. Perhaps DOJ has received too many TSLs. It seems like increasing the daily fine from $25 to $250 and adding that notice that if we don't forgive you're on the hook for the entire amount and have lost the opportunity to
pay the fine...might mean DOJ may not be in a forgiving mood.

Ouch indeed!
TSL works. Even though my account was small enough to avoid annual 5500EZ for years, I got nailed for not filing a proper termination. BE SURE to check the little FINAL box. I explained it was a confusing regulation, had never filed previously. I requested relief for a $13K penalty for not finalizing a $62K account and attached the TSL to the final 5500EZ checked FINAL. IRS relented, penalty avoided. That said, do not knowingly risk not finalizing TSL or not!
Did you file the 5000EZ and get fined for not filing it correctly? And if that was the sequence, how soon after filing did they send you the notice with the penalty?
simas
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by simas »

We are in the similar situation - spouse terminated her plan after full rollover from i401k with Vanguard into Vanguard rollover IRA few weeks ago.

My understanding she/we need to produce the 'final' EZ-5500 form for the simple i401k plan (single participant, single contribution 7 years ago, single distribution now) . Any recommendations of where to start looking?

thank you
jimhend1
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by jimhend1 »

drzzzzz wrote: Thu Jun 17, 2021 12:57 pm
jimhend1 wrote: Thu Jun 17, 2021 12:39 pm
Springskier wrote: Wed Jun 16, 2021 7:57 pm retiredjg, that's what I meant that writing the TSL is not for the risk adverse. Perhaps DOJ has received too many TSLs. It seems like increasing the daily fine from $25 to $250 and adding that notice that if we don't forgive you're on the hook for the entire amount and have lost the opportunity to
pay the fine...might mean DOJ may not be in a forgiving mood.

Ouch indeed!
TSL works. Even though my account was small enough to avoid annual 5500EZ for years, I got nailed for not filing a proper termination. BE SURE to check the little FINAL box. I explained it was a confusing regulation, had never filed previously. I requested relief for a $13K penalty for not finalizing a $62K account and attached the TSL to the final 5500EZ checked FINAL. IRS relented, penalty avoided. That said, do not knowingly risk not finalizing TSL or not!
Did you file the 5000EZ and get fined for not filing it correctly? And if that was the sequence, how soon after filing did they send you the notice with the penalty?
About a year and a half.
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BolderBoy
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by BolderBoy »

OP - Your husband was over age 59.5 when he made the transfer from his Vanguard individual 401k plan. In every likelihood that represented an in-service distribution even if the i401k plan's balance was reduced to zero. Vanguard's summary i401k plan that was approved by the IRS is the same for all customers who have an i401k plan with Vanguard. If your husband didn't follow the "plan termination procedure" as given in Vanguard's "401k plan termination kit", then the plan hasn't yet been officially terminated by the employer (your husband). In that case there has been no foul that I can see and no need yet to have filed the final 5500EZ.

If your husband wants to terminate the plan now, he should call the small business retirement plan folks at VG and request the "i401k plan termination kit". VG will post the 'kit' so you can download it from your VG account via web access. They call it a 'kit' but it is in effect a one page document that spells out the steps that the plan administrator (presumably your husband) has to do to terminate the plan (easy to do, but he has to actually do it). The date on that plan termination document starts the 7 month clock on when the 5500EZ must be filed. There is nothing to send to Vanguard about the termination. Eventually (years) the zero balance i401k account will be purged by Vanguard.

I went through this process in January and waited until May to file the 5500EZ though I could have done it sooner.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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Springskier
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by Springskier »

Thanks BolderBoy! Very helpful. And matches the info spouse got from Vanguard.

He spoke with Vanguard Small Business, stating that he rolled the entire assets out in 8/18, but did not terminate the Plan in case a project materialized that he wanted to accept. (He has turned down projects -- interfered with travel and whatnot. I think he realizes now that he's completely retired). As HomeStretch and BolderBoy noted spouse was over 59 1/2. And was eligible for in-service distributions per page 19 of Vanguard's solo 401k Plan.

Vanguard said the account was open and could accept contributions. At this point, he needs to either restate by 7.31.22 or terminate the plan, following the steps in the termination kit. And he has to file a timely 5500EZ -- within 7 months of his terminating the Plan. Whew!-feel relieved.

So now am in the process of printing the 5500EZ. From the thread HomeStretch linked, is it true that if the 5500EZ is filled out incorrectly (and didn't I also read 90% of them have some error) that you can be penalized? If so, I will ask Bogleheads to check my work. (I may ask help from Bogleheads in any case!)

Also, I reviewed the FAQs in the Fidelity termination kit that HomeStretch linked. FYI IMO it was more helpful than Vanguard's kit, at least from my quick read through. I'm going to use that to help spouse too. Think he needs to write a letter to himself terminating the Plan.

Anyway, thanks to all who responded. It's why this site is the best!

And to all those with i401ks, read your Plan documents carefully. And research here and ask Bogleheads if the step you're taking makes sense.
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retiredjg
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Re: Required to file 5500EZ notice of termination of i401K plan with <250K assets after transferring all assets to Tira?

Post by retiredjg »

This is good news. Thanks for the update.
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