Form 5500 Question Reveals Noncompliant Plans

The 2023 Form 5500 added a new compliance question. Depending on the variation of the Form being prepared, at some point, the Form will ask for the date and serial number of the Opinion Letter if the plan sponsor is an adopter of a preapproved or prototype plan.  

What is a Prototype Plan?  

A prototype plan is a "ready-made" plan preapproved by the IRS. These plan documents are sponsored by financial institutions, insurance companies, or third-party administrators (TPAs) and provide employers with a streamlined, cost-effective solution.  

Benefits of a Prototype Plan  

The IRS estimates that at least 94% of all qualified retirement plans are prototype plans. A prototype plan restatement cycle occurs every six years, meaning plan sponsors must update their plan documents to reflect recent legislative and regulatory changes every six years as mandated by the IRS; this is often referred to as a "cycle," with each iteration needing to be restated within a required timeframe.  

Why Opinion Letters Matter   

For the 5500 filers who leave this question blank, the IRS is beginning to query the filer again for the Opinion Letter information and suggesting that there may be a compliance issue that needs investigating. Unfortunately, it has been a wake-up call for many solo and small plans that have not complied with the restatement cycle because their opinion letters may date back to 2002. Current, defined contribution plan opinion letters would have a 2022 date. 

IRS Enforcement and the Risks of Non-Compliance  

Fortunately, a pilot reexamination compliance program has made bringing the plan back into compliance even more effortless. This pilot program gives plan sponsors a heads-up before an IRS audit of their prototype plan. It allows such plans to use the IRS self-correction program to fix any discovered errors at a lower cost than the Audit Closing Agreement Program (Audit CAP). 

Correction Options  

The Voluntary Correction Program (VCP) self-correction program requires filing an application and paying a fee ($1,500-$3,500) to seek IRS approval of the correction. The advantage of VCP is that it can correct a restatement cycle failure, which involves completing a restatement of the plan for each restatement cycle missing for submission to the IRS. Those who wait for Audit CAP can expect to pay a sanction amount of 400% or more of the VCP fee. 

Get Compliant  

As we roll into the 2024 filing season, make sure you have a recent opinion letter to reduce IRS inquiries into the qualification of your prototype plan.  If you can’t find a recent opinion letter, let us help you through the restatement process.