This week I talked with a friend who owns a small business. He’s had a solo 401(k) for years, & it has been over $250,000 for years. In all that time, his tax preparer never filed a Form 5500-EZ. Not once.
He only found out because the preparer retired & the new one started going through his file.
(He is not a client. Wink, wink. Nod, nod.)
I don’t know how that story ends yet. I do know why I’m writing this today.
Form 5500-EZ sounds like a droid R2-D2 would politely ignore. It’s actually the annual IRS return for a solo 401(k), & plenty of business owners with one have never heard of it.
Quick vocabulary, because I hate jargon. A “solo 401(k)” is a 401(k) for a business owner with no employees other than a spouse. The IRS calls it a “one-participant plan.” Same thing. I’ll use both.
The good news first: most solo 401(k)s never file this form. The bad news: the line between “most” and “you” is $250,000, & balances cross it faster than folks expect.
The $250,000 test
Look at the balance on the last day of the plan year (the 12-month period the plan runs on, December 31 for most folks). If the plan holds $250,000 or less, you file nothing. Over it, & you file Form 5500-EZ for that year.
Here’s the part that trips people up. The $250,000 isn’t, “per plan.” It’s every one-participant plan you own, added together. Say a solo 401(k) holds $180,000 & a separate owner-only pension (the technical name is a “defined benefit plan”) holds $90,000. Neither is over the line alone. Together they’re at $270,000, so you file a return for each one.
The IRS reviewed first-time filers & found that many plan sponsors (that’s the owner, i.e. you) assumed the limit applied per plan, per participant, or per investment. It doesn’t.
It’s also a year-by-year test. Some summaries online say once you cross $250,000 you file forever. The IRS instructions say the test is applied at each year-end, so a balance that slips back under skips that year. One exception: the year the plan terminates. Close it & pay everything out, & you file a final Form 5500-EZ no matter how little is left.
When it’s due
The last day of the seventh month after the plan year ends. For a calendar-year plan, that’s July 31. The 2026 return is due July 31, 2027.
Need more time? File Form 5558 (officially the “Application for Extension of Time To File Certain Employee Plan Returns,” because of course it is) on or before that July 31 date & you get until October 15. It’s a one-time extension, & it’s approved automatically if filed on time. There’s also a way to ride along on an extended income tax return. I’d ask your CPA about that one.
How to file
Either on paper, mailed to the IRS, or electronically through EFAST2 (the government’s electronic filing system for retirement plan returns; I won’t pretend the name is better than it is). The IRS also accepts the short form, Form 5500-SF, from a one-participant plan with the one-participant box checked.
My suggestion: don’t assume your plan provider is filing it. Ask who is.
The penalty
The IRS can charge $250 a day, up to $150,000 per return. One hundred fifty thousand dollars, for a form that mostly asks for numbers you already know.
Before anyone panics: there’s a permanent relief program for late-filed Form 5500-EZ returns. If the IRS hasn’t already assessed a penalty, you pay $500 per late return, capped at $1,500 per plan. Still not fun. Considerably less not-fun than the alternative.
When it stops being a 5500-EZ
Hire an employee who’s eligible for the plan (not a spouse, an actual employee) & it’s no longer a one-participant plan. At that point the regular Form 5500, or its short form, Form 5500-SF, applies, & the $250,000 exemption goes away. I’d rather you know that before the hire than after.
Check the balance now
December 31 is about ten weeks away. If you’re anywhere near $250,000, now is a nice time to find out which side of the line you’re on.
A form with a droid’s name & a six-figure penalty. You can’t make this stuff up.
I’m not your CPA, & this is general information, not tax advice for your situation. If you want help keeping the pieces of your financial life organized, reach out to me.