i401k investors — IRS Form 5500-EZ could cost you a $150,000 fine. EVERY YEAR.

*i401k investors — It’s a horror show. A potential $150,000 fine per year for not filing an admin form.*

The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!

That got your attention, didn’t it?

This just caught me out; neither my accountants nor Schwab, my i401k provider, alerted me to fill out IRS Form 5500-EZ once my i401k reached a balance of $250,000.

My balance went over in 2020, so I owe the IRS three years of forms. My fine from the IRS? It probably won’t be $150,000 per year, a total of $450,000; it looks like it will be $1,500 under a ‘Penalty Relief Program.’ More below.

When I asked my accounts and Schwab why I wasn’t notified, they pointed fingers at each other. Form 5500-EZ is not part of a tax return, to be fair to my accountants, but still. The very educated crowd over at the Bogleheads Forum would be rolling their eyes right now. I should have known about it; the form has been discussed there many times. (The forum is named after Jack Bogle, the founder of the low-cost Vanguard funds.)

So far, none of my friends and colleagues I contacted with i401ks knew about 5500-EZ. Except one, Marshall Staton, he knew about it and eye-rolled me via text :)

What is IRS Form 5500-EZ?

Once your i401k balance reaches $250,000, you must fill out this form and submit it annually, even if it drops back below $250k during the year. (Links to the forms below.)

It’s a joint IRS and Department of Labor form to ensure the plan is administered correctly. Remember, even though a provider like Schwab or E*Trade gives you the plan docs, you become the plan administrator and are responsible for the plan. I know it’s all a bit overly complicated for a one-person plan (and maybe your spouse.)
The form is mostly straightforward but does ask for a few arcane details, more below.

What are the IRS penalties?

Frankly, I think it’s absolutely insane for a mistake that is not an attempt of tax skullduggery to have a penalty this large. The potential fine:

“$250 per day, up to $150,000 for each late Form 5500 or 5500-EZ, plus interest (IRC Section 6652(e)) as amended by section 403 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).”

— IRS

I mean, are you f**king kidding me? Would they really fine you that? I don’t know.

Under the Penalty Relief Program, which you must apply for, there is a $500 fine for each year missed, up to a maximum of $1,500. If the IRS contacts you first, you may be unable to use the program.

How to fill it out the 5500-EZ

I searched for help on this one. One of my go-tos for in-depth investing advice is The White Coat Investor; they are an advanced bunch of investors. Sure enough, Dr. Jim Dahle has a guide for filling it out here. Thanks, Doc!

With Schwab, it was a little different.

Jim is with Vanguard, so he received a nice, neat statement from them to prepare the 5500-EZ not so much with Schwab. I called them, and they don’t provide anything like that. (FYI: Vanguard announced in April 2024 that they are ending their i401k admin business and have sold it to Ascensus.)

Here is how I had to fill mine out:

Part III
- Starting and ending balance: I downloaded January and December statements for each year.
- Contributions: My business tax return details how much my employer’s contributions were. My employee contributions were on the W-2 my company paid me via payroll (Remember, with an i401k, you are the employer and employee)
Part IV - Plan Characteristics.
- This is the arcane bit. Bizarrely, the Schwab rep said they could not provide them as it was deemed ‘tax advice.’ I mean, they created the plan; they should know them. I went with the same as Jim: 2E, 2J, 3B, 3D

From 2023 on, the 5500-EZ requires the Plan’s ‘Opinion Letter date and Opinion Letter Serial Number.’
I called Schwab, and they guided me to it. It’s a letter from the Department of Treasury to Schwab on page 35 of the Schwab Basic Plan Document here. You may have to call your provider to get it.

The messy conclusion?

Thanks, IRS and Department of Labor. You make it so easy for us freelancers.

Both the Schwab reps I spoke to agreed that i401k account holders should be prompted yearly by them to fill out 5500-EZ. They said they’ve added it to a list of feature requests. In the meantime I will send out a blog post every year to remind us all to fill this little monster out.

Let me know below if this has caught you out.

Links to the oh-so-much-fun IRS forms