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Late contribution corrective measures


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Guest flogger

I'm quite weak on 401(k)s as I deal 95% w/ DB, so pls excuse my ignorance here.

If a plan sponsor fails to make timely deposits of employee deferrals, how is this corrected?

My understanding is that there must be deposits made that include interest, plus 5330 and the 15% excise tax must be filed. Assuming that the interest calculation is correct, is there anything else to do?

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The excise tax rate is multipled times the interest owed not the amount of the late contribution. Also, whoever files the 5500 should check the box saying the employer was late. Too many excise taxes sent in may trigger an audit, then your definition of what is late, which is probably the 15th business day, will get challenged. So tell the sponsor to pay attention.

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On the 5330, don't just report the penalty, make sure you complete the section IX to describe how the PT was corrected.

Also, on the 5500, reporting the PT on schedule G is no longer necessary, however, you have to include an attachment (schedule of late participant contributions.) See the DOL website for the format.

/JPQ

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The parallel laws of the Internal Revenue Code and ERISA impose separate remedies. The tax rules impose an excise tax on the prohibited transaction (the plan has loaned money to its sponsor, a disqualified person). The Department of Labor may also charge the sponsor (a party-in-interest) for lost opportunity costs: amounts that the sponsor will contribute to individual participants' accounts to restore forgone earnings on late deposits.

This situation is identified on Form 5500, Schedule H, Part IV, Line 4a and Schedule I, Part II, Line 2a.

Lori Friedman

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  • 4 weeks later...

would anyone know if the plan sponsor can deduct the lost earnings as an additional contribution on their corporate tax return?

addidtionally, for financial statement purposes, would these lost earnings be classified as earnings or contributions?

any assistance would be greatly appreciated

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I have a quick and ready answer for the IRS side of things. The I.R.C. Sec. 4975 excise tax on the prohibited transaction (Form 5330) is a nondeductible expense under I.R.C. Sec. 275.

As for the Dept. of Labor sanction, I'm trying to find a good answer. The lost opportunity charge appears to be equitable relief to compensate for foregone earnings on plan assets (deductible) rather than a fine or fee for violating federal law (nondeductible). The lost opportunity costs are deposited to participants' accounts, not kept by the Dept. of Labor. Anybody else have any thoughts about this matter?

Lori Friedman

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Guest gnappi

i agree regarding the excise tax, but i am more concerned about the classification and application of the lost earnings.

the employer deposits the lost earnings into the participant's account. can the employer take a deduction for the lost earnings on the corporate tax return? additionallly, from an audit stand point, would these lost earnings be classified as earnings or as an employer contribution?

once again, any guidance would be appreciated.

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