Jump to content

Earnings on Late Deferrals


Recommended Posts

Guest annieap1

Isn't the 'amount involved' the amount that was not deposited on time? Isn't that the amount that is considered a loan to the Company? I don't have the 5330 instructions before me, but I believe that the amount involved is the late deposit itself - not the interest that is calculated afterwards.

Link to comment
Share on other sites

Isn't the 'amount involved' the amount that was not deposited on time? Isn't that the amount that is considered a loan to the Company? I don't have the 5330 instructions before me, but I believe that the amount involved is the late deposit itself - not the interest that is calculated afterwards.

The amount involved is the interest on the late deposit, not the amount of the late deposit.

Link to comment
Share on other sites

Just taking a little poll here:

How many of you out there think that the missed earnings on late deferrals should be included when calculating the "amount involved" for purposes of the 15% excise tax?

Just curious.

We don't gross up for lost earnings when calculating the amount involved. Honestly, I have never thought about it & this is the first time I've even seen it suggested. Having said that the suggestion doesn't seem that off the wall to me because the prohibited transaction really hasn't been corrected until those lost earnings are deposited. I'll have to think about that some more.

Link to comment
Share on other sites

Please clarify the question. Assume facts as follows: 401(k) deferrals of $10,000 that should have been deposited by 2/15 not deposited until 3/15. Rate of return for the month is 1%. Therefore, $10,000 plus $100 earnings should have been paid to plan. However, the additional $100 was not calculated and deposited until much later. The original $10,000 late deposit is not the amount reported on the 5330. It is the $100. (See the discussion of loans and the example on Pt IV of the Form 5330). So is the question whether earnings on the $100 is also reported?

Link to comment
Share on other sites

My thinking is that the failure has not been fully corrected until the earnings on the late participant contribututions have been remitted. In addition, Rev. Ruling 2002-43, which provides guidance on how to calculate the excise tax for prohibited transactions that span several years, contains an example (in this case, a discrete loan rather than late deposits) that leads me to believe that earnings may be included. Perhaps I'm just reading the example wrong...since it's a bit different when there is determinable interest on a loan rather than having to come up with a fair market value for the amount involved.

In addition, Katherine, as to your example...you indicate that the $100 is the amount involved (from which the excise tax is to be determined) ...is this not just the earnings on the late deposits rather than the fair market value of the use of the money. We've taken the position that these are two separate concepts (i.e., earnings and fair market value)...we usually use the client's corporate lending rate from a bank or the 6621 rate and apply this to the late deferrals...then we apply the excise tax. Some though have included the earnings when applying the corporate lending rate to get to the amount involved.

Clear as mud?

Link to comment
Share on other sites

Since late participant contributions is such a hot topic, it would be nice to have clearer guidance. I tend to take a fairly conservative approach as to the earnings question (I've included it for those clients who are panic-stricken about being audited, but explained that most practitioners do NOT think that it should be included), especially whent he excise tax ends up being minimal.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...