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ERISA-covered 403(b) Plan and 4975


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This has been discussed on these boards, but some conflicting opinions from elsewhere have made this.

IRC §4975 does not apply to an ERISA 403(b) plan, but ERISA 3(2) includes
403(b) plans. That, in turn, makes an ERISA 403(b) plan subject to the prohibited
transaction rules, but not under 4975, under ERISA 406.

Does this cause an ERISA 403(b) plan to be subject to an excise tax that requires Form 5330, thus completing the section of the form under 4975 and paying the 15% excise tax?

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Thanks, I agree. This is congruent with the EOB which states:

Section 403(b) plans. Section 403(b) plans are not included in the definition of a plan under IRC §4975(e)(1). Thus, a prohibited transaction involving a section 403(b) plan would not be subject to these excise tax provisions, even if the plan is covered by Title I of ERISA. Accordingly, when a prohibited transaction occurs with respect to a section 403(b) plan (e.g., plan sponsor is late on depositing participant contributions), the disqualified person should not file Form 5330.

emphasis in bold is also in the EOB.

Looking for anyone (other than TAG) that disagrees and say a 5330 is needed, and if so, under what basis.

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Just out of curiosity what are we talking about here? Late deposits of elective deferrals? If so it is going to be disclosed on the 5500 and that's what will trigger the DOL's assessment of the civil penalty (assuming it has the resources to actually undertake this kind of assessment).

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Right, the disqualified person files a 5330, of course.

Yes, it is for late deferral deposits for a 403(b) plan covered by ERISA. Suppose it's $1,000,000 of deferrals over a long period of time, and the missed earnings are $2,500. That has been deposited. If the DOL does the 5% assessment on the $2,500, that's $125.

edited to make a correction/clarification:

if the period exceeds a year, the 5% is charged again on any uncorrected amounts, so the actual 5% assessment might be closer to $375.

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I don't understand why one would file 5330s and pay a 15% excise tax when there is no liability for it. And, you could end up getting dinged twice: once for the 15% excise tax (good luck trying to get a refund after you've already filed and paid) and again for the DOL civil penalty.

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I haven't researched the question but as I understand it the IRS can only enforce the IRC PT rules under 4975 which require payment of tax on PT.Since 403b plans are exempt from PT under 4975 no 5330 is filed because there is no tax due. No brainer. See instructions to 5330.

mjb

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The penalty is discretionary and is imposed by the DOL. DOL notifies the plan of the violation. Plan has 90 days to correct the PT or appeal the DOL decision. See DOL reg 2500.502-i. Its not like the tax law where tax is paid when 5330 form is filed to avoid late filing penalties. I don't know if the DOL reviews the 5500 forms or whether the 5% penalty would be levied if the plan has cured the violation of 501i by the time it is notified of the violation by the DOL.

This is the classic regulatory conundrum of if a tree falls in the forest and no one hears it is there a sound?

mjb

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My lord, if you need to hire a friggin ERISA Attorney to find out how to pay a $150 penalty, I don't even know what to say. Take it from me, file the 5330! No one will ever fault me, I guarantee it!

And just so we are clear, a guarantee from Austin Powers on a public message board has no value whatsoever :)

Regardless, I think it is extremely practical advice...

Austin Powers, CPA, QPA, ERPA

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I am all for practical solutions Austin, but your suggestion is no solution. First, why pay 15% when the penalty is only 5%? Second, if no penalty is assessed you end up paying 0%. Third, if the plan is a 403(b) plan nobody from the IRS should be inquiring about missing 5330 and excise tax payments, but if they do all you need to do is show them the 5330 instructions (I realize that showing them the actual law may be a waste of time).

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Austin: do you get paid by the number of forms you file? 403b plan cannot file a 4975 form for PT because it is not a plan which is subject to excise tax. If plan files 5330 it will need a lawyer to straighten out the mistake of paying an incorrect amount of excise tax on a transaction that is not subject to the tax.

Why bother creating problems for the client when there will be no problem if DOL never follows up with the client?

mjb

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Hey if it's always worked for me in the past I see no reason to change course... Now if the plan gets audited I can say, "Listen I just felt so awful I wanted to pay the $150 in taxes even though I overpaid by $100. Will you please forgive me for paying more taxes than I owed?? Please?"

Austin Powers, CPA, QPA, ERPA

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I wanted to pay the $150 in taxes even though I overpaid by $100.

Who actually pays the $150? you, the participant, the Plan, the sponsor?

My apologies for a dumb question. I know nothing about 403b's, but this is an interesting thread.

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So, you are making the assumption that you are in the context of a DOL audit. If that is the case won't it be very easy to whip out the 5330 instructions and show the auditor that there is no excise tax for a 403(b) plan?

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Great responses. How about just telling the employer this:

The missed earnings due to late deferral deposits are generally a prohibited transaction under Internal Revenue Code Section 4975. A 15% excise tax normally applies on these missed earnings and it is collected by the IRS by using Form 5330.

However, 403(b) plans are exempt from Code Section 4975. Thus, 403(b) plans are not listed in the instructions for Schedule C of Form 5330 for Section 4975 excise taxes. Thus, no excise tax payments are due to the IRS and we do not recommend that a Form 5330 be filed.

However, the DOL has an option under ERISA 502(i) to possibly assess a 5% civil penalty on the missed earnings. The DOL has no provision in place to voluntarily file and pay this 5% excise tax. If they decide to assess the 5% penalty, they will contact you to at least make sure the deposit was made and perhaps demand the 5% penalty be paid.

Optional text: [Due to the small amount involved, it is unlikely that you will ever hear from the DOL regarding the $X of missed earnings.] Additional optional text: [Have a nice day!]

edit: Of course this assumes the employer has correctly calculated and deposited the missed earnings, otherwise that would need to be addressed as well.

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That's about how I would do it, although I would jump right to have a nice day and not offer an opinion on the likelihood of assessment. Bottom line is that the client has no obligation to do anything other than to fix the problem by depositing the lost earnings.

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I concur with JPOD. IRS auditors know that 4975 does not apply to 403b plans so that question will never be asked in the unlikely event that 403b plan is audited by IRS. DOL auditors don't audit plans for compliance with IRS requirements so they do not ask about filing IRS forms.

Bottom line is Plan sponsor is not required to file any form with IRS or DOL to notify agency of late contribution to a 403b plan.

mjb

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