Form 5330

[Guest mwest]

I have a client who I had to answer "Yes" on the question on Schedule I regarding whether they made untimely deferrals. The untimely deferrals were for 5 out of 80 people and only occurred for one payroll period. Do I have to file a Form 5330 with the IRS?

[R. Butler]

I would file. The penalty is generally nominal; it shouldn't be that big of a deal.

[Guest dubya]

I'm probably wrong about this, but is it required to file 5330 for untimely deferrals? I didn't think there was a fixed penalty (eg, 10% excise tax) for this type of violation.

I thought the remedy was to go through a voluntary self-correction program, and have the plan sponsor deposit whatever was lost in earnings in order to make the plan "whole", as if the contributions had been deposited in a timely manner. As well as, of course, to demonstrate how procedures are now in place to ensure that the violation does not occur again.

Any comments as to whats right and wrong about the above?

[Guest Ray Williams]

DOL considers these to be prohibited transactions, and therefor reportable on the 5330.

[Guest dubya]

Understood about the filing. Other than acknowledging the infraction on the form, do you know if the sponsor is prompted via the form to take action to correct the problem, including paying a penalty, VCR-type filing, deposit for lost earnings, etc? If so, do any of these "remedies" have to be enacted before or with the filing of the 5330?

Thanks

[R. Butler]

Late deposits usually can be self-corrected without a "VCR-type filing"......A full correction must be made, including making up lost earnings. The 5330 asks for an explanation of the corrective measure taken......An excise tax for a prohibited transaction is assessed on the "amount of involved". The DOL views late deposits as a loan to the employer; thus the "amount involved" isn't the amount of the late contribution, but rather the hypothetical interest accrued on the hypothetical loan.

[Guest CMC]

I've got a client who had late deferrals for at least 3 pay periods in 2000 and am trying to decide how many prohibited transactions they've got with respect to each of those pay periods.

The instructions to Line 26a say that a problem of an ongoing nature (which I take late deferrals to be) will be treated as a new prohibited transaction on the first day of each succeeding tax year that is within the taxable period. On our facts, the taxable period doesn't end until "the date the correction is completed."

Although the deferrals went in just a few days after the end of each 15-day period, so that all the deferrals went in in 2000, because the problem was just discovered by outside auditors, the earnings won't go in until 2001.

If the correction isn't completed until the earnings go in, it appears that there will be 2 prohibited transactions with respect to each pay period's late deferrals -- one for 2000 and one for 2001 -- and thus a need to pay an excise tax on the amount involved for each year. (Although I guess, in 2001, the excise tax is just on the value of the use of the interest rather than the on the value of the use of the principal.)

Sound right?