IRS Penalties

[Guest Michael Anderson]

Does anyone know what the penalties are for Employers who turn in their employee contributions late? If the form 5500 Schedule I Part II 4a. is marked yes with a dollar amount, what penalties would the employer incur? I would like to let my employers know so they understand what can happen if they are late with their contributions. Thanks! Mike

[Guest James Osterhaus]

The penalty for late contributions is 15% of the late dollar amount. The check must be sent in with a 5330.

[R. Butler]

The penalty is not assessed on the late dollar amount, but the rather on the "amount involved". The DOL treat late deposits as a prohibited loan. The "amount involved" is the interest that accrues on a the hypothetical loan. The penalty is 15% of the hypothetical interest.

Quick Example

Late Contribution is $10,000. It is 6 months late. Simple interest of 8% per year.--------------- The amount involved is $400 ((10,000*(6/12)*8%)). The penalty is $60 (15%*$400).

I kept my facts simple, but keep in mind as with prohibited loans there may be multiple prohibited transactions if late contributions are actually made in different year.

[Guest James Osterhaus]

Thanks for the correction R. Butler

[Guest Michael Anderson]

Thanks for your help! Mike

[Disco Stu]

In addition to the excise tax mentioed above, another cost to factor into the equation is the cost of being audited by the DOL. They use that 5500 question as a BIG audit flag. At a seminar I attended, the speaker said that if you answer that question stating you had late salary deferrals, you may as well include a suggested time for the DOL to come by.

[R. Butler]

I agree with Disco Stu that chances of an audit are increased by answering Yes, but the answer is what it is. I don't recommend answering falsely on the 5500. I do recommend making a complete correction and timely filing the 5330. You may even want to footnote the 5500 stating that the correction has been made and the 5330 has or will be filed.

The DOL isn't extremely well staffed. They aren't going to visit if they don't think they can find something. If you make the correction and file the 5330 and if your plan is otherwise compliant you will probably be O.K.