prohibited transaction

[Guest bogart126]

we have an employer who has not timely deposited his participant contributions for the 2000 plan year. we are trying to calculate the excise tax owed on multiple payrolls that were not timely deposited. for the 'amount involved' is it the interest that would've been earned on the contribution from the 15th business day after the end of the month to the day it was actually deposited? and how do you determine what interest rate is acceptable? will it change for each payroll? is there an "IRS acceptable" interest rate that can be used if the actual interest rate is indeterminable?:confused:

[Guest galdridge]

We generally calculate lost earnings by using the greater of the following rates:

1. Actual lost earnings (based on the highest possible investment return available to a participants during the period of loss)

2. Amount gained by the employer (i.e., incremental borrowing rate on an employer's line of credit)

3. IRS underpayment rate as published monthly in the Federal Register. (see www.wwwebtax.com/payments/penalties_and_interest.htm)

The beginning point for calculating the lost earnings should be based on the earliest point at which the employer could have segregated the employee contributions from corporate assets but in no event latter than the 15th business day of the following month. In other words, the "15th business day rule" cannot be interpretted as a safe-harbor point at which to begin calculating the lost earnings. The beginning point should be based on the individual facts and circumstances of the situation.

I am not sure what you are referring to when you say "amount involved". The amount that should be reported on Schedule H, Part IV, Lines 4a and 4d should be the total amount of the EE contributions and lost earnings. The amounts that should be reported on Schedule G, Part III should be as follows: column (d) "purchase price" would be the amount of the EE contributions, column (i) "current value of asset" would be the EE contributions plus the estimated lost earnings, and column (j) "net gain or loss" would be the amount of the estimated lost earnings.

You should also referr to the instructions for IRS Form 5330 for additional guidance on calculating the excise tax and lost earnings.

By the way, if the prohibited transaction is not corrected by the end of a calandar year, you would have to report the same transaction as a nonexempt transaction for both years (and pay an excise tax for each year) because the Schedule G reporting requirements are based on a calandar year period.

Glenn Aldridge, CPA

Audit Manager

Bennett Thrasher PC

Atlanta, GA

[k man]

I have always interpreted the "amount involved" to be the lost earnings or interest that would have been earned. That would be your base for the excise tax.

[R. Butler]

I agree with K man, the "amount involved" is only the lost interest on the contribution. The excise tax is assessed on the "amount involved". The excise tax is usually nominal.

I have never seen written guidance on the applicable interest rate used to calculate the amount involved. We usually tie to the calculation to the prime rate (i.e. prime plus 1). Our reasoning is that the late contribution is a loan to the employer. Most of our loan documents tie the interest rates to the prime rate.

[KJohnson]

I don't believe that the IRS has spoken on the applicable interest rate, but I believe that DOL's DFVC program says that you use the greater of what the participant would have earned or the 6621 rate for underpayments.

I agree that the applicable amount would be the interest on the contributions. However, using this interest method, watch out when the delinquency crosses over from one year to the next. There is a new prohibited transaction at the beginning of each year for each month's delinquency as well as an "ongoing" prohibited transaction until the delinquency is corrected.