Prohibited Transactions and reporting on From 5330

[Guest kwagner]

I have a client who deposited employee contributions late. I have calculated the interest owed ("amount involved") to report on the form 5330. However, this amount has still not been deposited (the employee contributions were deposited.) Therefore, I would assume this transaction has not been corrected and would need to be reported on the 2002 form 5330.

My question is, do I report the original amount involved from the 2001 form 5330 on the 2002 form 5330. Or do I calculate a new amount involved based only on the interest owed which has not been deposited?

[austin3515]

Interest owed but not deposited is the amount invlolved - not the original amount of outstanding deferrals.

The rationale is that the deemed loan is only the interest due, as the deferrals were eventually depoisted. Of course, if deferrals were deposited 4 months late, that might change the story. Its definitely judgment though.

The DOL put out a great Q&A on the Voluntary Fiduciary Correction Program. Check that out - it walks you through the process of correcting late deposits of employee deferrals very well.

[E as in ERISA]

The "amount involved" on the 2001 Form 5330 is the 2001 interest. The "amount involved" on the 2002 Form 5330 is both the 2001 interest (only because it wasn't restored in 2001 and is a continuing violation) plus the 2002 interest.

[Guest carsca]

Katherine,

I'm confused by your post, and would appreciate a clarification.

Assuming that the deferrals were late for a few days in 2001 (but were deposited in 2001), and the correction is being made now in 2003, wouldn't there only be a requirement to file one Form 5330 for the 2001 Plan Year (albeit with an interest charge for being late with the filing)? I would conclude as such because the prohibited transaction was "corrected" in 2001 by the deposit of the late deferrals.

Your post seems to indicate that a 2002 Form 5330 would need to be filed under these circumstances.

Thanks in advance.

[E as in ERISA]

Once you cross over January 1, you have a second prohibited transaction.

See the instructions for Form 5330, Part VII line 26b. It says, “When a loan is a prohibited transaction, the loan is treated as giving rise to a prohibited transaction on the date the transaction occurs, and an additional prohibited transaction on the first day of each succeeding taxable year (or portion of a taxable year) within the taxable period that begins on the date the loan occurs. Each prohibited transaction has its own separate taxable period which begins on the date the prohibited transaction occurred or is deemed to occur and ends on the date of the correction.” There is an example where a loan is made on July 1, 2001 and repaid on December 31, 2002; and interest is $1,000 per month. The instructions say that the 2001 Form 5330 shows one prohibited transaction of $6,000 (for 6 months of interest at $1,000).” The instructions indicate that the 2002 Form 5330 shows two prohibited transactions – $6,000 for 6 months of interest in 2001, and $12,000 for 12 months of interest in 2002.

I'm also assuming that the interest itself starts accruing interest if you fail to deposit it at the time that you deposit the deferrals.

[Guest carsca]

Thanks for the reply, Katherine, but I'm not sure the example in the Instructions is comparable to the current situation.

The example in the Intructions deals with a situation where a loan was outstanding as of December 31 of the year. In that case, there is no question that a new PT is generated on each January 1. However, the comparable situation with late deposits would be if the November deferrals were not deposited until February. In that case, the PT was not corrected as of the end of the year, and so a new PT would be generated for 2002. The distinction here is that the deferrals were paid to the Plan in 2001, and so a new PT is not generated on 1/1/2002.

While it's true that the earnings were not paid to the Plan until 2003, they were not part of the PT. The earnings are a separate item necessary to put Plan particiapnts in the same position they would have been in.

Anybody else have an opinion on this?

[E as in ERISA]

I would note that its my understanding that the 5330 is usually only filed for the year of correction. What I would have normally seen in this case is a 2002 Form 5330 filed for the interest on the 2001 late deposit....and in some cases for the interest on the interest (which is usually nominal). Its my understanding that the IRS doesn't pursue those further (from a former IRS employee).