Form 5330 Excise Tax

[Guest moosegirl]

I am completing Form 5330 for late deposit of employee deferrals. The deferrals were deposited approximately 60 days late. The employer has now also deposited the lost earnings on the late deposit.

I have calculated the excise tax as 15% of the earnings on the late deposit from the date it should have been made until the date it actually was made. Is there an additional excise tax on the deposit of the lost earnings? The lost earnings were deposited approximately 1 year after the deferral. Please note that we used compounding when we computed the lost earning amount.:confused:

[Guest LKHartnett]

Yes, you are paying an excise tax on the "fair market value" of this deposit, and it includes lost earnings.

On top of the excise tax, the client should pay "constructive use" interest to participants, that is, interest paid on all "borrowed" amounts for the time period "borrowed." That will include an interest rate on your undeposited lost earnings as well. That rate of interest is determined under code section 6621, and is Fed short term +3%.

I'm wondering if your client is a candidate for VFC . . . I don't know how much money we're talking about here, but if the client enters VFC, he can forego the excise tax altogether if he follows certain guidelines.

Delinquent deposits are a biggy with the DOL. You're handling the IRS part of it right now, but that doesn't protect your client from any DOL action.

[Guest LKHartnett]

Looking back at your posting, it does sound like the client accounted for the constructive use interest . . . I assume that's what you were referring to when you mentioned the "compounding." Just make sure that you've got a clear accounting of that amount, and how it was allocated to the participants. You may also want to make sure that it at least meets the Section 6621 rate. If the client chooses not to follow the DOL's VFC program, it's in his best interest to document all corrective measures with care.