Prohibited Transaction

[Guest LTurner]

The CPA found, through late bank reconciliations, that two payroll run deposits for 401k deferrals did not clear the bank. Don't know if they got lost in mail or what, but investment company did not receive. The first was 2-28-03 and the second was 3-14-03, both were caught and resent - clearing the bank by 4-24-03. Plan year ended 3-31-03.

I believe these are prohibited transactions, and as such we need a 5330. Do we describe this as late deposits or as a loan? Seems like if it is a loan, we have to do this again for the next plan year also...?

Please advise.

[Guest oxdougw]

I'm pretty sure this is looked at as a loan to the company and you calculate either lost interest on the money to the plan or what should've happened with investment purchases if the contributions had posted on time and make up that difference.

[Guest LTurner]

I haven't yet seen on the 5330 where I calculate the interest and show it was deposited also. I'm currently looking at calculating the 15% excise tax on the prohibited transaction.... Is the 15% a flat calculation, or do we prorate it for the time period involved?

[Guest oxdougw]

Our Large plan auditor caught the late contributions I'm referring to and calculated the late interest on a spreadsheet. This then was the amount entered on the 5330 and the excise tax was calculated on the interest amount.

[Guest LTurner]

also, if all accounts are self directed do I make everyone whole by calculating each of their returns for the time period and allocating thus, or do I use an average? If the amount here is negligible, do I use an amount from some table? like 5% or something like that (seems I've heard about this but can't find it) to justify the use of the $ by the company until it was deposited.

[Guest LTurner]

so the excise tax is only on the interest amount? or original transaction plus interest?

[pmacduff]

The excise tax is only on the interest amount due.

[Guest cease]

I am in curious about this string of messages. Did anyone do a cost analysis of the impact of going to the DOL VFC process for these late contributions? I am wondering if the time it takes to file with the VFC program is worth the waiver of the excise tax and the reliance from the DOL?

[Guest LTurner]

cease, that is what i'm trying to do.... hence all my questions on excise, interest....

I feel the best thing to do is let the trustee make the decision after showing them the numbers

[chris]

I believe that under the VFC you have the option of paying the highest rate of return achieved under the investment options offered within the plan or a floor rate of return based on the underpayment rate in Sec. 6621 of the Code. Basing it on the underpayment rate is usually simpler to do.

[Guest jashendo]

Actually, there is not an option as to how to compute the amount. The payment required is the greater of the lost earnings amount (computation of which can vary depending upon the plan) or the 6621 interest rate. Technically, there is another amount that can apply -- the earnings realized by the employer from use of the amount involved-- but that is usually not an issue in delinquent contribution situations.