Calculating Excise Tax on Late Deferrals

[Guest TomW]

From my research there is no clear guidance on how to calculate the 15% excise tax for late deferrals to be reported on the 5330. I know it is based on the interest. I've checked the ERISA Outline Book and even it is unclear. The outline book hints at the fact that this would be treated as a loan to the employer. So does that mean that it is "discrete" or an ongoing transaction. And from what I can tell, the calculation for the interest to be deposited is different from what is used to calculate the amount for the 5330. And how does this come in to play when the prohibited transaction and the correction date spans two different years.

Can anyone shed some light on this for me or specifically direct me to a place the DOL or IRS has issued guidance on this subject?

Thanks.

[jquazza]

As far as the 15% penalty is concerned, we usually use the underpayment penalty rate for the applicable period, however, this should truly be calculated based on how the sponsor benefited. For example, the sponsor has a line of credit at the bank which would have been used to make the deposit. The prohibited transaction resulting from the use of the plan assets benefited the sponsor because he didn't have to tap in his line of credit to make the deposit, it would therefore be reasonable to use the line of credit interest rate as the base of earnings for the penalty calculation. The same logic would apply if the sponsor hold his funds in an account at a bank that's earning a specified interest. For all you know, the sponsor might have used the money to buy Lotto tickets and hit the jackpot, that how he benefited with the plan assets and that's what the penalty calculation should be based on.

For the make up earnings, there are several methods acceptable, actual rate of return of the plan investments (w/o regards to losses) best performing fund or the underpayment penalty rate (published quarterly in an IRS ruling, the latest one is 2004-56.)

[Guest mmc]

According the the instructions for Part VII (Section 4975) of the form 5330, "Section 4975(a) imposes a 15% excise tax on the amount involved for each taxable year or part thereof in the taxable period of each prohibited transaction."

The examples provided show prorated excise tax for partial years.