Missed a few years of MP funding - a "how-to" on the 5330 preparation?

[AlbanyConsultant]

Just picked up a client that didn't make their 2000 ($30K) or 2001 ($9K) money purchase contributions. Luckily, the plan was converted to PS in early 2002, so there were no more required contributions. And now we want to make things as right as can be, given the circumstances.

If I understand the pyramid-like way this is supposed to work, I think I submit the following Forms 5330 with the penalties like so:

2001: $30K * 10% = $3,000

2002: ($30K * 2 + $9K) * 10% = $6,900

2003: ($30K * 3 + $9K * 2) * 10% = $10,800

2004: ($30K * 4 + $9K * 3) * 10% = $14,700

2005: ($30K * 5 + $9K * 4) * 10% = $18,600

Total penalty due: $54,000

And don't even get me started on earnings calculations... unless, that is, they're counted in the accumulated funding deficiency (which I don't believe they are).

Does this look right? I know I can't be the only one with a plan like this... thanks.

[jaemmons]

I don't believe that you can use a "pyramiding" approach in determining excise taxes for minimum funding deficiencies. I thought that this approach was for reporting prohibited transactions. In general, if a past funding deficiency is not corrected timely (see instructions to Form 5330), an additional 100% excise tax is assessed. If I read the instructions correctly, you would need to file a Form 5330 for every tax year that the funding deficiency was not satisfied. Of course late filing penalties may be applied due to the fact that they may have not ever been filed.

2000 tax year filing - Line 7a - $30k *10% = $3k for 2001

2001 - Line 7a - $9k * 10% = $900 plus Line 7b -$30k * 100% = $30k

Total exise taxes for 2002 filing = $30,900

2002 - Line 7b only - $39k * 100% = $39k for 2003

2003 - same as 2002

2004 - same as 2003

Total exises taxes (not including late filing penalties which may be assessed)=

$150,900

[SoCalActuary]

The last suggestion assumes a worst case scenario, in which the 100% excise tax was applied each year. You must remember that the 100% excise is only imposed after the IRS is informed and the deficiency is not remedied immediately. The IRS has the power to impose the excise you mentioned, but I don't expect them to do so.

Don't forget to include the interest adjustment each year on the failed contributions, to restore participant account balances to what they would have been if the payments were made timely. At the very least, include interest based on comparable short-term money funds, or possibly the Federal short-term interest rate, or the yield on the most favorable of the investment funds during the period. Because this is complicated, check the published guidance given others who were in the same boat.