Late deposit of 2004 deferrals were done in early 2005, do we need to file two 5330's?

[Beltane]

When the books were reconciled in early 2005, it was discovered two deposits from early in 2004 were not made. We have calculated the lost earnings using the greatest rate of return of all fund options and are basing the excise tax on Form 5330 on this amount. Deposits were promptly made in early 2005 when discovered.

Looking at the 5330 instructions, it appears there are two taxable periods involved here, one for 2004 and another for 2005, although only one prohibited transaction, which occured in 2004. Any insight on if two 5330's must be filed? One for 2004 and the second for 2005? Or can we just report it on one 5330 using the taxable period of 1/1/04 -12/31/04?

thanks for any help

[Alf]

Definitely 2 5330s, but there are two PTs for 2005 (the 2005 5330 will have two entries904 and 05).

[Beltane]

Two entries on the 2005 version? One for the 2004 hypothetical earnings and a second for the 2005 hypothetical earnings?

Put another way, if the hypothetical earnings for 2004 were $ 120 and the hypothetical earnings for 2005 was $ 20, those would be your entries?

[RCK]

Yes, you have a 5330 filing for each tax year of the sponsor in which you have a PT. Assuming a calendar year tax year, the 2004 filing would include earnings on the missed contributions from date they would have gone in until the end of the year. Then the 2005 filing would be earnings on that balance from 1/1/05 until the date the contributions were made up, and earnings on the lost earnings until they are credited to the account.

For a plan that we acquired, we had to go back almost four years.

[Beltane]

Thank you, that makes sense.

[austin3515]

Should point out that you did not need to use the best performing fund. I think you were working off the old VFCP, not the new which came out I think in May? Anyway, the DOL's got a web-site and everything to calculate the lost earnings just based on the underpayment rate.

[Archimage]

That is something I have been wondering. Can you use that if you are not using the VFCP? I was thinking that it would also change with self correction outside of VFCP but I have not been able to find anything. If someone knows where this is, please provide me with a reference.

[jquazza]

Austin, the way I read it, I think you can use the DOL calculator only if you file with them under VFCP, not if you self-correct without filing. Do you agree?

[austin3515]

What I think is that the DOL came out and said if your filing under VFCP, this calculator is the minimum we will accept. Therefore, it stands to reason, that they believe the model to be sufficient, fair and accurate.

The "best performing fund" method came from the original VFCP program, and people used that regardless of filing under the old VFCP. I think it's fair to pretend that the "best performing fund method never existed...

[J2D2]

Have recently worked on a situation where the DOL discovered late contributions on audit. In response to the DOL letter, we have proposed restoring lost earnings using the VFCP calculator. I'll report back when we hear from DOL.

[E as in ERISA]

We should be clear here that the amount that you restore to the participant's accounts is not necessarily the same as the amount on which you pay the excise tax on Form 5330.

The amount you restore is what the participants have lost (based on how the money is invested).

The amount on which the employer pays excise taxes is essentially the amount that it has benefited. It doesn't matter how the participants were invested. The employer doesn't get a break on excise taxes if the employees were in money markets that paid nothing or in investments that lost money. The employer pays excise taxes on the commercial value of the loan. Using a business rate of interest. So the AFR is generally used.

http://www.reish.com/practice_areas/Techni...s/IRStip145.cfm

[austin3515]

For the 5330, you pay the greater of fair market value or the amount actually paid.

So let's say the underpayment rate exceeds the FMV rate (i.e., the rate the plan would have earned in arms-length loan). You still pay the excise tax based on the underpayment rate, because the amount paid (based on the underpayment rate) exceeds the fair market value rate.

Let's say the fair market value is greater than the underpayment rate... But wait, are you really going to take the position that you paid participants less than fair-market value? Certainly not when the DOL has endorsed the underpayment rate as a pseudo-safe-harbor rate of interest.