Correction/4975(b) excise tax

[Guest Richard Tennenbaum]

Generally, the second tier tax of 100% is avoided if the prohibited transaction is corrected during the taxable period. Section 4975(f)(5) more or less defines correction as 'undoing' the PH. For example, if you have a loan to a DQ'd individual, you've got to undo the transaction and put the plan back as it would have been if the loan never occurred.

Is there any authority that correction must also include the filing of the 15% tax related to 4975(a) during the taxable period? I haven't come across any, but I recall reading that the Service has taken that position.

Thanks,

[Guest Richard Tennenbaum]

Any comments? Just wanted to bump this in hopes of eliciting a comment or two...appreciate your help.

[WDIK]

The following link may be of some interest.

http://www.irs.gov/retirement/article/0,,id=163722,00.html#5

[J. Bringhurst]

Generally, the second tier tax of 100% is avoided if the prohibited transaction is corrected during the taxable period. Section 4975(f)(5) more or less defines correction as 'undoing' the PH. For example, if you have a loan to a DQ'd individual, you've got to undo the transaction and put the plan back as it would have been if the loan never occurred.

Is there any authority that correction must also include the filing of the 15% tax related to 4975(a) during the taxable period? I haven't come across any, but I recall reading that the Service has taken that position.

Thanks,

Since the filing of Form 5330 and the payment of the 15% excise tax may not be required if the DOL's voluntary fiduciary correction program is used, I would not consider payment of the excise tax to be part of the correction itself. What I've seen debated is whether or not the payment of lost earnings must be completed for the prohibited transaction to be fully corrected. I'd think that full correction would include lost earnings (i.e., putting the plan back in the position it would have been in had the PT not occurred), but some have taken a more aggressive approach on this.