Late deposit of 401(k) and negative earnings

[MoShawn]

A company is 5 days late in depositing elective deferrals. Participants' accounts were down during the period, thus the actual deposit made was worth more than what the "earnings" would have been.

Is there a 5330 to file in this case? The "amount involved" when considering elective deferrals is the lost earnings due. Since there were no lost earnings, there would be no amount involved and thus no excise tax?

[austin3515]

Lost earnings are due since it's late, and the DOL says you pay the greater of the udnerpaymetn penalty rate or the actual return. Of course, under the VFCP filing (which requires a submission), you would exclusively use the underpayment rate. The DOL has this built into their on-lien calculator.

http://askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx

With respect to the 5330, if it's only 5 days late, I would suggest it's not worth it since 10% of the lost earnings will be such a small dollar amount. We usually skip it unless the penalty due is greater than $100, which is based very loosely on informal guidance from the IRS

[Tom Poje]

Austin, its not realyy 'informal'

my notes say something like:

If excise tax amount is less than $100 then:

Pay to plan participants rather than IRS, may use online calculator to determine amount of lost earnings.

No notice to participants

No 5330 to IRS – but send a copy to DOL apparently just for the heck of it

Its buried somewhere in the class exemption, or something like that, but I would have to dig out my notes to find out exactly where. I think its in the Fibber and McGee closet, so you don't want that to be opened.

[Guest Scott Foreman]

This may help in the discussion of de minimus amounts for the Form 5330. Please see page 3 "Discussion of Written Comments Received".

71 FR 20135

Scott

[austin3515]

I see something on page 5 that discusses the $100 threshhold, but only in the context of VFCP. But it does give more weight to the $100 threshhold that I've heard thrown about.

If anyone happens to know of a place in published IRS guidance that says de minimis equals $100, but deposit the tax to the trust, I'd love to see it. The question comes up constantly on these boards!!

[Tom Poje]

ugh. you make me dig through my stacks and piles notes and folders. get buried under a mess. papers everywhere on floor. you no longer good friend.

the $100 is also discussed in

Amendment to Prohibited Transaction Exemption 2002-51:

The Internal Revenue Service (the Service) submitted a comment

requesting a modification to the current requirement in PTE 2002-51

which provides that an applicant must notify interested persons in

writing of the transactions for which relief is being sought pursuant

to the VFC Program and this exemption.\6\ The Service requested that

the notice requirement not apply in those situations where: (a) The

excise tax due under section 4975 of the Code for a failure to timely

transmit participant contributions and loan repayments is less than or

equal to $100.00; (b) the excise tax that otherwise would be owed and

payable to the United States Treasury is contributed to the plan; and

© the contribution is allocated to the accounts of the plan's

participants and beneficiaries in a manner consistent with the plan's

provisions concerning the allocation of plan earnings. Lastly, the

Service noted that, under the circumstances outlined above, employers

that meet the applicable conditions of the class exemption would not be

required to file a Return of Excise Taxes Related to Employee Benefit

Plans (IRS Form 5330) with the IRS. After considering the issue, the

Department has determined to modify the final exemption as requested by

the Service. The Department notes that, for the purpose of determining

whether the excise tax due under section 4975 of the Code for failing

to timely transmit participant contributions and loan repayments is

less than or equal to $100, and determining the amount to be

contributed to the plan, an applicant may calculate the excise tax that

would otherwise be imposed by section 4975 of the Code based upon the

Lost Earnings amount computed using the Online Calculator.

and also found under

"FAQs about the 2006 VFCP update"

Why did the Department amend the class exemption?

Based on growing public use of the VFCP and the related exemption, we expanded the VFCP to include new transactions and amended the class exemption to add two of these transactions, the illiquid asset and settlor fees transactions. In addition, the IRS recommended that we eliminate the notice requirement in some delinquent employee contribution situations if the amount of the excise tax is less than or equal to $100 and certain requirements were met. We adopted this recommendation.

but...

Participant contributions to the plan were delinquent, but the dollar amount needed to correct is very small. Do I have to participate in the VFCP?

No one is required to file an application under the VFCP to correct a violation. Participation is voluntary. Of course, you must take appropriate actions to correct the violation even if you don’t submit an application. However, if you don’t file an application with us, you can’t get the relief available under the Program. In addition, if we discover the violation during an investigation, and the correction was not complete, a civil penalty may be assessed on any additional amount required to fully correct the violation. Remember, too, that you aren’t eligible for the IRS excise tax relief unless you receive a no action letter. See the FAQs on the class exemption for more information.

..................

so, as I understand things, let say the amount is $75. I can go through the trouble of VFPC, skip paying the excise and put it in the plan or

I can simply send the excise tax to the IRS and not worry about VFPC, but possibly run the risk of trouble in the future (but that is sort of the way things work when you self correct under EPCRS)

[PensionPro]

Did something change or is this still an option to pay the excise tax to the trust if that amount is less than $100?  Thanks!

[ESOP Guy]

Some other links that talk about it that are more current.  I don't think it changed. 

 

[PensionPro]

Also, is there any exposure from using the DOL calculator (instead of computing actual earnings) if not filing under VFCP?  Thanks!

[chc93]

From what I understood, the DOL calculator is only "correct" (for lack of a better word) if filing through VFCP.  If not filing through VFCP, you can use the DOL calculator, but on audit/investigation, you may be subject to additional earnings and/or penalties.