Late deferrals to ERISA 403(b) Plan

[Craig Garner]

According to my research, late deposits are corrected just like a 401(k) plan: late deposits are made and lost interest is deposited to the plan as calculated on the DOL DFVC calulator. (I know, technically, you should only use the calculator if you are going through VFCP, but I think most use the calculator anyway)

My confusion is on the next step: the prohibited transaction penalty (ERISA) and/or excise tax (4975). My research indicates that 403(b) plans are NOT subject to 4975, but they ARE subject (maybe) to ERISA 502(i). Further, Form 5330 cannot be used to pay the 5% penalty under 502(i). Is this true, even for ERISA plans?

After an ERISA 403(b) plan has corrected the late deferral PT, what is the next step? What penalties, if any, need to be paid and how do you pay them? And, does the penalty "pyramid" from year to year like it does with 4975 excise taxes?

I assume I continue to report late deferrals on Form 5500 until corrected, but I feel like I'm missing something if I don't also prepare From 5330.

This is a large plan, subject to a CPA audit, so any cites would be appreciated.

Craig Garner

[PensionPro]

ERISA 502(i) provides for the imposition of a civil penalty. It is not a mandatory excise tax.

[Craig Garner]

May I assume you agree that ERISA 403(b) plans are NOT subject to 4975? In which case the correction would be.....

-deposit the late deferrals

-calculate and deposit the lost earnings

-do not file Form 5330

-do not pay the 4975 excise tax

-report the late deferrals on Form 5500

-sit back and wait for the DOL to ask for a civil penalty...which may never occur.

It is the last step that concerns me. Instead of sitting back and waiting, would the plan be "well advised" to enter into the DOL VFCP, or do 403(b) plans generally sit back and wait?....just asking.

[PensionPro]

Yes I agree that ERISA 403(b) plans are not subject to 4975. In the last step the plan has the option to file under VFCP as you noted.