Form 5330 - Improper Loan

[hunter001]

A plan went through DOL investigation and found that the plan allowed loans up through 1/1/2000. A participant was issued a loan as of 2/2/2000. Loans were not allowed at that time, therefore, creating a prohibited transaction. During the audit (2013) a 1099R form was issued in order for the participant to tax report on the outstanding loan amount. Furthermore, the IRS will be notified of this matter and a Form 5330 should be filed to also correct this.

The instructions for the Form 5330 are a nighmare and when I called the IRS on their helpline they told me no one there is trained to give any feedback on preparing the form.. . . . that's very frustrating. So Im hoping someone has a little advice or direction in this matter.

What is considered the amount involved? Is it the outstanding loan value or the interest that would have accrued if the dollars were part of the plan? Also, file a Form for every year 00-13? Any help would be appreciated.

[My 2 cents]

Just wondering -

Did you say that a 2013 audit turned up something from 2000 making a loan from back then a prohibited transaction? Isn't there any sort of statute of limitations? How could corrective action be needed now for something that happened a decade and a half ago? Assuming no fraud, wouldn't the IRS have to forgive any penalties that should have been paid so long ago? Aren't most of the relevant tax years all closed?

Assuming the dates are as indicated, how and why did the plan stop allowing loans as of 1/1/2000? Was it a deliberate amendment? If so, how could they have granted a new loan so soon after they amended loans out of the plan?

The corrections certainly sound draconian. Is that the worst plan transgression in all that time? Why is the DOL taking so hard a line?

[hunter001]

There were two active participants that have deemed loans as they stopped paying on around 2003. One participant's loan was issued before 2000 and this one was issued after the removal of the loans. This is why the DOL investigator started looking into the issue because currently the plan does not allow loans. Not sure of the circumstances of why they removed the loans, but Im assuming the recordkeeper was unaware that the loan policy was removed a month before the improper loan was made. Ive come across the mention of statute of limitations for the Form 5330 filing but not exactly sure of the timing?

[My 2 cents]

If the participants stopped loan repayments in 2003, wouldn't the entire outstanding balance at that time have become taxable at that time?

Ten years later, what recourse would the government have?

[masteff]

1) An ERISA 406 prohibited transaction is not the same as an IRS 4975 prohibited transaction. Unless a key fact is missing (specifically that the person who got the loan was a disqualified person), I'm not seeing why you would file a 5330.

<EDIT>: http://www.irs.gov/irm/part4/irm_04-072-011.html "2.The excise taxes described in IRC 4975 apply only in the instance of a prohibited transaction between a plan and a disqualified person. Because ERISA 406 and ERISA 407 are broader in their application than the Code, there might be a prohibited transaction under Title I for which the IRC 4975 excise tax cannot be imposed." <END EDIT>

2) Resist all temptation to report or amend something that's past its limitation as you can reset the clock and suddenly owe lots of penalties and interest. Only report or file if you are 100% certain that you have a current legal obligation to do so.

See this IRS manual: http://www.irs.gov/pub/irs-tege/epch1102.pdf It addresses the 4975 tax limitation on page 15:

"Thus, it is the filing of the Form 5500, and not the Form 5330, which starts the running of the statute. The timely filing of the Form 5500 series return, however, does not excuse the taxpayer from the delinquency penalty on delinquent Forms 5330 secured during the examination.

If the filed Form 5500 series return does not disclose the PT, the six-year statute period applies. The excise tax may be assessed, or collection begun without assessment, at any time within six years after the later of the date the Form 5500 series return was filed or due."

[hunter001]

In response to My2cents - the deemed loan was never tax reported in 2003, thus another issue.

Masteff - -the DOL notices states - Congress is enacting ERISA, added section 4975 to the Internal Revenue Code of 1954, which imposes an excise tax on disqualified persons (generally, the same as parties in interest under Title I of ERISA) who engage in prohibited transactions with employee retirement benefit plans. As a company employee the participant with the improper loan is a party in interest to the plan.

[My 2 cents]

I still wonder if a 2003 violation would be too long ago for there to be a current penalty or tax.