5330 - late deposit of deferrals

[Belgarath]

Ignoring the fact that the 5330 is, IMHO, one of the more obnoxious forms ever, I'm taking a poll.

Let's take a fairly standard situation, and keep it simple. Suppose an employer forgets to deposit deferrals from one payroll in 2016. Discovers error in 2017, and corrects, with interest and prior to July 31, in 2107. Interest amounts are very small - say less than (pick a number) $25.00.

In the real world out there, do people:

A. File a 5330 for 2016, and be done with it.

B. File a 5330 for 2016, and another for 2017.

C. Other.

I've seen all kinds of answers/solutions, particularly when you get down to absurdly small amounts such as a few cents or a dollar or two. So I wondered what the experts here do. In case anyone cares, I would say the correct method is "B" above, since this isn't a "discrete" transaction, and is treated for these purposes as a "loan" - RR 2006-38 has an example of this.

[RatherBeGolfing]

B

[D Lewis]

"C" - we give the excise tax amount to the plan participants as additional earnings

See prior discussions:

 

 

[My 2 cents]

36 minutes ago, D Lewis said:

"C" - we give the excise tax amount to the plan participants as additional earnings

See prior discussions:

 

 

Unless I am missing something, don't you have to give the excise tax to the IRS???  I presume that you do not mean to say that you pay the excise tax to the IRS and then deposit a like amount to the participant accounts.  Form 5330 is supposed to be accompanied by a check to the government.

[RatherBeGolfing]

6 minutes ago, My 2 cents said:

Unless I am missing something, don't you have to give the excise tax to the IRS???  I presume that you do not mean to say that you pay the excise tax to the IRS and then deposit a like amount to the participant accounts.  Form 5330 is supposed to be accompanied by a check to the government.

If the excise tax is small enough (less than $100), you can pay the excise to the participants as part of the VFCP filing.  You still have to prepare to the 5330 you would have submitted to the IRS and submit it to the DOL with the VFCP filing.

 

[D Lewis]

23 hours ago, My 2 cents said:

Unless I am missing something, don't you have to give the excise tax to the IRS???  I presume that you do not mean to say that you pay the excise tax to the IRS and then deposit a like amount to the participant accounts.  Form 5330 is supposed to be accompanied by a check to the government.

We calculate the amount and give it to the participants - we don't send it or the 5330 to the IRS.  This is based on this informal guidance:

From the thread called "Late Deposits" (link above):

"At the 2011 Mid-Atlantic Benefits Conference in Philadelphia on May 5-6, the issue of the excise tax was discussed at one of the "Ask the Experts" sessions.

George Brim and Michael Sanders of the IRS said there was no set number. But they clearly stated that if the cost to calculate, fill out, and file the 5330, PLUS the cost of the IRS to process it (who would know what that amount is?), was more than the excise tax, they didn't want it filed. Instead they said to calculate the tax, and add it to the lost earnings, and give it to the participants."

As far as how much is the de minimis amount that it's ok to do this - a lot of people say $100, but I've never really heard there is a magic number.

The second part of the question about how to handle it with the DOL was never answered at the time (we asked the DOL at the conference and after by email).  We haven't seen the directions RatherbeGolfing gave (but haven't looking into it either).  We haven't done that part yet.

[RatherBeGolfing]

1 hour ago, D Lewis said:

As far as how much is the de minimis amount that it's ok to do this - a lot of people say $100, but I've never really heard there is a magic number.

Im pretty sure it stems from PTE 2002-51.  Note that for the PTE, simply depositing the amount as earnings is not enough, you also need to go through VFCP. 

PTE 2002-51 (my emphasis in bold)

Quote

Section IV. Notice

A. Written notice of the transaction(s) for which the applicant is seeking relief pursuant to the VFC Program, and this exemption, and the method of correcting the transaction, was provided to interested persons within 60 calendar days following the date of the submission of an application under the VFC Program. A copy of the notice was provided to the appropriate Regional Office of the United States Department of Labor, Employee Benefits Security Administration, within the same 60-day period, and the applicant indicated the date upon which notice was distributed to interested persons. Plan assets were not used to pay for the notice. The notice included an objective description of the transaction and the steps taken to correct it, written in a manner reasonably calculated to be understood by the average Plan participant or beneficiary. The notice provided for a period of 30 calendar days, beginning on the date the notice was distributed, for interested persons to provide comments to the appropriate Regional Office. The notice included the address and telephone number of such Regional Office.

B. Notice was given in a manner that was reasonably calculated, taking into consideration the particular circumstances of the plan, to result in the receipt of such notice by interested persons, including but not limited to posting, regular mail, or electronic mail, or any combination thereof. The notice informed interested persons of the applicant’s participation in the VFC Program as amended and intention of availing itself of relief under the exemption.

C. Notwithstanding the foregoing, Section IV.A. and B. shall not apply to a transaction described in Section I.A., provided that (i) the applicant under the VFC Program has met all of the other Program requirements; (ii) the amount of the excise tax that otherwise would be imposed by section 4975 of the Code with respect to any transaction(s) described in Section I.A. would be less than or equal to $100.00; (iii) the amount of the excise tax that otherwise would be imposed by section 4975 of the Code was paid to the plan and allocated to the participants and beneficiaries in the same manner as provided under the plan with respect to plan earnings; and (iv) the applicant under the VFC Program provides a copy of a completed IRS Form 5330 or written documentation containing the information required by IRS Form 5330 and proof of payment with the submission of the application to the appropriate EBSA Regional Office. For the sole purpose of determining whether the excise tax due under section 4975 of the Code on the ‘‘amount involved’’ with respect to the prohibited transaction involving the failure to timely transmit participant contributions and loan repayments is less than or equal to $100, an applicant may calculate the excise tax due based upon the Lost Earnings amount computed using the Online Calculator.

 

[Below Ground]

I thought that you could either (1) file an application under VFCP, or (2) file Form 5330 with payment of the tax.  (Lost earnings must be deposited to member accounts under either method.)  Why would a person complete Form 5330 AND complete a VFCP Application?

[RatherBeGolfing]

31 minutes ago, Below Ground said:

I thought that you could either (1) file an application under VFCP, or (2) file Form 5330 with payment of the tax.  (Lost earnings must be deposited to member accounts under either method.)  Why would a person complete Form 5330 AND complete a VFCP Application?

Filing VFCP doesn't excuse your excise tax under 4975, so you still have to file your 5330 and pay the tax.  Under limited circumstances, you can file VFCP and deposit what would have been the tax to the participants instead. But outside the PTE it really isn't an either/or situation...

[Below Ground]

I was looking at it from the other direction.  Doing the Form 5330 without a VFCP Filing.

 

[RatherBeGolfing]

3 minutes ago, Below Ground said:

I was looking at it from the other direction.  Doing the Form 5330 without a VFCP Filing.

 

Ok.  So you file a 5330 and pay the tax but don't go through VFCP.  There are several reasons why you may want to file VFCP in addition to paying your excise tax.  

Did you use the DOL calculator to figure out your lost earnings?  If you did and did not file VFCP, the DOL can come back at you and say you can't use it, either file VFCP or redo your calculations without the calculator.

Even if you didn't use the calculator, filing the 5330 does not grant you relief for fiduciary violations, it just means you paid tax on a prohibited transaction.

So in short, you can sometimes avoid filing a 5330 when filing VFCP, but you can't avoid filing VFCP by filing a 5330.  You are correcting different issues, but under limited circumstances, correcting one can give you relief on the other.

[Below Ground]

Typically, "my plans" have small sums related to late deferrals.  If the amount was large, I could and would justify the expense a client would need to pay.  However, when your penalty tax adds up to something like $15 on late deferrals that do not total $1,000, it is pretty hard to justify what would need to be charge to provide for the filing.  I do see your point though.

I am guessing, from the OP, I am not alone in this regard.