Does anyone know where I can get an example of how to compute the 5330

[Guest Phil L.]

Does anyone know where I can get an example of how to compute the 5330 excise tax on late deposits? In particular, I am seeking answers to the following questions:

1. How to compute the 1999 excise tax for a deposit of salary deferrals relating to a 12/1/99 payroll that wasn't remitted until February 15, 2000. Assmume the amount is $1,000 and a reasonable interest rate on this transaction is 10% per annum. It seems to me that the excise tax for the 1999 year would be calculated by applying the 15% excise tax percentage times the interest on the deposits for the period 12/4/99 throught 12/31/99. (I assumed a 3 day turnaround for the date that the deposits should have been remitted in this example). I come up with an excise tax of about $7.40. Is this correct?

2. Is there a need to file another 5330 form for 2000 due to the fact that the prohibited transaction wasn't fully corrected by 1/1/00? How do I calculate the excise tax for 2000? Continuing with the example at hand, would the 2000 excise tax be another $12.60 calculated by taking 10%/365 multiplied by 46 days (1/1/00 to 2/15/00) multiplied by the $1,000 of salary deferrals?

3. Finally, when filing the 2000 5330 form (I am assuming that needs to be done), would the excise tax for 2000 be the $12.60 from 2000 plus another $7.40 from the 1999 prohibited transaction that wasn't corrected until 2000?

Thanks a ton to anyone who can steer me in the right direction!

Phil

5330 Excise tax calculation question - Assume a plan sponsor fails to remit the salary deferrals for the 12/15/99 payroll until 1/15/00. Assume

[Guest kwright]

Phil - sounds to me like you're doing the calculations correctly. All that work for so little excise tax!

[k man]

Phil L, did you ever determine whether this is the correct method or whether there is some other way to calculate the excise tax?

[Guest Phil L.]

I didn't get any responses that directly answered my questions. However, I do feel that the methodology outlined in my original question is correct for two reasons.

First, I have asked a number of people this same question and I didn't get any responses contrary to my understanding. And second, in the absence of clarity in the IRS publications, Revenue Procudures, regulations, etc., it sure seems like a reasonable interpretation. I have decided to employ the methodology I described and if the IRS or DOL advise that the calculations should be done differently, I'll happily revise the calculations (assuming they enlighten me as to the correct methodology).

I don't know if I've helped you all that much, but that is the approach I've taken.

[k man]

Phil L, do you know what the safe harbor rate of return is that should be used? ie. if the plan earned less than 10%, should we use 10% when claculating lost earnings?

[KJohnson]

The method Phil L. described is what I have used for calculating the excise tax. You simply treat the failure to make the contribution in a timely fashion as a "loan" and follow the guidance in 5330 regarding loans. Therefore, if the "loan" is not repaid until the following year, you would have two prohibited transactions to report for that year as described in Phil L.'s example. Because of related issues in the DFVC program, I have always used the Section 6621 rate as the "reasonable" interest rate but I don't think this is required.

Of course you also most restore participants accounts with lost earnings. I believe that DOL specifically addresses this in the DFVC material and my recollection is that their position is that you should credit the participant with the greater of what the actual return would have been on the untimely contributions or interest at the 6621 rate. If the earnings are not deposited at the same time as the contribution itself, there are also "earnings on earnings" issues.

If you want to follow through with full DFVC correction there are both notice requirements to participants and filing requirements with the DOL.

[Guest Jeff V]

I did one of these recently, the situation was very similar to yours - we had deferrals in November of 1999 that were deposited to the trust in January 2000.

This is how we handled the 5330:

We filed 1 5330, although we had to multiply the late deposits by 30% (excise tax was 15% x 2.)

We used only one 5330, using the dates 1/1/99 - 12/31/99.

The interest we awarded the affected participants was based on the most beneficial return of all the funds in the plan for the period the "loan" was outstanding.

The interest calculated on the interest was applied the same way. We have a daily valued plan, but we used the best annual performance, since there is no specific guidance by the IRS (only that the employee cannot suffer a loss (we inferred "lose money.")

[Guest RJM]

Where are the 6621(a)(2) interest rates posted?

Could major U.S. bank's current "prime rate" be considered a "reasonable interest rate"?

[KJohnson]

It comes out quarterly in the federal register which you can search at the GPO site. This link might work (or should at least get you started:

http://benefitsattorney.com/cgibin/framed/...gi?ID=66&id==66

[Guest CMC]

Anyone think you've got 2 prohibited transactions if late deferrals went in in the year they were late (2000) but the interest on the "loan" didn't go in until the next year (2001)?

If so, is the excise tax in 2001:

* 15% of the value of the use of the principal amount for the period from 1/1/01 to when the earnings went in; or

* 15% of the value of the use of the earnings (which is all the employer still had the benefit of on 1/1/01) for the same period?

Any thoughts would be very much appreciated.

[k man]

when completing the 5330 (line 26a(a)), what is the date of the prohibited transaction? is it the taxable year it occurred or is it the date the deferrals where late or something else? Also, when calculating the lost earnings and using the underpayment rate, do you divide the rate of return by the appropriate amount of days?