Lost Earnings and form 5330

So we have a client that missed a 401k deposit for 1/5/2021.  The total missed deferrals was $330.

The lost earnings was $11.14.

The 15% penalty is $1.68.

The question i have does the IRS have a deminimis rule for self-corrections like this or do they need to file 5330 and pay the $1.68 penalty.

Just looking for some clarification/thoughts on how best to handle.

An edited transcript of a 2011 IRS telephone forum about Form 5330 includes this:

Question 3: “Please confirm that there is no de minimis exception to the excise tax, the Form 5330 should be filed and the tax paid, regardless of the amount of excise tax due.”

The simple answer to that is that there is no [c]ite to quote for de minimis exception to the excise tax. At this time and in all the years I’ve been with the IRS, we have not deviated from this stance. There is no de minimis exception to the excise tax, no matter how small it is.

https://www.irs.gov/pub/irs-tege/5330_phoneforum_transcript.pdf

That statement is not authority. But it is logically consistent with Form 5330’s Instructions.

Peter.. that is what I thought.. and thank you for sharing.. i was hoping someone had a ruling or procedure from the IRS that maybe i just missed.. 

Is there a TRUE penalty for not filing the form in this case?  Other than there would be interest upon the interest?

Has anyone seen a client get into trouble for not filing that $3 5330?

This is very old now and informal:

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

Someone asked if there was a de minimis amount where one did not need to file the excise tax return. Someone else said that they had heard that if the tax was under $100 it did not need to be filed.

George Brim and Michael Sanders of the IRS said there was no set number. But they 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.

What no one knows is if this would be ok with the DOL if the sponsor receives a letter from them.  If one has done all of the self correction steps, one is supposed to be able to get a "no action" letter from the DOL without filing under VFCP.   I asked a DOL agent once a a conference and he said it was a "fascinating question".  He asked me to email it to someone at the DOL.  Of course I never got a response.

I also asked @Ilene Ferenczy about this once.  I don't pretend to speak for her, but my memory says she didn't like the idea and thought the excise tax should be paid no matter how small. 

Without doubting that Brim or Sanders said what D Lewis describes, seminar-law statements of IRS employees are preceded by the warning that nothing they say is the Treasury’s, or even the Internal Revenue Service’s, rule, interpretation, or position.

While the March 24, 2011 IRS forum I quoted likewise is not authority, it’s safer to follow a statement confirming the absence of a dispensation than to rely on ostensible relief stated in no rule or regulation and in no administrative-law publication Internal Revenue Code § 6662 permits one to treat as authority.

On 2/7/2022 at 8:11 PM, Ahuntingus said:

So we have a client that missed a 401k deposit for 1/5/2021.  The total missed deferrals was $330.

The lost earnings was $11.14.

The 15% penalty is $1.68.

The question i have does the IRS have a deminimis rule for self-corrections like this or do they need to file 5330 and pay the $1.68 penalty.

Just looking for some clarification/thoughts on how best to handle.

No, the IRS does not explicitly have a deminimis rule, BUT they did request that the DOL add one to the updated VFCP effective 5/19/2006 and to the Amended PTE 2002-51 effective for the same time.  In short, if the contributions are remitted to the Plan within 180 calendar days, the excise tax on the lost earnings would be less than $100, and that same amount is also added to the Plan's trust along with the calculated lost earnings; then there is no requirement to separately file a Form 5330 for payment of said excise tax.

On 2/7/2022 at 9:00 PM, Peter Gulia said:

An edited transcript of a 2011 IRS telephone forum about Form 5330 includes this:

Question 3: “Please confirm that there is no de minimis exception to the excise tax, the Form 5330 should be filed and the tax paid, regardless of the amount of excise tax due.”

The simple answer to that is that there is no [c]ite to quote for de minimis exception to the excise tax. At this time and in all the years I’ve been with the IRS, we have not deviated from this stance. There is no de minimis exception to the excise tax, no matter how small it is.

https://www.irs.gov/pub/irs-tege/5330_phoneforum_transcript.pdf

That statement is not authority. But it is logically consistent with Form 5330’s Instructions.

Again, the IRS hasn't granted an exception, but they did request one be honored by the DOL.  And I'll go so far as to espouse that I believe EPCRS contains a reference to the VFCP, so it would then be incorporated back to the IRS by inference.

On 2/9/2022 at 8:11 AM, BG5150 said:

Is there a TRUE penalty for not filing the form in this case?  Other than there would be interest upon the interest?

Has anyone seen a client get into trouble for not filing that $3 5330?

Not once, I have prepared dozens of these and always received a "no action" letter from the DOL, and also approval from the IRS under a VCP filing(Plan in question had multiple issues), and approval under an IRS CAP whereby we disclosed some more recent participant loan issues that were outside the scope of the original examination.

On 2/9/2022 at 9:06 AM, D Lewis said:

This is very old now and informal:

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

Someone asked if there was a de minimis amount where one did not need to file the excise tax return. Someone else said that they had heard that if the tax was under $100 it did not need to be filed.

George Brim and Michael Sanders of the IRS said there was no set number. But they 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.

What no one knows is if this would be ok with the DOL if the sponsor receives a letter from them.  If one has done all of the self correction steps, one is supposed to be able to get a "no action" letter from the DOL without filing under VFCP.   I asked a DOL agent once a a conference and he said it was a "fascinating question".  He asked me to email it to someone at the DOL.  Of course I never got a response.

I also asked @Ilene Ferenczy about this once.  I don't pretend to speak for her, but my memory says she didn't like the idea and thought the excise tax should be paid no matter how small. 

That was the IRS' reasoning cited in the response to the DOL that the additional paperwork and processing cost was excessive if the tax was less than $100

It wouldn't be the first time that Ilene has adopted a way too conservative stance that runs contrary to published guidance...

Based on the information Nate S describes, is there a difference between correcting under the Labor department's Voluntary Fiduciary Correction program and correcting without using that program?

On 2/11/2022 at 3:04 PM, Peter Gulia said:

Based on the information Nate S describes, is there a difference between correcting under the Labor department's Voluntary Fiduciary Correction program and correcting without using that program?

VFCP - DOL won't impose additional civil penalties; allowed use of DOL lost earnings calculator; summary documentation reporting for "no action" letter application; can treat excise tax under IRS requested de minimis guidance (i.e. no Form 5330 to be filed, calculated tax added to corrective contribution to trust)

w/o VFCP - would need to correct under EPCRS principles (DOL calculator not appropriate unless administratively convenient and no investment option returning >3%); DOL maintains right to impose additional civil penalties; full supporting documentation for "no action" letter application; Form 5330 required and excise tax payment due for all circumstances

It should also be noted that ANY late deposit instance should be reported on the 5500 even if amending a prior period filing; the DOL has warned that failure to not do so can result in disqualification of the filing, which under the new late filing penalty amounts would be abhorrently expensive.

Returning to Ahuntingus’ originating question, Nate S’s explanation resolves it.

No excise tax return is due for an excise tax that would have been no more than $100 if one submits under the Voluntary Fiduciary Correction program and meets VFC’s conditions, which include paying into the plan the amount that otherwise would have been the excise tax. (The conditions include showing EBSA an unfiled Form 5330 or a computation showing what would have been the excise tax.) This can get the relief of the related prohibited-transaction exemption. Under the 1978 Reorganization Plan, the Labor department has authority to make exemptions under Internal Revenue Code § 4975.

Or, no VFC = no de minimis.

21 hours ago, Peter Gulia said:

No excise tax return is due for an excise tax that would have been no more than $100 if one submits under the Voluntary Fiduciary Correction program and meets VFC’s conditions, which include paying into the plan the amount that otherwise would have been the excise tax. (The conditions include showing EBSA an unfiled Form 5330 or a computation showing what would have been the excise tax.) This can get the relief of the related prohibited-transaction exemption. Under the 1978 Reorganization Plan, the Labor department has authority to make exemptions under Internal Revenue Code § 4975.

Also, I believe, you can only get relief from the excise tax only once every two or three years.  I don't have a source, it's just how it was explained to me at a former job.

The condition BG5150 mentions is: “[II]F.(1) With respect to any transaction described in Section I. [the transactions one may correct under VFC], the applicant has not taken advantage of the relief provided by the VFC Program and this exemption for a similar type of transaction(s) identified in the current application during the period which is three years prior to submission of the current application.”

The source is the 2006 amendment of class Prohibited Transaction Exemption 2002-51 https://www.govinfo.gov/content/pkg/FR-2006-04-19/pdf/06-3675.pdf.

Also a FAQ which is a little easier on the eyes of some of us older folks... https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/vfcp-class-exemption-faqs.pdf