"date of correction" for purposes of Form 5330 excise tax on late deposit of contributions

Plan sponsor has late deposit of deferrals over several pay periods over period of 4 years.  Deferrrals were only late by a few days (but technically outside the timing the employer generally could make the deposits).  However, lost earnings were not deposited until September 2026 for all payrolls (some going back to 2022).  In calculating the excise tax we looked at the example in Rev. Rul. 2006-38 which references the date the employer "corrected the failure" but does not indicate whether this was when the deferrals were deposited or when the lost earnings under VFCP were deposited.  If we use the deferral deposit date, the excise tax is minimal.  If we use the lost earnings deposit date the excise tax is dramatically higher (several thousands of dollars).  We were under the impression that the "correction date" is the date the prohibited transaction is fully corrected - meaning both deposit of the deferrals AND the deposit of lost earnings - to put the plan in the position it would have been in had no error occurred.  But we are now getting advice that we should use the deferral deposit date and not the lost earnings deposit date.  Does anyone have a cite to any IRS guidance, etc. on this?  Obviously, which route we choose will have a financial impact. 

We are filing a VFCP application and providing notice to participants in an effort to have the excise tax waived.  However, we would like to know what our exposure is if the waiver is not granted.

Any thoughts/guidance are appreciated!  

A couple of things to keep in mind here, the prohibited transaction is on the use of the money (i.e., a loan or extension of credit), so the excise tax is on the interest applicable to each plan year and is a rolling tax for subsequent years until the lost earnings were actually deposited to the plan. So a late deferral that occurs in 2022, where the lost earnings were not deposited until 2026 will require reporting on 5 Forms 5330 (2022, 2023, 2024, 2025 and 2026). The excise tax stacks each year.

Here is an example:

(Calendar‑year employer; 7% rate assumed for illustration only)

$50,000 of deferrals were due by 10/15/2025 and deposited 2/13/2026.

• 2025 Form 5330: $50,000 × 7% × 77/365 = $738.36 amount involved → $110.75 tax.
• 2026 Form 5330: two rows.
  • Row (i): the 10/15/2025 transaction, $738.36 → $110.75.
  • Row (ii): the 1/1/2026 deemed transaction on $50,738.36 × 7% (the rate in effect 1/1/2026) × 44/365 = $428.15 → $64.22.
  • Line 3 total: $174.97.

Correction under § 4975(f)(5) still requires depositing the principal plus lost earnings to the plan. The excise tax is a separate liability.

• Instructions for Form 5330 (Rev. 12/2025) — IRS
• Rev. Rul. 2006‑38 — IRS
• Internal Revenue Bulletin 2006‑29 (Rev. Rul. 2006‑38 text)

Below is a snippet of an Excel sheet I created to check the amount of excise taxes owed on the Forms 5330.

401kology - thanks for the detailed calculation example - very helpful!

If I understand your calculations correctly, you identify the "correction" of the late deferral as the date the deferrals were actually deposited (2/13/26 in your example), even though complete correction does not occur until the lost earnings are deposited.  In my experience those two date are not always the same.  In the case I'm dealing with currently the deferrals were deposited outside the historical time frame for this plan sponsor for deposit of deferrals, but within a few days; however the lost earnings were not deposited until years later.  We are preparing a VFCP application, including a request for waiver of excise tax.  The plan sponsor is asking for potential excise tax liability should the waiver be denied.  The difference in the excise due is significant if we calculate it based on the "full correction" date (i.e., the date the lost earnings are deposited) versus the deferral deposit date.  Based on the language in the Form 5330 instructions defining "correction", one could argue that the deposit of the participant deferrals a few days after the deposit deadline "places the plan in a financial position not worse than that which it would be if the disqualified person were acting under the highest fiduciary standards."  As you state, the excise tax is a separate liability from the liability to restore lost earnings. 

Ok. Let’s say payroll was 1/1/23….usually deposit 1/2/23….deposited 1/10/23…. discovered on 10/15//26 and corrected 11/11/26.

The first date (deposit date) determines how long you charge interest on the original deferral; the second (full correction date) determines how many tax years the original prohibited transaction remains subject to the 15% excise tax, absent an earlier assessment or notice of deficiency. RR-06-38.doc

The DOL calculator first computes lost earnings on the deferral through January 10, then compounds the unpaid lost earnings through November 11 if you entered that date in the Final Payment Date field. It does not compute earnings on the entire deferral through 2026.

For an ordinary Form 5330, your eight-day period is right for measuring the original use of principal. It doesn’t limit the tax to 2023. Under §4975(a) and the worked example in Rev. Rul. 2006-38, the original transaction’s amount involved carries into each tax year or part of a year until full correction.

So, for a calendar-year employer, if the original eight-day amount involved were $10, that original transaction would produce $1.50 of tax in each of 2023, 2024, 2025, and 2026, before considering any additional deemed transactions. The ruling also treats unpaid interest as part of the balance going into the next year. Applying that reasoning here, any additional annual computation would start with the unpaid earnings balance, since the original principal was already back in the plan. The ruling’s example does not expressly address principal and earnings paid on separate dates, so I’d document that application in the workpapers.

If you’re using the VFCP Self-Correction Component and claiming PTE 2002-51 relief, there is a different calculation. The 180-day condition measures when the deferral itself was remitted, so the 1/10 deposit meets that timing condition. If the other SCC and exemption conditions are met, the SCC uses 1/1, the withholding date, as the loss date (not 1/2), and the exemption directs you to calculate the amount paid to the plan using the DOL calculator’s lost-earnings amount. If today’s payment used 1/2 and the client intends to use SCC, it seems you would rerun it from 1/1 and address any shortfall.

Also I think your request would be not for a "waiver" but for “VFCP no-action relief and excise tax relief under PTE 2002-51.”  just being a little nit picky...

Finally, note when estimating the potential taxes due if PTE 2002-51 relief is unavailable, there also could be IRS late filing or late payment additions and interest.