Calculating the Excise Tax on Prohibited Transactions (Posted May 22, 2005) Technical Tip 145: The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: A calendar year 401(k) plan has not been remitting deferrals timely. The plan sponsor would now like to make the plan whole and send in all outstanding deferrals. Is the amount that must be shown on the 5330 (and hence, subject to the 15% excise tax penalty) the TOTAL amount of all late deferrals or is it only the trust income lost due to the deferrals not being deposited timely? Response: Neither. When the deposit of participant contributions are untimely, the participants have lost an opportunity to earn investment income on such contributions during the period measured from the deposit deadline. The employer or other responsible fiduciary should correct the late deposit by making the participants whole for this investment opportunity loss under the VFC program. In addition, the employer, being in possession of plan assets, would be subject to sanctions under the prohibited transaction rules. The correction used in the VFC Program is not necessarily the same as correction for IRC § 4975 purposes. It is the prohibited transaction rules that require reporting using Form 5330. Since the resulting prohibited transaction is effectively a loan by the plan to the employer, in the amount of the delinquent contribution, Treas. Reg. § 53.4941-(e)-1(c)(4) requires the disqualified person to pay no less than the fair market value of interest on the loan. It is this interest amount that would be reflected on the 5330 and, thus, subject to the excise tax penalty. View all Tips © 2008 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.