Late deposits of employee deferrals: Paying the Piper

Posted by Stacey Snyder

Disclaimer: All blog posts are valid as of the date published.

ERISA Limited Scope AuditAs explained in Timeliness of Deposits, the Department of Labor (DOL) has set deadlines for which salary deferrals must be deposited into the plan. If these deadlines are not met, a prohibited transaction under Section 4975 will have occurred and Form 5330 must be filed and excise taxes paid for each year or part of the year that the prohibited transaction is outstanding.

The purpose of Form 5330 is to calculate and pay excise taxes on failures related to employee benefit plans. When Form 5330 is filed because prohibited transaction has occurred under Section 4975, the amount of excise tax is equal to 15% of the amount involved. In the case of late deposits, the amount involved is based on interest on the late deposits because the late deposits are treated as a loan to the employer.

The interest is calculated by multiplying the amount of deferrals withheld by the interest rate for underpayments of tax set by the Internal Revenue Service (IRS), which is currently 5%; prorated for the number of days the deposit was late.  For example, if deferrals totaling $25,000 were deposited 30 days late, your formula for calculating interest would be: $25,000*5%*(30/365) = $103. However, let’s say the deferrals of $25,000 were withheld in November or December and deposited 50 days late – 30 days during year 1 and 20 days during year 2. The interest calculated for year 1 ($103) should be added to the original amount of deferrals when calculating year 2 interest: $25,103*5%*(20/365) = $69. Additionally, year 1 interest must be added to year 2 interest when determining the excise tax due for year 2. Therefore, the total excise tax due based on the example above is $41: Year 1 excise tax ($103*15%) + Year 2 Excise Tax (($103+$69)*15%).

Each late deposit should be reported on Schedule C of Form 5330, which must filed by the end of the 7th month following the plan’s year end and can be extended for 6 months. Additional interest and penalties will be assessed on the amount of tax due if the form is not filed on time.

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