Retirement Services

401(k)ology – Form 5330 Excise Taxes

Occasionally, retirement plan sponsors will owe excise taxes to the Internal Revenue Service (IRS) upon the occurrence of certain plan related failures. Retirement plans are exempt from taxation, if the plan is operated in compliance with both IRS and Department of Labor (DOL) regulations. The most common plan failures that result in excise taxes are the late remittance of employee contributions to the trust and the failure to timely process refunds due to failed nondiscrimination tests. Excise taxes are reported and filed with Form 5330, “Return of Excise Taxes Related to Employee Benefit Plans,” and the due date of the filing and associated excise tax payment depends on the nature of the failure.

Some plan sponsors may never need to file a Form 5330 or owe any excise taxes to the IRS as a result of a plan failure, but plan sponsors should be aware of the form and the filing requirements in case one of these issues arises. If a failure impacts the company retirement plan, the plan sponsor will first correct the failure and will subsequently pay the associated excise taxes to the IRS by filing Form 5330.

Form 5330 covers a broad range of excise taxes (twelve subsections of the Internal Revenue Code to be exact)—ranging from nondeductible contributions to a qualified plan, to prohibited allocations in an employee stock ownership plan, to prohibited transactions in a qualified plan, IRA, or HSA and covers all types of employee benefit plans (i.e., retirement plans, fringe benefit plans, welfare plans, and HSAs).

In this blog, we will review the most common failures that impact both 401(k) and 403(b) plans and provide the filing and tax payment due dates for the most common failures.

Common Failures Resulting in Excise Taxes

  1. Late Remittance of Employee Contributions to the Plan – Form 5330, Schedule C (Section 4975). ERISA requires that employee deferrals and loan repayments (i.e., “employee contributions”) be deposited to the retirement plan as soon as the assets can reasonably be segregated from the employer’s general assets. Failure to timely remit the employee contributions to the plan results in a prohibited transaction with excise tax liability under the Internal Revenue Code. The 15% excise tax is applied to the “lost earnings” or use of the money by the employer during the applicable period. Note that in some situations, employers can avoid the prohibited transaction excise tax and associated Form 5330 filing if they receive a formal VFCP “No Action Letter” from the DOL clearing the employer of the potential ERISA breach of fiduciary duty. For more information on late contributions and the Form 5330 exemption, see our blog “Late” Employee Deferrals and Loan Repayments.

  2. Failure to Timely refund Excess Contributions and Excess Aggregate Contributions due to a Failed ADP/ACP Test, Form 5330, Schedule H (Section 4979). 401(k) plans that are subject to nondiscrimination testing must satisfy the Average Deferral Percentage Test (ADP Test) each year; and, both 401(k) plans and 403(b) plans that provide for employer matching contributions and/or employee after-tax contributions must satisfy the Average Contribution Percentage Test (ACP Test) each year. 403(b) plans are not subject to the ADP Test due to the Universal Availability requirement in that type of plan. If a plan fails the ADP and/or ACP Test, refunds must be distributed to the Highly Compensated Employees (HCEs) within 2.5 months after the end of the plan year (March 15th for calendar year plans). Failure to timely refund the excess to the HCEs subjects the employer to a 10% excise tax reported on the Form 5330 that is based on the principal amount of the total refunds.
    Note: 401(k) Plans that contain Eligible Automatic Contribution Arrangements (“EACAs”) have a special extended deadline of 6 months after the plan year end to refund ADP/ACP excess amounts (June 30th for calendar year plans). For more information on EACAs see FAQs – Auto Enrollment.

  3. Nondeductible Employer Contributions – Form 5330, Schedule A (Section 4972). Defined contribution retirement plans are generally subject to an employer deduction limit of 25% of eligible plan compensation (other limits apply if the employer also maintains a defined benefit plan). If employer contributions to the retirement plan exceed the deduction limit for a plan year, the excess amount must remain in the plan to be allocated in a future plan year and is subject to a 10% excise tax. Although not as common as the first two failures, nondeductible contributions occur more frequently in profit sharing only type retirement plans and plans sponsored by sole proprietorships or partnerships where eligible plan compensation is not based on Form W2. For more information see Calculation of Plan Compensation for Partnerships.

Summary of 401(k)/403(b) Filing Due Dates

Reason for the Excise Tax

Form 5330 - Tax Payment Deadline

Prohibited transactions (late employee contributions), Section 4975. Applicable excise tax is 15% of the lost earnings, accumulates each plan year the transaction remains uncorrected.

Last day of 7th month after the employer’s fiscal year end (for calendar year filers, the deadline is July 31st)

Failure to distribute ADP/ACP Test refunds by 2.5 month deadline (6 months for EACA), Section 4979. Applicable excise tax is 10% of the principal amount if the refunds.

Last day of the of the 15th month following the end of the plan year for which the refunds were applicable. For a calendar year ended 12/31/2023, the deadline would be March 31, 2025.

Nondeductible contributions to a retirement plan, Section 4972. Applicable excise tax is 10% of the excess.

Last day of 7th month after the employer’s fiscal year end (for calendar year filers, the deadline is July 31st)

The filing due date(s) of the Form 5330 may be extended by filing a Form 5558, Application for Extension of Time to File Certain Employee Plan Returns; however, the extension does not extend the due date for the excise tax payment.

If the Form 5330 is filed late or the excise taxes are paid after the deadline, the IRS will send a follow up notice with regard to the amount of any penalties and interest due as a result of the late filing.

Practical Note: Report and file Form 5330 for each section separately. For example, if a plan must report both a prohibited transaction under Section 4975 and refunds processed after the deadline under Section 4979, file a separate Form 5330 for each. Technically, excise taxes with the same deadline to file can be reported on the same Form 5330; however, most practitioners will file these separately to prevent the misapplication of the taxes.

Conclusion

The Form 5330 is not a difficult form to complete, but there are some nuances to completing the form correctly, especially when reporting excise taxes due to prohibited transactions. Plan sponsors should consult with their tax professionals and service providers to ensure that the form is completed accurately before filing.

Newfront’s Retirement Services team is available to assist you with questions regarding plan operation, plan compliance or other retirement plan questions that may arise.

Email us at 401kHelp@newfront.com.

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Joni L. Jennings
The Author
Joni L. Jennings, CPC, CPFA™

Chief Compliance Officer, Newfront Retirement Services, Inc.

Joni Jennings, CPC, CPFA is Newfront Retirement Services, Inc. Chief Compliance Officer. Her 30 years of ERISA compliance experience expands value to sponsors of qualified retirement plans by offering compliance support to our team of advisors and valued clients. She specializes in IRS/DOL plan corrections for 401(k) plans, plan documents and plan design.

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