Computing the Sec. 4975 excise tax for failure to timely deposit elective deferrals.

• Author: Lindbloom, John W.

Sec. 4975(a) imposes a 15% excise tax (first-tier excise tax) on a prohibited transaction. In addition, Sec. 4975(b) imposes a 100% excise tax (second-tier excise tax) on a prohibited transaction that is not corrected during the tax period. The tax applies to any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such). The excise tax applies to the "amount involved" in the prohibited transaction, which, for purposes of calculating the excise tax, was recently addressed by the IRS.

Rev. Rul. 2006-38

In the ruling, an employer sponsors a calendar-year, qualified profit-sharing plan that contains a Sec. 401(k) cash or deferred arrangement. Employees are paid on a payment date following the close of each payroll period. A portion of each employee's compensation is withheld in accordance with the election he or she makes under the plan. The aggregate amount withheld for all employees for the payroll period in question is $100,000. The employer could have reasonably segregated this amount from its general assets and deposited the funds with the plan oil Dec. 8, 2004, but failed to do so. It did not correct the failure until Dec. 30, 2005. The underpayment interest rate under Sec. 6621(a)(2) was 5% on Dec. 8, 2004 and on Jan. 1, 2005.

Definitions

Prohibited transaction: Under Sec. 4975 (c)(1)(D), a prohibited transaction is any direct or indirect transfer to, or use by or for the benefit of, a disqualified person, of a plan's income or assets. In addition, a prohibited transaction includes any act by a disqualified person who is a fiduciary when he or she deals with the plan's income or assets for his or her own interest or account; see Sec. 4975(c)(1)(E). Sec. 4975(e)(2) includes in its definition of a disqualified person an employer with employees covered by the plan.

Amount involved: Under Sec. 4975(f)(4), the "amount involved," generally, is the greater of the amount of money and the fair market value (FMV) of the other property (1) given or (2) received in such transaction. The FMV is determined as of the date on which the prohibited transaction occurs, for the first-tier tax. For purposes of the second-tier tax, it is the highest FMV during the tax period described in Sec. 4975(f)(2).

Tax period: The "tax period" begins with the date on which the prohibited transaction occurs and ends on the earliest of the date (1) of the mailing of a statutory deficiency notice, (2) on which the...