The formulas
- Tax for each prohibited transaction = 15% of its amount involved, for each year or part of a year in its taxable period
- A use of money is a new prohibited transaction on the first day of each later year in the taxable period
- Year k tax = 15% x sum of amounts involved for the transactions of years 1 to k
How it works
Section 4975(a) imposes a 15 percent tax on the amount involved for each tax year, or part of one, in the taxable period of each prohibited transaction. Transactions involving the use of money, such as a loan or late transmittal of participant contributions, give rise to a new prohibited transaction on the first day of each succeeding year in the taxable period, so earlier amounts are taxed again each year until correction.
The Form 5330 instructions illustrate this: a $6,000 amount involved in year 1 gives $900 tax for year 1; in year 2 the year 1 transaction is taxed again ($900) and the new $12,000 transaction adds $1,800. For late participant contributions the amount involved is based on interest on those amounts, under Revenue Ruling 2006-38. If the transaction is not corrected within the taxable period, the 100 percent second-tier tax applies.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the amount involved for late participant contributions?
The Form 5330 instructions base it on interest on the late elective deferrals, citing Revenue Ruling 2006-38.
Which rate applies if the rate changes mid-period?
The instructions apply the rate in effect at the beginning of each prohibited transaction's taxable period, citing Revenue Ruling 2002-43.
Sources
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