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IRS Explains Taxation Of Late Plan Payments

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The Internal Revenue Service has issued procedures employers can use when computing tax obligations resulting from delays in sending employees’ contributions to 401(k) plans and other retirement plans.

The procedures, described in IRS Revenue Ruling 2006-38, may affect employers that fail to meet plan payments deadlines even though they have the ability to do so.

Section 4975(a) imposes a 15% “first-tier excise tax,” or penalty tax, on an employer that profits from a prohibited transaction, and it imposes a 100% “second-tier excise tax” on employers that fail to correct prohibited transactions during a taxable period, Michael Rubin, an IRS employee plans specialist, writes in the revenue ruling.

Rubin writes in the revenue ruling solely about computation of the 15% first-tier excise tax. He helps clarify the nature of the “amount” subject to the excise tax.

When employers need to pay the first-tier excise tax, they can apply the 15% excise tax rate to any interest owed on the late payments, Rubin writes.

The interest rate used should be the rate for underpayments described in Section 6621(a)(2) of the Internal Revenue Code, Rubin writes.

“This revenue ruling only applies for purposes of determining the amount involved under Section 4975 when there is a failure to transmit participant contributions or amounts that would have otherwise been payable to the participant in cash, and does not apply to self-dealing violations under Section 4941,” Rubin notes.

A copy of the revenue ruling is on the Web at Document Link


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