Late deposits of participant 401(k) contributions are the single most common reason plan sponsors file Form 5330. Even a few days' delay can trigger a prohibited transaction under IRC § 4975 — and the penalties can be steep if not addressed promptly.
What Is a "Late" Deposit?
Under DOL regulations, participant contributions must be deposited into the plan trust as soon as they can reasonably be segregated from the employer's general assets — and no later than the 15th business day of the month following the month of withholding (for large plans) or 7 business days (for small plans under the DOL safe harbor). In practice, the DOL generally expects deposits within 3–5 business days for large plans.
Why Is It a Prohibited Transaction?
When participant contributions are held by the employer past the earliest date they could have been deposited, the employer is effectively using plan assets — making it a prohibited transaction under IRC § 4975(c)(1)(B). The employer (or other disqualified person) owes a 15% excise tax on the "amount involved."
What Is the "Amount Involved"?
This is where most plan sponsors get confused. For late deposits, the "amount involved" is not the principal amount of the late deposit. It is the lost earnings on that amount during the period of the prohibited transaction — calculated using the IRC § 6621 underpayment rate.
The Lost Earnings Formula
Lost Earnings = Principal × (IRC § 6621 Rate / 100) × (Days Late / 365)
Then: Excise Tax = Lost Earnings × 15%
Example: A $10,000 payroll deposit was due on March 7 but wasn't deposited until March 21 — 14 days late. With an 8% § 6621 rate:
- Lost Earnings = $10,000 × 0.08 × (14 / 365) = $30.68
- Excise Tax = $30.68 × 15% = $4.60
Even though the tax is small, the IRS requires it to be reported on Form 5330 and the DOL may assess additional penalties during a Form 5500 audit if the late deposits appear on Schedule H.
Multiple Transactions on One Return
You can report multiple late deposit transactions on a single Form 5330 — each goes on a separate line of Schedule C. The total amount involved and total excise tax are summed on Part I of the form.
Self-Correction vs. Filing
The DOL's Voluntary Fiduciary Correction Program (VFCP) and the IRS's Employee Plans Compliance Resolution System (EPCRS) both offer paths to correct late deposits. However, if the transaction has not been corrected before the Form 5330 due date, filing and paying the excise tax is required regardless of any correction program.