IRS Form 5330 is used when paying excise taxes related to employee benefit plans, including 401(k) plans, even though the error that caused the excise tax has already been corrected. While Betterment can help answer questions, typically your accountant or attorney will help you prepare this filing.
When would a 401(k) plan incur excise taxes?
Although no plan sponsor wants or expects to incur excise taxes, sometimes a 401(k) plan may trigger an excise tax due to administrative oversight, most often when employee deferrals are deposited late.
Although the form covers nearly two dozen situations, some of the most common situations are outlined below. Note that the amount of the excise tax and the filing deadline varies depending on the reason for the excise tax. Note that you must file one Form 5330 to report all excise taxes with the same filing deadline.
|Reason for Excise Tax||Description||Amount of Excise Tax||Filing Deadline|
|Late deposits of employee deferrals (late payroll)||For small businesses, deposits are considered late if they are made more than 7 business days from the date deferrals were withheld from payroll.
Large plans must deposit contributions as soon as administratively feasible but no later than 15 business days of the month after the contribution was withheld. However, if the plan has established a precedent for depositing contributions earlier, then that precedent will define what is considered late.
|15% of lost earnings||Last day of the 7th month after plan year end|
|Failed ADP/ACP test refunds issued after deadline||Refunds issued more than 2 ½ months after the close of the plan year are considered late.||10% of the refund excluding investment gains||15 months after the close of the plan year|
|Contributions exceeding the annual tax deduction limit||An employer’s deductions for contributions to a 401(k) plan cannot be more than 25% of the compensation paid during the year to eligible employees participating in the plan.||10% of the excess contribution||Last day of the 7th month after the plan year-end|
Penalties for late filing and late payment
Failure to file Form 5330 on time results in a 5% penalty each month, up to a maximum of 25% of the unpaid tax. Failure to pay excise taxes on time may result in a penalty of ½ of 1% of the unpaid tax for each month, up to a maximum of 25% of the unpaid tax.
Penalties will not be imposed if you can show that the failure to pay on time was due to reasonable cause. Interest and penalties for late filing and late payment will be billed separately after the return is filed.
The deadline to file Form 5330 may be extended for up to six months by filling a Form 5558 on or before the date the 5330 is due. The extension applies only to Form 5330, not to the payment of the excise tax, which must be paid on or before the original deadline.
Links to forms, instructions and useful information
IRS forms are periodically updated, so be sure to download the latest form and other relevant information from the IRS website.
- IRS Form 5330 Corner from IRS website, with links to latest Form 5330 and instructions.
- About Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns) from IRS website, including link to latest form.
Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.