Code section 4975
Code Section 4975 provides for taxes on prohibited transactions. The initial excise tax is 15 percent of the "amount involved" for each year (or partial year) of the "taxable period." If the prohibited transaction is not corrected by the end of the taxable period, the excise tax is 100 percent of the amount involved.
- Computing the "amount involved" can be difficult. Under Rev Rul 2006-38, the amount involved if an employer does not timely pay the participant deferrals or contributions to a qualified plan is based on interest on those elective deferrals.
- Generally, each new taxable year will cause a new 15 percent excise tax on the amount involved. For example, a prohibited transaction by a calendar year plan in Dec. 2006 that is corrected in Jan. 2007 will result (somewhat unfairly) in two 15 percent excise taxes on the amount involved. (Note that the amount involved will usually change as of the start of each calendar year due to prior interest.)
- Rev Rul 2002-43 provides an example of how the first-tier excise tax is calculated over a multiyear taxable period. This ruling should be reviewed before attempting to calculate an excise tax for a transaction that spans multiple plan years.
- Rev Rul 2006-38 provides an example of first tier excise taxes for a delinquent 401(k) contribution.
- Form 5330 (excise tax return)
See prohibited transactions for guidance.