Guidance on Filing Form 5330 Related to Excise Taxes

Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, is used to report and pay excise taxes on certain prohibited transactions, including those specifically defined under the Employee Retirement Income Security Act of 1974 (ERISA), as well as other failures related to employee benefit plans. While the Form 5330 is not a form most plan sponsors or employers file regularly, it becomes necessary when specific compliance issues arise.

For tax-exempt entities, a filing may be required when a manager approves or causes the organization to participate in a prohibited tax shelter transaction, especially if they know or should know the transaction is not allowed. Similarly, disqualified persons or individuals who engage in prohibited transactions with retirement accounts may also be subject to filing, unless an exception applies.

Employers face filing requirements if they fail to meet minimum funding standards or required liquidity rules for certain plans. These rules exist to ensure that plans maintain sufficient assets to cover both current and future obligations.

Multi-employer plans carry additional responsibilities. An employer may need to file if they fail to comply with a required funding improvement or rehabilitation plan, or if they do not meet standards for plans classified as endangered or in critical status. Plan sponsors must also file if a rehabilitation plan is not adopted within the required time limit.

Sponsors of cooperative and small employer charity (CSEC) plans can also be subject to Form 5330. A filing is triggered when a funding restoration plan is not adopted within the required period, ensuring corrective action is taken to strengthen the plan’s financial position.

Excess contributions are another common cause for the need to file Form 5330. Employers must file if they contribute more than the allowable deductible limits to a qualified plan, while individuals must file if excess contributions are made to their 403(b) custodial accounts and remain uncorrected. Employers are also required to file if excess contributions are made to cash or deferred arrangements, such as 401(k) plans.

Excise taxes also apply in cases involving improper benefits or allocations. For example, an employer must file if they maintain a welfare benefit plan that provides disqualified benefits, or if they pay excess fringe benefits and elect to be taxed on those amounts. Employers and worker-owned cooperatives must also file if an employee stock ownership plan (ESOP) improperly disposes of qualified securities within three years or if prohibited allocations of ESOP securities—including S corporation stock—are made.

Finally, there are situations where the filing requirement is tied to plan terminations or notices. Employers must file if they receive a reversion of assets from a deferred compensation plan, since those assets were originally intended for participant benefits. In addition, both employers and multi-employer plans must file if they fail to provide the required notice of a significant reduction in the rate of future benefit accruals.

The excise tax liability reported on Form 5330 varies depending on the type of compliance failure or prohibited transaction. The table below summarizes the applicable excise tax rate and the corresponding due date for payment and filing:

These rules highlight the importance of timely monitoring and correction of plan compliance issues. Not only must employers restore participant accounts when failures occur, but they must also calculate and pay the required excise tax within the prescribed period to avoid further penalties.

In summary, Form 5330 acts as a safeguard within the retirement and welfare plan system, ensuring that failures, prohibited transactions, and excesses are identified and corrected through the payment of excise taxes. While many plan sponsors and employers may never encounter the need to file it, understanding when it applies is critical to maintaining compliance and avoiding costly penalties.

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