When participant contributions are deposited late into a 401(k) plan trust, the "amount involved" for the § 4975 excise tax is not the deposit principal — it's the lost earnings on that principal during the period of the prohibited transaction. Getting this calculation right is essential for accurate Form 5330 reporting.
The Formula
Lost Earnings = Principal × (§ 6621 Rate ÷ 100) × (Days Late ÷ 365)
Excise Tax = Lost Earnings × 15%
Step 1: Determine the Principal
The principal is the total amount of participant contributions that were deposited late. If multiple payrolls were affected, each one is a separate transaction with its own calculation.
Step 2: Determine "Days Late"
Days late = the date the contribution was actually deposited minus the date it should have been deposited (the earliest date it could reasonably have been segregated from general assets). In practice, the IRS and DOL use the actual deposit date minus the payroll date as a proxy, though the standard is "earliest possible segregation."
Step 3: Find the Applicable § 6621 Rate
The IRS sets the underpayment rate under IRC § 6621 each quarter, expressed as an annual percentage rate. The rate is the federal short-term rate plus 3 percentage points. Recent rates have ranged from 5% to 8%. You can verify the current rate at IRS.gov/Newsroom before filing.
Worked Example
A plan sponsor withheld $25,000 in participant deferrals from the March 15 payroll. The plan's prior deposit history shows a consistent 3-day deposit pattern. The contribution was deposited on April 5 — 21 days after payroll. The applicable § 6621 rate is 8%.
- Days late: 21
- Lost earnings: $25,000 × 0.08 × (21 ÷ 365) = $115.07
- Excise tax (15%): $115.07 × 0.15 = $17.26
Multiple Payrolls
If multiple payrolls were deposited late, each is reported as a separate transaction on Schedule C of Form 5330. The total excise tax is the sum of 15% × lost earnings for each transaction.
What About the DOL's Online Calculator?
The DOL's VFCP online calculator uses a similar methodology but applies actual IRS-published quarterly rates (rather than an annual approximation) and compounds them for precision. For formal VFCP submissions, use the DOL calculator. For Form 5330 filings alone, the § 6621 annual rate formula above is the standard approach.
Interest Rate Changes Mid-Year
If the deposit was so late that it spans a quarter boundary where the § 6621 rate changed, you can either use the rate in effect at the start of the prohibited transaction (conservative approach) or pro-rate using each quarter's rate (more precise). The IRS has not issued definitive guidance on which approach is required for Form 5330 purposes.