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Employee Plans Compliance Unit (EPCU) - Completed Projects - Project with Summary Reports - Form 5330 - 4979 Excise Tax Report


There were two purposes associated with this project. The first was to verify compliance with deferrals and the proper calculation and reporting of excise tax under IRC Section 4979 for plans with cash or deferred arrangement (CODA) limits. The second purpose was to ensure Forms 5330, Return of Excise Taxes Related to Employee Benefit Plans, are filed appropriate to the Form 5500. The project focused on those returns who indicated excess deferrals were made for plan years ending between 12/31/2006 and 11/30/2008, and having filed the applicable Form 5330. The project also verified that employers filed Forms 5330 for plans not allowed to maintain a CODA.

The goal of this project was to verify nondiscrimination compliance was met by requesting and reviewing information to:

  1. Determine the plan provisions properly allowed and adopted a 401(k) as part of a CODA.
  2. Determine compliance with IRC Section 401(k)(11) for SIMPLE 401(k) plans.
  3. Determine compliance with IRC Section 401(k)(12) for Safe Harbor plans.
  4. Verify corrective measures were taken to satisfy ADP or ACP tests and any applicable 1099-Rs were issued.
  5. Verify reporting and the accuracy of calculations used to determine the amount of excise tax asserted under IRC Section 4979, requesting corrections when errors were identified.

Project Benefits and Conclusion

Though a valid sample was not worked for DC plans, this project indicates there is potentially an issue to be pursued with regard to proper ADP and ACP testing, correction, and classification of employees as HCE vs. NHCE. This project verified DB sponsors are correct in not filing excise tax returns under IRC Section 4979, though the incorrect use of Pension Feature Codes is an issue.


The results of this project with regard to returns indicating they sponsor DB plans, worked as compliance checks, are accurate as 100% of the returns identified were worked. Results for the DC plans worked as examinations should be viewed as for informational purposes as only 47 of the 185 returns identified for a valid statistical sample were contacted.

Tables two and three below show the type of closure for each Form 5330 contact made:

Table 2 Type of Closure Form 5330 DB Compliance Checks

Year of Return Number of Contact Returns Closed as Taxpayer Error
2006 15 15
2007 11 11
2008 2 2
Total 28 28

All returns identified as DB plans as having filed Form 5330 returns reporting excise tax under IRC Section 4979 were included in the project. All contacts were closed as Taxpayer Error. A review of the compliance check closures identifies issues with proper use of the plan benefit feature codes used by preparers when filing form 5500. It further indicates DB plans are not erroneously filing Forms 5330 reporting excise tax under IRC Section 4979, though errors exist in the tax computations.

Table 3: Type of Closure Form 5330 DC Plans Examinations

Year of Return Number of Contact Returns Closed as Taxpayer Error Agreed Tax Change Correction of Operation Practice Future Impact Referral to EP Exam or R&A No Changes Cannot Locate Current or Previous Audit
2006 18 1 3 6 2 6 0 0
2007 29 4 0 6 5 12 1 1
Total 47 5 3* 12* 7 18 1 1

*2 Agreed Tax Change contacts and 10 Correction of Operation Practice Future Impact contacts were also Referrals to EP Exam or R&A but are only listed in the specified category above.

Correction of Operational Practice Future Impact

Defects identified as operational practices having future impact on the plan did not have a significant effect on the ADP/ACP testing for the period examined, but could have an impact in the future. Ten of these cases were also referred to EP Examination for possible future year examinations.

Referrals to EP Examination or R&A

The top two reasons for referral for examination or to R&A were for:

  1. Errors in performing the ADP/ACP tests, and
  2. Improper classification of employees as HCE or NHCE.

Other reasons included

  1. Incorrect ratio or dollar leveling method
  2. Excise tax computed incorrectly
  3. Failure to provide requested information
  4. Deferrals not timely remitted
  5. Plan document failure
  6. Current/prior year testing method error
  7. Failure to amend the plan
  8. Form 1099R not issued
  9. Failure to follow the terms of the plan
  10. No fidelity bond


Internal Revenue Code (IRC) Section 401(k) provides the requirements for a cash or deferred arrangement (CODA). A CODA must be part of a profit sharing plan, a stock bonus plan, a pre-ERISA money purchase plan or a rural cooperative plan. In a cash or deferred arrangement (CODA), an eligible employee may elect to receive an amount in cash or to have the employer make payments as contributions to a plan for the employee’s benefit.

Under IRC Section 401(k)(3), an employer maintaining a 401(k) plan must annually compare the elective contributions of eligible highly compensated employees (HCEs) with those made by eligible non-highly compensated employees (NHCEs) by performing nondiscrimination testing. The exclusive nondiscrimination test for amounts contributed under a CODA is the actual deferral percentage (ADP) test. A failed ADP test can be corrected by distributing excess contributions to certain HCEs by no later than 12 months after close of the testing year.

The employer is liable for an excise tax equal to 10 percent of any excess contributions or excess aggregate contributions that are not corrected within 2 ½ months after the end of the plan year in which excess deferrals were made.


Originally for this project, a statistically valid sample was identified. However, due to the voluminous amount of documentation, statute concerns, amount of time necessary to work each case, and the burden to the taxpayer in providing documentation via correspondence, it was determined the project would be concluded with the cases reflected in the table below. The EPCU performed compliance checks for cases identified as DB and examinations on cases identified as DC.

Note: The entire sample was not worked for the examination segment of this project; therefore the results are not reflective of a valid sample and should be used for informational purposes only. With the exception of one state, reviewed returns were for entities in the Eastern or Gulf states, thus the sample was not geographically valid.

The table below summarizes the data queried from RICS indicating a Form 5330 filing reporting excise tax under IRC Section 4979 of $1,000 or more. In this report 2006 refers to periods ending 12/31/2006 thru 11/30/2007, and 2007 refers to periods ending 12/31/2007 thru 11/30/2008.

Table 1: Scope of Forms 5330

Year of Forms 5330 Return Number of Form 5330 Return Number of DC Filing Form 5330 Number of DC Filing Form 5330 Selected Number of DC Filing Form 5330 Not Worked Number of DC Filing Form 5330 Worked Number of DB Filing Form 5330 Return Selected & Worked
2006 2582 2565 93 75 18 15
2007 2157 2148 92 63 29 11
Total 4738 4713 185 138 47 26


Page Last Reviewed or Updated: 18-Aug-2016