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Employee Plans Compliance Unit (EPCU) - Completed Projects - Project with Summary Reports - Prohibited Stock Allocations in ESOPs Project

Summary Report


The purpose of this project was to verify compliance with the prohibited stock allocation (PSA) rules and to ensure Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, is filed appropriate to the Form 5500. The project focused on those Forms 5500 returns that indicated a PSA occurred for plan years ending between 200701 through 200812 without a Form 5330 filed reporting excise tax under IRC 4971A. In addition, Forms 5330 filed reporting excise tax under 4975(a) by plan sponsors identified under the previous criteria were reviewed to ensure accuracy of the plan number, plan year and code section used to report excise tax.

Project Benefits & Conclusion

This project allowed EPCU to determine the validity of information reported by Form 5500 filers indicating they had a Prohibited Stock Allocation.

This project identified an issue with the conversion of information received from the DOL/EBSA to the IRS data base with regard to Form 5500 Schedule E line 1(b). (Note – This system has since been replaced with E-Fast2.)

Though no deficiencies were verified in the reporting of Prohibited Stock Allocations in ESOPs, this project put plan sponsors and their representatives on notice IRS is reviewing their returns and is cognizant of return filings that indicate operational problems. This project also verified the accurate filing and processing of Forms 5330.


A review of responses indicates returns identified as having a PSA shows the information was either reported in error or the conversion of the information into IRS systems was flawed. None of the plans identified had PSA issues. The following table shows the type of closure for each Form 5500 contact made:

Table 4: Type of Closure Form 5500

Year of Form 5500 Return Number of Contact Returns Closed as Processing Error Closed as Taxpayer Error Closed as Other
2006 1 0 0 1*
2007 6 4 2 0
2008 13 7 6 0
Total 20 11 8 1*

*Case was closed after initial contact letter was returned undeliverable with no new address available.

A review of the responses received with regard to the Form 5330 filings reflects excise tax was reported under the correct code section. The following table shows the type of closure for each Form 5330 contact made:

Table 5: Type of Closure Form 5330

Year of Form 5330  Return Number of Contact Returns Closed as No Change Closed as Processing Error
2001 1 1 0
2002 1 1 0
2005 2 1 1
2006 1 1 0
2008 1 1 0
2009 1 1 0
Total 7 6 1


Internal Revenue Code (IRC) section 409(p) precludes an ESOP from making an allocation in a non-allocation year (as defined in IRC 409(p)(3)) to any disqualified person as defined by IRC 409(p)(4). Violations of 409(p) by an ESOP subject allocations to an excise tax imposed on the S Corporation under IRC 4971A of 50%.  Allocations are taxable to the disqualified person under IRC 409(p)(2). Section 1.409(p)-1 of the Federal Tax Regulations provides further guidance and information.

Form 5500 Schedule E (ESOP Annual Information) Item 1(b) filed with the Form 5500 asks if any prohibited allocations (PSA) of securities occurred during the year. Returns indicating a positive answer are subject to excise tax under IRC 4971A. This excise tax is reported using Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.  EPCU sent inquiries in the form of compliance checks to 27 plan sponsors meeting project criteria.


This project identified 27 cases meeting project criteria, 20 cases were identified as filing a Form 5500 reporting a prohibited stock transaction with no record of filing a Form 5330 reporting the related excise tax, and 7 Form 5500 filings where the related Form 5330 had been filed. The sponsors contacted were asked to:

  1. Please explain the prohibited stock allocation that occurred.
  2. Explain why a Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, was not timely filed as required under Code section 409(p).
  3. Send a completed Form 5330 (for the applicable tax year(s)) to reflect the amount of excise tax due to the address indicated on the attached 1564-D letter.
  4. Send amended Forms 1040, U.S. Individual Income Tax Return (for the applicable year(s)) to reflect the increase in income of the disqualified person(s) who received the prohibited stock allocation(s) to the address indicated on the attached 1564-D letter.
Page Last Reviewed or Updated: 28-Jul-2016