Your 401(k) is running smoothly — contributions go in every payroll, the match is funded, everyone is happy. Then one day your accountant asks whether the company ever held employee deferrals a few extra days before depositing them, or whether the plan overfunded the owners last year. If the answer is yes, you may owe a tax you have never heard of, reported on a form you have never filed: Form 5330, the Return of Excise Taxes Related to Employee Benefit Plans.
Form 5330 is the IRS's collection point for more than a dozen different excise taxes that apply when something goes wrong with a retirement plan or employee benefit plan. Most of them exist to punish transactions that put plan assets at risk or enrich insiders. This guide walks through what the form covers, the two taxes small businesses trip over most often, how the penalties are calculated, and how to fix mistakes before the second, much larger tax kicks in.
What Form 5330 Covers
Think of Form 5330 as a single envelope for many different problem taxes. Each tax has its own Code section and its own schedule on the return. The full roster includes:
- Prohibited transactions (section 4975) — dealings between the plan and insiders
- Nondeductible employer contributions (section 4972) — putting in more than the deduction limit allows
- Minimum funding deficiencies (section 4971) — failing to fund a defined benefit pension as required
- Excess 401(k) contributions (section 4979) — failed ADP/ACP nondiscrimination testing, left uncorrected
- Reversions of plan assets to the employer (section 4980) — taking money back out of the plan
- Excess 403(b) contributions (section 4973(a)(3)), ESOP dispositions and allocations (sections 4978 and 4979A), funded welfare plan benefits (section 4976), excess fringe benefits (section 4977), prohibited tax shelter transactions (section 4965), and missed benefit-reduction notices (section 4980F)
If your business sponsors a 401(k), a SEP, a SIMPLE IRA plan, or a defined benefit plan, the sections that matter most to you are 4975 and 4972, with 4979 close behind. The rest mostly affect pensions, ESOPs, and large employers — but it helps to know they share one return, because a single plan failure can trigger more than one of them.
Prohibited Transactions: The 15% Tax That Becomes 100%
Section 4975 is the heart of Form 5330 for small businesses. A prohibited transaction is a broadly defined category: almost any dealing between the plan and a disqualified person. Disqualified persons include the employer sponsoring the plan, fiduciaries, owners of 50% or more of the business, officers and directors, highly compensated employees, service providers, and their family members.
Prohibited transactions include selling, exchanging, or leasing property between the plan and a disqualified person; lending money or extending credit; furnishing goods, services, or facilities; transferring plan income or assets for the use or benefit of a disqualified person; and a fiduciary using plan assets in its own interest. Note that intent does not matter — a transaction that technically fits the definition is prohibited even if everyone acted in good faith and the plan lost nothing.
The mistakes small plans actually make
Three patterns account for most small-business 4975 filings:
Late employee deferrals. When you withhold 401(k) contributions from paychecks, that money becomes plan assets quickly — the Department of Labor expects small plans to deposit deferrals within seven business days, and larger plans as soon as reasonably possible. Every payroll where the company holds deferrals past the deadline is a prohibited transaction: the employer used plan assets for its own benefit. A business that habitually deposits deferrals two weeks late can rack up dozens of separate transactions in a year.
Loans and leases with the owner. A self-employed person borrows from the plan beyond what the participant-loan rules allow, or the business leases office space from the owner's IRA-owned property. Participant loans have strict limits — generally the lesser of $50,000 or half the vested balance, repaid within five years — and anything outside those lines is a prohibited loan.
Overlapping service deals. Hiring a company owned by the plan fiduciary's spouse to administer the plan, or paying unreasonable compensation to a related-party provider, can be a prohibited furnishing of services. Reasonable, arm's-length arrangements with proper exemptions are fine; cozy ones are not.
How the tax is computed
The first-tier tax is 15% of the amount involved for each year (or part of a year) in the taxable period. The amount involved is generally the greater of the amount of money and the fair market value of property given or received. For a continuing arrangement like a lease or an uncorrected late deposit, each year the transaction remains uncorrected generates a fresh 15% charge — the instructions walk through exactly this stacking with a worked example.
The second-tier tax is where the real pain lives: 100% of the amount involved if the transaction is not corrected within the taxable period. Correction means undoing the transaction to the extent possible and putting the plan in a financial position no worse than it would have occupied had the disqualified person acted under the highest fiduciary standards — typically restoring the assets plus lost earnings. Each disqualified person who participated must file a separate Form 5330, so one bad deal can produce several returns.
Nondeductible Contributions: The 10% Tax on Overfunding
Section 4972 imposes a 10% excise tax on nondeductible employer contributions to qualified plans. Every employer deduction for plan contributions has a ceiling — for defined contribution plans, generally 25% of the compensation paid to plan participants during the year. Contribute more than the limit and the excess is nondeductible for income tax purposes; leave it sitting in the plan instead of withdrawing it, and the 10% excise tax applies year after year until the excess is used up or removed.
Small businesses usually trigger this tax in one of three ways. First, a profitable year tempts the owners to stuff extra money into the plan without checking the 25%-of-compensation cap — especially common in owner-heavy businesses where a large contribution for two owners blows past the limit computed over modest staff payroll. Second, a defined benefit plan gets a contribution computed from an outdated actuarial valuation. Third, an acquisition or payroll swing shrinks eligible compensation after contributions were already made.
The fix is to remove the excess or apply it against future deductible contributions. Defined benefit plans and certain defined contribution situations have exceptions and ordering rules, so run the calculation with your actuary or CPA before writing the check — but the principle is simple: deductible contributions go in, excess comes out, and whatever nondeductible amount stays behind pays 10% annually.
The Other Schedules Worth Knowing
Even if 4975 and 4972 are your main exposures, three more schedules deserve a quick scan:
Failed nondiscrimination testing (section 4979). If your 401(k)'s ADP or ACP test fails — meaning highly compensated employees deferred disproportionately more than everyone else — the excess must be refunded within 2.5 months after the plan year ends. Miss that window and a 10% excise tax applies to the excess, reported on Form 5330. Safe-harbor plan designs exist precisely to make this schedule irrelevant.
Minimum funding deficiencies (section 4971). Defined benefit pensions must be funded according to statutory minimums. Fall short and the excise tax applies to the unpaid balance — 10% for single-employer plans, with a 100% second-tier tax if the deficiency is not corrected. Cash-balance plans, which many small professional firms now sponsor, live under these rules too.
Reversions (section 4980). When a plan terminates with surplus assets that revert to the employer, the reversion is hit with an excise tax of 20% — or 50% unless the employer establishes a replacement plan or provides enhanced benefits to participants. Terminating an overfunded pension without planning for this tax is an expensive surprise.
Filing Mechanics: Who Files, When, and How
Who files. The person liable for the tax files the return: the disqualified person for prohibited transactions, the employer for nondeductible contributions and funding deficiencies. Remember that each disqualified person in a 4975 transaction files separately.
When. For the most common schedules — 4972, 4973(a)(3), 4975, 4976, 4978, and 4979A — the return is due by the last day of the seventh month after the end of the filer's tax year. A calendar-year filer reports 2026 excise taxes by July 31, 2027. A few sections keep their own deadlines, so confirm the due date for your schedule in the instructions rather than assuming.
How. Form 5330 can be filed electronically through the IRS Modernized e-File system, and e-filing is mandatory for filers who file at least 10 returns of any type in the calendar year the Form 5330 is due — filing on paper when e-filing is required counts as not filing at all. Note that the IRS waived the e-file mandate for tax years ending December 31, 2025, but the mandate is the default rule going forward.
Correct first, file second. Filing the return reports the tax; it does not fix the underlying problem. For late deferrals, the Department of Labor's Voluntary Fiduciary Correction Program lays out the accepted correction: deposit the missing amounts plus lost earnings, and document everything. For operational plan failures more broadly, the IRS Employee Plans Compliance Resolution System provides self-correction and voluntary-correction paths. A clean correction record is also what stops the 15% annual meter — and blocks the 100% second-tier tax entirely.
Common Mistakes That Make a Small Problem Big
- Treating the company and the plan as one wallet. Late deferrals are the number one self-inflicted 4975 transaction. Set up automatic deposits timed to each payroll and reconcile them monthly.
- Ignoring the deduction cap until tax time. Model the 25%-of-compensation limit before year-end contributions, not after the return is drafted.
- Correcting the operation but skipping the return. Depositing late deferrals with earnings fixes the plan; it does not report the excise tax. The 5330 is still due.
- Letting one late year become three. The 15% tax repeats for every year a transaction stays uncorrected, and the 100% tax looms at the end of the taxable period. Calendar the correction.
- Assuming good faith is a defense. Prohibited-transaction status turns on the structure of the deal, not on anyone's motives. Exemptions must be affirmatively satisfied.
Keep Your Plan — and Your Books — Clean
Form 5330 taxes share a root cause: plan money moving on a different schedule, or in a different amount, than the rules allow. The same discipline that keeps your general ledger trustworthy — timely deposits, monthly reconciliations, documented approvals — is what keeps excise taxes off your desk. When deferrals, match contributions, and deduction limits are tracked in real time alongside the rest of your finances, problems surface while they are still cheap to correct.
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