Section 4942 of the Internal Revenue Code: A Detailed Overview
Readers,
Welcome to our comprehensive guide to Section 4942 of the Internal Revenue Code. This section of the tax code plays a crucial role in ensuring compliance with employee benefit plans. In this article, we’ll delve into the intricacies of Section 4942, exploring its provisions, exceptions, and penalties. So, grab a cup of coffee and let’s dive into the world of employee benefit plans!
Section 4942: Overview
Section 4942 of the Internal Revenue Code imposes an excise tax on certain disqualified benefits received by disqualified persons from employee benefit plans. The term "employee benefit plan" refers to any plan, fund, or program that provides benefits to employees or their beneficiaries. Disqualified persons include anyone who is a fiduciary or has any control over the plan.
The Excise Tax
The excise tax imposed under Section 4942 is equal to 10% of the amount of the disqualified benefit. The tax is payable by the disqualified person who receives the benefit. The tax is not deductible for income tax purposes.
Exceptions to the Excise Tax
There are a number of exceptions to the excise tax imposed under Section 4942. These exceptions include:
- Benefits provided to employees who are over the age of 59½
- Benefits provided to disabled employees
- Benefits provided to employees who terminate employment and receive a lump-sum distribution
- Benefits provided to employees who die before receiving their full benefit
Penalties for Noncompliance
Failure to comply with the provisions of Section 4942 can result in substantial penalties. The IRS may impose a penalty of up to 100% of the amount of the disqualified benefit. The penalty is payable by the disqualified person who receives the benefit, as well as any plan fiduciaries who knowingly participated in the violation.
Table: Summary of Section 4942 Provisions
| Provision | Description |
|---|---|
| Excise Tax | 10% tax on disqualified benefits received by disqualified persons |
| Disqualified Persons | Fiduciaries and anyone with control over the plan |
| Exceptions | Benefits for employees over 59½, disabled employees, etc. |
| Penalties | Up to 100% of the disqualified benefit |
Examples of Disqualified Benefits
Some examples of disqualified benefits that may be subject to the excise tax under Section 4942 include:
- Loans to disqualified persons
- Payments to disqualified persons for services that are not related to the plan
- Use of plan assets for the personal benefit of disqualified persons
- Transfers of plan assets to disqualified persons
Conclusion
Section 4942 of the Internal Revenue Code is a complex and important provision that helps ensure compliance with employee benefit plans. Failure to comply with the provisions of Section 4942 can result in substantial penalties. If you have any questions about Section 4942, we encourage you to consult with a qualified tax professional.
To learn more about employee benefit plans, be sure to check out our other articles:
FAQ about Section 4942 of the Internal Revenue Code
What is Section 4942 of the Internal Revenue Code?
Answer: Section 4942 imposes an excise tax on net investment income of private colleges and universities with endowment assets over $500,000 per full-time equivalent student.
What is the purpose of Section 4942?
Answer: To generate revenue for scholarships and other financial aid programs for low- and middle-income students.
What does "net investment income" mean?
Answer: The difference between (1) the gross income from investments (such as interest, dividends, and capital gains) and (2) the expenses related to those investments (such as management fees and custodial expenses).
What is the tax rate under Section 4942?
Answer: 1.4%.
How is the tax calculated?
Answer: It is calculated by multiplying the net investment income by 1.4%.
Who is subject to the tax?
Answer: Private colleges and universities that have endowment assets over $500,000 per full-time equivalent student.
When is the tax due?
Answer: April 15th of each year.
Are there any exemptions to the tax?
Answer: Yes, there are exemptions for certain types of investments, such as those used for research and endowment funds invested in real estate or venture capital.
How does Section 4942 affect students and families?
Answer: By generating revenue for financial aid programs, Section 4942 helps make college more affordable for low- and middle-income students.
What are the main arguments against Section 4942?
Answer: Some argue that it unfairly targets private colleges and universities and that it discourages charitable giving to these institutions.
