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Auditor reporting of corrective distributions


PLAN MAN

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The auditor is insisting we report the corrective distributions (for the 2014 plan year, corrected on 3/1/2015) on the Schedule H in the same manner they are treating these distributions in their financial statement. Specifically, the auditor wants us to -

1. Report these corrective distributions as a payable at 12/31/14 for excess contributions paid in the following year. We are to list them on line 1j(b), Other liabilities.

2. Reduce the Participant contributions reported on line 2a(1)(B) by the amount of these corrective distributions because their best practice is to reduce employee contributions because these were not eligible contributions. The audior says these contributions are required to be remitted back to participants and therefore were not actual contributions in 2014.

3. Not report the corrective distributions on line 2f, on either the 2014 or 2015 Schedule H, because the participant contributions are being reduced by this amount. The auditor will add a footnote to the financial statement describing this activity.

I know the Generally Accepted Accounting Principles (GAAP) the auditor uses for the financial statement wants the corrective distributions handled this way, but I never heard of the Schedule H being completed in this manner.

Has anyone come across this situation this year? If you have, how did you handle it with the auditor and the client?

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I would proffer, in answer to # 2, that the employer gets a dedcution for those ineligible contributions, so they should stay as contributions in the Schedule H.

#3 makes sense if #2 is followed.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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You know auditors are allowed to put into the notes of their report a reconciliation of the differences between their FS and the Form 5500 Sch H. Why not suggest they prepare their work as they see fit and prepare the reconciliation note while the Sch H stay the same? it really isn't true the two have to be the same. There just has to be an explanation of why they are different in the auditor's report.

By the way I normally give the auditors what they want as to me most changes aren't important. This would be one of the few I would push back on. It is for the reason BG5150 gives. If the IRS were to ever compare the deduction to the Form 5500 I think they should match. Just like the distributions and the 1099-Rs for any given year ought to match. Which this change will make not happen.

That is another argument you can give to the auditor in my mind. Why wouldn't you want any given year's 1099-Rs and 5500 distributions to not be the same?

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I once had an auditor tell me I needed to put amounts for failed ADP tests as a payable because they were 'ineligible' as well.
I pointed to the instructions for the 5500 which would seem to disagree (if you put them as a payable how can you show them as a distribution the following year? granted, deferrals made by ineligibles are less clear, on the other hand the instruction do say 'any elective deferrals returned to 'employees' (it doesn't say 'participants'.

note: this is from the 5500-SF instruction, so the 5500 long form may differ slightly.
Line 8e. Include on this line all distributions paid during the plan year of excess deferrals under Code section 402(g)(2)(A)(ii), excess contributions under Code
section 401(k)(8), and excess aggregate contributions under Code section 401(m)(6). Include allocable income distributed. Also include on this line any elective
deferrals
and employee contributions distributed or returned to employees during the plan year as well as any attributable income that was also distributed.

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I usually ask to speak to the partner in charge and tell them it's not our job to train their interns and can you please have your underlings read the instructions so we don't have to bill the client for our time educating your employees.

Though I usually use nicer language.

Nicer language? Why?

And who says it isn't part of your job to train them?

Always check with your actuary first!

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I once had an auditor tell me I needed to put amounts for failed ADP tests as a payable because they were 'ineligible' as well.

I pointed to the instructions for the 5500 which would seem to disagree (if you put them as a payable how can you show them as a distribution the following year? granted, deferrals made by ineligibles are less clear, on the other hand the instruction do say 'any elective deferrals returned to 'employees' (it doesn't say 'participants'.

I just had an auditor request this very thing.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Here is the response on this issue from Janice M. Wegesin at form 5500 help.com:

"The auditor is wrong. (I love saying that! :-))

While I understand the auditors have this stupid practice on the statement of changes page of reducing the participant contribution number by the value of the corrective distribution (which includes earnings so you and I know that's crazy, plus the money did go in the plan) - the Form 5500 requires that corrective distributions be reported on the line you mention.

Because the auditor insists on his presentation style, then he has to create a Note in the financial statements that is Reconciliation to Form 5500 - and reconcile the contribution and distribution numbers to the Schedule H.

That's what's missing here.

Can you tell this is one of those items that makes me crazy?!!

Thanks,

Janice"

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or it could simply mean that is the way the auditor learned it (incorrectly) and it is awful hard to unlearn things, I prefer to give people the benefit of the doubt.

if not, and they are just being pig-headed, then the line from The Holy Grail seems appropriate

"You don't frighten us, English pig-dogs! Go and boil your bottom, sons of a silly person. I blow my nose at you, so-called Arthur King, you and all your silly English k-nnnnniggets"

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I go back to my first comment and what Janice said. Tell the auditor they should complete the reconciliation showing why the Form 5500 and the auditor's report are different. They don't have to be the same. I just had a client file a form with one of those reconciliations in the auditor's report.

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