Refund of loan principal overpayment

[Liam]

Hi yall,

I'm working on a 2017 Form 500 for a plan and have a small issue

There was one participant got refund of $50 loan principal overpayment in 2017 for a 2016 loan.

How can i characterize this refund on 5500? 

I was thinking about putting that $50 as negative ($50) in other income or $50 in the Benefit payment - directly to participants.

 I looked into 5500 instruction 

Line 2c. Other income.  Enter all other plan income for the plan year. Do not include transfers from other plans that are reported on line 2l. Other income received and/or receivable would include: 1. Interest on investments (including money market accounts, sweep accounts, STIF accounts, etc.). 2. Dividends. (Accrual basis plans should include dividends declared for all stock held by the plan even if the dividends have not been received as of the end of the plan year.) 3. Rents from income-producing property owned by the plan. 4. Royalties. 5. Net gain or loss from the sale of assets. 6. Other income, such as unrealized appreciation (depreciation) in plan assets. To compute this amount subtract the current value of all assets at the beginning of the year plus the cost of any assets acquired during the plan year from the current value of all assets at the end of the year minus assets disposed of during the plan year. 

Line 2e(1) Directly to participant. payments made (and for accrual basis filers) payments due to or on behalf of participants or beneficiaries in cash, securities, or other property (including rollovers of an individual’s accrued benefit or account balance). Include all eligible rollover distributions as defined in Code section 401(a)(31)(D) paid at the participant’s election to an eligible retirement plan (including an IRA within the meaning of Code section 401(a)(31)(E));

How do yall think this should be in the 5500? I'm leaning more on the Benefit payments directly to participant. This is a new situation for me.

I appreciate all the inputs.

Thank you.

 

[ERISAAPPLE]

When did the participant overpay?  I am guessing in 2017.  If the overpayment was in 2017 and the refund was in 2017, can you show it as other income and then an expense?  I don't think it would be a benefit payment.

As always in matters of accounting, don't rely on me.  I am just a simple caveman lawyer.  

[Bird]

If both the overpayment and refund happened in 2017, I'd think they would offset and net to $0 - no special entries needed.

If the overpayment happened in 2016, then there was an error in the 2016 reporting and theoretically that should be amended.  For $50, I'd just bury it anywhere.  (But this wouldn't happen in our reporting system since we reconcile everything.)

[Liam]

Appreciate for your responses. Bird, you was right about there was an error and it should be corrected in 2016 but get carry over to 2017 and show an adjustment of $50 out of participant account. Basically, it was a refund of $50. Well, it's from one of the big TPA so we wouldn't have known this.

For small amount like this, we will just stick it somewhere in distribution on 5500 since if put a negative amount in other income will make the presentation looks weird.

 

[CuseFan]

I think you all just spent more than $50 worth of professional time trying to figure out where to report $50, which you could easily explain to any auditor any decision you made without them caring.

[Kristina]

You do realize that the IRS can connect the dots from the distributions reported on the 5500 series and the 1099Rs filed for the plan year.  A proper reconciliation of the assets could contain a proper explanation of the refund.

A return of a mistake in fact is NOT a distribution.

[Bird]

17 hours ago, Kristina said:

You do realize that the IRS can connect the dots from the distributions reported on the 5500 series and the 1099Rs filed for the plan year.

I hate to do anything to prolong this thread but while that is theoretically possible, I have never seen any evidence of that and don't believe they do it - except in an audit.  And as noted that is easily explained.

[Liam]

Bird I also hate to further dig in deep down for this $50. But Kristina got a good point of that is in fact not a distribution.

But on the 5500, there was no other line to show the refund of a over payment of loan. Corrective distribution and certain deemed distributions lines on 5500 definitely cannot be used for this $50. So y'all right about that any auditor would have understand about this if ever needs to explain. All I can say is Form 5500 should have had some lines to show any unusual situation like that.

And if they nit-picking $50 then I think they should spend the resource somewhere else. 

Close this thread and appreciate for all y'all input. 

[BG5150]

Is this a Schedule H 5500?  Or Schedule I?  SF?

In any case I would just put it on the 'Other Income' line.  Who cares if it's a negative.

It certainly is NOT a benefit payment.  Was a 1099-R issued?  (If so, I think it should not have been).

[Bird]

Agreed it is not a distribution.  Don't worry about any "other" line being negative.

[Becky Schwing]

I have a similar situation - loan was paid in full but employer forgot to stop making payments.  If we refund the excess payment + earnings to the participant - how is it reported on 1099-R?  What code is used to report the distribution from the plan back to the participant? 

Is it even permissible to refund the extra payments (they are basically post-tax contributions now since the loan was paid in full but there is no provision for post tax contributions).  Would it be better to forfeit the extra payments and have the employer make the participant whole outside of the plan?

[Bird]

50 minutes ago, Becky Schwing said:

Would it be better to forfeit the extra payments and have the employer make the participant whole outside of the plan?

Yes.  It's essentially a plain old mistake, and it does not affect the payroll system or tax reporting for the participant.  It is part of his or her after-tax cash that should have been received in a paycheck, and mistakenly went to the plan.  

[ESOP Guy]

2 hours ago, Becky Schwing said:

I have a similar situation - loan was paid in full but employer forgot to stop making payments.  If we refund the excess payment + earnings to the participant - how is it reported on 1099-R?  What code is used to report the distribution from the plan back to the participant?

I would never issue a 1099-R in this case.