final form 5500

[betheeg]

when assets were distributed from a terminated ps plan, the loss was understated and participants were paid out more than they were supposed to be. what should be reported on the final 5500?

[Mike Preston]

This sounds like a trick question. How does one pay assets that don't exist? Overdraft protection?

[betheeg]

it does sound strange, but yes, it happened. they were paid out with checks, all of them were sent at once, and then their error was discovered. the employer had to make an additional deposit to the account to cover the mistake. so, any ideas?

[Mike Preston]

Sounds like they made a contribution to me.

[Blinky the 3-eyed Fish]

I am betting it was a contribution which was probably not allocated according to the plan document.

[Mike Preston]

You are right. But this is probably something that the client will see as a minor issue, but that all of the techies will see as something other than a minor issue.

Depending on the amounts involved, the practical approach might be to consider the amounts deposited by the Plan Sponsor to be in anticipation of litigation and therefore not a contribution deductible under 404 and deductible instead under 162. Maybe an aggressive position, but one that if the dollars are small might be the best approach.

Standard caveat as to engaging an attorney to guide the plan sponsor with respect to the choices to be made.

[RCK]

It seems to me that there is risk in calling this a contribution, in line with Blinky the 3-eyed Fish's comment. I feel that this is a self correction of an operational error, and would be deductible as a reasonable business expense under section 162.

But I'm not sure how to categorize the income on the 5500--probably not Employer Contributions, but that seems to only leave Other Income.

RCK

[QDROphile]

I wonder if this would be a legitimate correction of the error. Seems like cutting new checks is more in line with correction principles. I don't see anything in the Revenue Procedure about making up investment losses. In fact, making up investment losses is something of a taboo. Mike Preston is correct. The techieswill not be satisfied.

If you want wild suggestions, how about breach of fiduciary duty? The fiduciary should not have cut checks without ascertaining good funds. The fiduciary makes the plan whole by covering the shortfall in the checks. The company indemnifies the fiduciary. Still not very satisfying, especially since each participant gets a different windfall.

[BFree]

I have a plan that is currently in the same situation, although not as far along. Plan was audited by the DOL after participant complaints about slow payment. DOL agent indicated to me that the Employer would have to make up the difference (lost earnings). We are not privy to final DOL "suggestions" to the employer, and may never be.

[Blinky the 3-eyed Fish]

Let's have an extreme example:

1 HCE with a balance of $500,000

1 NHCE with a balance of $1,000

There is a loss of $50,000 proportionately. Would this change your thinking if this amount was made up by the employer? In other words, just because participants get more, it does not mean that it is okay.

[pmacduff]

Since this resulted from an "understated loss" per the original thread, I don't understand why everyone is saying it was unfair to the participants. Sounds to me like a loss was allocated, participants paid out and then when it was discovered that the loss was greater, the Employer "reimbursed" the investment fund. If the original loss had been allocated correctly, the participants would have gotten LESS, right?!?!? DOL's bottom line is always on the side of the participant, so I don't see where they would have a great problem with this situation.

[R. Butler]

I tend to agree with pmacduff. If it checks were issued prior to discovering the error it is at likely that some of those checks were cashed. The overpayment does affect the benefit owed other participants and the fiduciary has a duty to correct. Unless recovering the overpaid amount would be relatively easy, in a terminating plan I don't see wher the fiduciary has any other option, but to make up the lost amount.

Blinky, in your extreme example, the only employee that could have been overpaid is the NHCE (the HCE wouldn't be able to cash the check because due to the loss the money is not really in the bank). If the fiduciary does have difficulty recovering the extra $100 from the NHCE, I wouldn't see it a problem if the fiduciary makes up that the lost $100.

[Blinky the 3-eyed Fish]

It was an extreme example at an extreme bank with extreme overdraft protection.

[QDROphile]

The Department of Labor may not care, but Blinky's example shows why the IRS might care, disqualify the plan, and create a mess with any rollovers. And the point is well taken even without the extreme numbers.

[R. Butler]

Lets just alter Blinky's example. Instead of $1,000, the NHCE has $50,000. The $50,000 error is discovered, but only after the HCE has cashed his check. There is nothing in the account. Obviously, the fiduciary needs to first try and recover from the HCE, but lets assume the HCE doesn't return the excess. The HCE is willing to litigate. If the fiduciary can't make the deposit for the error, then how is the NHCE ever going to get his money?. Is he forced to wait throught the litigation process? That doesn't seem reasonable, but lets assume he does. HCE invested everything in Enron, WorldCom and Adelphia. Fiduciary wins judgement, but the money is gone. You can't suck blood from a turnip. So is the NHCE just out of luck? If the fiduciary can't deposit for the error he would be.

I guess really the bottom line is, if it is not reasonable to recover the overpaid amount from the participants, how else can the participants be made whole but through the fiduciary making up the difference?

[betheeg]

ok. good conversation. here's the facts of what happened in the original post. the amount the employer had to contribute was $13,500. this was allocated between 125 participants and yes, they did receive more than they were entitled to, the most extreme was a few hundred dollars. the error was discovered after some checks had been cashed, and trying to recover the checks and reissue would have been almost impossible. i was thinking it could be considered a contribution, but like already stated, it was allocated not according to plan doc. any other suggestions on how to report this on 5500?

[pmacduff]

Come on...realistically, how many of you have actually seen a plan disqualified...especially over an issue such as this. In my almost 15 years in Pensions/administration, I have seen many IRS & DOL audits and have yet to see a plan disqualfied. We even had an Employer who was not depositing deferrals & match to the plan for quite a time, they ended up (with the DOL blessing) using the owner account balances to replenish the deferral amounts to make the participants whole for deferrals, but the participants never got the match! The DOL/IRS also allowed all of the former participants in the plan to roll the balances to IRA accounts and avoid taxation. The Employer (who went out of business, surprise, surprise) was told that neither of the Trustees could ever Trustee a Qualifed Plan again. Go figure.......Seriously, I would like to know on average how many of you out there have seen plans disqualified and what was the reason?

betheeg - I would report it on the 5500 form as "other income"........just my opinion....because of the amount involved. What were the total plan assets? What percentage does the $13500 represent?

[R. Butler]

I would report either as other income as pmacduff suggets, or as "other" on the contribution line. I don't see that it matters either way.

[betheeg]

Total distributions should have been $344,000.00 (prior to 13,500 dep for error).

Thanks for all the help....I appreciate it!