Reporting Corrective Distributions

[pmacduff]

Ok - I know this seems like a no-brainer, but every year I confuse myself. I have a client who failed the 2002 ADP test. 2 HCE took refunds, they were paid out by March 15, 2003. When I complete my 2002 form 5500; Schedule I, I use the actual total deferral deposits on the "participant contribution" line (2a(2)), which includes the excess. I believe the refund to be a liability of the plan, however if I put the amount in at the top(1b), the assets don't balance unless I reflect the corrective distribution on line 2f. I know that isn't right because I want to show the distribution on the 2003 5500 when it actually occured. How do others report this? Thanks in advance.

[Guest ElKH]

It sounds to me like you're trying to mix cash basis with accrual basis, and there's where your problem lies.

If you recognize a liability at the end of a plan year, then you're going to have to recognize the distribution within the same plan year. Posting a liability is an "accrual basis" action.

Picture the good ole debits and credits you had to deal with in your Accounting classes . . . If you credit something within a period (such as recognizing a liability), then you're going to have to have a balancing debit in the same period (post the distribution). In this scenario you're saying, "I owe this money. My assets haven't been physically reduced, but I'm going to recognize the distribution in this period, and show a reduction in "equity" in the form of a liability.

If you are a cash basis filer, you do not recognize the liability at the end of the year. The money is still in the plan, and as far as you're concerned, what you see is what you get. In 2003 the distribution goes out (debit), and your assets decrease accordingly (which is essentially a credit to your assets).

[WDIK]

I think the question arises because the plan is being filed on an accrual basis, but the instructions for Schedule I Line 2f indicate that you "include all distributions paid during the plan year of excess deferrals...excess contributions". You could argue that you could accrue those distributions as well, however the instructions for Schedule I Line 2e (Benefits Paid) specifically refers to including payments due for accrual base filers.

Do the instructions mean that you should not report excess deferrals/contribtuions on an accrual basis?

[Guest ElKH]

We report our excess refunds on a cash basis, because that is our interpretation of the instructions. (I doubt you'd get harrassed if you reported on an accrual basis though).

We report corrective distributions in the year in which they occur.

Everything else is done on an accrual basis, including ordinary distributions.

[Alex Daisy]

Ok - I know this seems like a no-brainer, but every year I confuse myself. I have a client who failed the 2002 ADP test. 2 HCE took refunds, they were paid out by March 15, 2003. When I complete my 2002 form 5500; Schedule I, I use the actual total deferral deposits on the "participant contribution" line (2a(2)), which includes the excess. I believe the refund to be a liability of the plan, however if I put the amount in at the top(1b), the assets don't balance unless I reflect the corrective distribution on line 2f. I know that isn't right because I want to show the distribution on the 2003 5500 when it actually occured. How do others report this? Thanks in advance.

I have the same situation for 2007, and was wondering if there was a final verdict on the question above?

Thank you, Alex

[Jim Chad]

I do it the same way as ELK h says above. Even if the rest of the 5500 is on an accrual basis, I still report corrections on a cash basis: in other words in the year they are paid out. This is the only way I can see to have the gains be reported correctly.