Reporting Participant Loan Defaults on Form 5500

[Guest Eprail]

Participants defaulted on 401(k) plan loans during 1999 and 2000, but Employer never reported deemed distributions.

Fast forward to 2002. Employer seeks forgiveness from IRS under EPCRS, and IRS agrees, in 2004, that Employer can "make things right" if it reports the deemed distributions for 2004 (i.e., by issuing 1099-Rs to the defaulted participants early in 2005).

Here's the rub: Big accounting firm (let's call it E&Y) insists that loan defaults must be disclosed on 2003 Schedule G filed in 2004. But if Employer does so, there will be a mismatch since 1099-Rs will not be distributed until 2005. Further, Schedule G Instruction (I think) expressly provide that defaulted participant loans under individual account plans are not reported on Schedule G Part I. Nor are they reportable under Part III because they are exempt under ERISA 408(a).

Who is right? Worth a second opinion?