1099R for which year for 2004 or 2005?

[Guest mmc]

In December, we sent instructions to the plan sponsor for distributions to terminated participants. Many of those checks were not cashed by December 31st.

The business was sold and the assets were transferred to the acquiring employer's plan except for the cash representing the distribution that were still outstanding as of the end of the year.

One position here is that if the cash was not distributed/rollover by December 31st, it becomes a 2005 distribution and we file the final 5500 for 2005.

The administrator wants to send 2004 1099R's to all the participants and file a final 5500 for 2004.

Any guidance?

[Demosthenes]

It's the year that the distribution was made (check cut, Wire, ACH, EFT, or IBP) not the year that the check was cashed.

If the checks have a 2004 date on them, I'd issue a 2004 1099-r.

[WDIK]

What if the checks are never cashed?

[Guest TAG]

Constructive receipt.

TAG

[Demosthenes]

Expanding on constructive receipt

According to the IRS, the date when a taxpayer received income, such as a dividend payment, interpreted as the first date the taxpayer has the right to claim it, whether or not that claim was actually exercised.

[WDIK]

Employing the constructive receipt rules as you describe, why is there ever an issue with missing participants? You could just mail out checks, issue 1099-R's and file a final return.

EDIT: Note that the first post refers to filing a final 5500.

[Guest TAG]

Not trying to be funny, but if the participant was missing where would you have mailed the check? To employ the rules we are discussing one should have a known valid address before checks are mailed. Expanding with specifics will always expand the discussion. How many, how much, etc.

On the other hand, I know few administrators who wouldn't welcome the opportunity to do another year's admin and 5500

TAG

[WDIK]

Expanding with specifics will always expand the discussion.

Which is precisely what I am trying to do.

Forget the missing participant tangent for a moment, but what if a participant delayed cashing a distribution check? At what point would it be inappropriate to file a final Form 5500? Six months? After the extended due date of the return? One year? This is what I am driving at, albeit somewhat erraticaly and perhaps without a license.

[Demosthenes]

Honestly, I wasn't even looking at the 5500 question, mental block because this is always a major pain. But let's break the question down into two parts.

Are we agreed that under the constructive receipt rules, the 1099-r is issued for the year in which (to keep it simple) the check is cut? This is under the IRS rules and definitions so it seems pretty clear cut and reasonable to do so.

Assuming we're OK there, with the 5500 we're looking at the day the last dollar leaves the plan/trust as defining the year for which you file the final 5500. These are DOL rules and, to me, are much murkier.

When does "leaves the plan" occur? Certainly it leaves the plan once the check is cashed. But, what if I've engaged the services of a paying agent outside of the trust? I can argue that the assets are gone, no longer a trust asset, if it doesn't get cashed, it's the paying agent's problem to escheat the funds.

If the plan/trust stays in control of the funds i.e. controls the account on which the checks are drawn, then I'd argue that the last dollar isn't gone and while I've filed my last 1099-r, I still can't file my last 5500. At which point I'm stuck playing "Where's Waldo?" (in Boston we call it "Where's Whitey?")also know as find the missing participant.

Until we find the last one and make them cash the check, or throw it over the fence to the DOL as an orphan plan, I'm playing the role of Sisyphus and trying to get that rock to the top of the hill.

[Alf]

Checks cut on 12/31 don't prevent next year's 5500 from being due even if the checks are cashed in a timely manner. I can't see why constructive receipt is relevant from the ER perspective. If the checks were cut in a year, the 1099 is done for that year. If there is a dollar in the trust on 1/1, the 5500 is due (for a calendar year plan at least).

[Guest TAG]

Alf,

Are you saying that the 5500 must be run on the cash basis only?

TAG

[WDIK]

Are we agreed that under the constructive receipt rules, the 1099-r is issued for the year in which (to keep it simple) the check is cut?

Agreed.

But, what if I've engaged the services of a paying agent outside of the trust? I can argue that the assets are gone, no longer a trust asset

Agreed, if by paying agent you are referring to the purchase of an irrevocable commitment.

Until we find the last one and make them cash the check, or throw it over the fence to the DOL as an orphan plan, I'm playing the role of Sisyphus and trying to get that rock to the top of the hill.

Agreed. (Bonus points for the mythological reference.)

[mbozek]

I think there is a distinction between the tax rules for determining when plan assets are paid for terminaton of the plan and when payments are deemed made for the purpose of the taxation of distributions under IRC 402(a).

The 5500 rules relate to payment of plan assets which continue until the last assets are withdrawn from the plan's account. There is an old IRS ruling that says that a plan is not terminated until all assets have been paid out. The plans assets are not paid out if the checks are not cashed. This is why a terminating plan shoud forfeit all benefits payable to missing participants because there are no uncashed checks to hold up the termination.

The distribution rules apply to the date the payment is distributed, e.g, leaves the control of the payor, not when the check is received. IRC 402(a). In financial institutions MRDs are deem to be paid if the check is mailed or payment wired on Dec 31 regardless of when it is cashed or credited to participant's account because the plan's assets are deemed debited on that date. Under the CR rules a taxpayer is deemed taxed when the payment is made because if taxation was delayed until the check was cashed the taxpayer could avoid taxation simply by refusing to cash the check. However, if a check bounces for lack of funds there is no distribution. A payment to a missing participant which is never cashed is taxed in the year the payment is distributed and is reported on the 1099-R for that year.

[Demosthenes]

Probably because I have this mental image of the DOL as the Furies, relentlessly pursuing at the whim of some half-baked deity (read regulation).

[WDIK]

Demosthenes:

I'm not sure I followed your last post. Perhaps it is the pebbles in your mouth.

[Alf]

Are you saying that the 5500 must be run on the cash basis only?

I don't know the balance sheet answer to that, just that a 5500 is due in any year that the trust has funds and that is determined on a cash basis legally.

[Harwood]

From Schedule H instructions: "The cash, modified cash, or accrual basis may be used for recognition of transactions in Parts I and II, as long as you use one method consistently."

[Guest TAG]

Harwood,

Yep.

TAG

[GBurns]

It does not matter whether you use cash or accrual basis. Once the check is drawn the entry is made to the Cash account/Checking account. Balancing the accounts at the end of a period to recognize undeposited checks is a separate issue.