Corrective distributions on 5500

[Alex Daisy]

Can someone shed some light on the correct way to report Corrective distributions on the 5500?

A CPA who is auditing a Plan that I administer is insisting that I reflect the 2007 corrective distributions that were paid out in 2008 as a liability (benefits claim payable) on the 2007 Form 5500 and netting it out of EE Contributions.

Is this the correct way to do it?

[JanetM]

Accounting standards require that if a liability is quantified and certain you must show as payable at year end.

[Kevin C]

I disagree.

The schedule H instructions say to report corrective distributions paid during the plan year. There is a separate line for reporting corrective distributions. I would not net it out of the EE contributions amount. Show the CPA a copy of the 5500 instructions.

From page 40 of the 5500 instructions:

Line 2f. Include on this line all distributions paid during the plan year of excess deferrals under Code section 402(g)(2)(A)(ii), excess contributions under section 401 (k)(8), and excess aggregate contributions under section 401(m)(6). Include allocable income distributed. Also include on this line any elective deferrals and employee contributions distributed or returned to employees during the plan year in accordance with Treasury Regulation section 1 .415-6(b)(6)(iv), as well as any attributable gains that were also distributed.

and:

Do not include the value of future pension payments on lines 1g, h, i, j, or k.

Line 1g. Noncash basis plans should include the total amount of benefit claims that have been processed and approved for payment by the plan. Welfare plans should also include ‘‘incurred but not reported’’ benefit claims.

I would complete the Form 5500 based on the instructions. If accounting standards require different treatment of the corrective distributions for the audit, the CPA can note that in the audit report.

[pmacduff]

FWIW - I'm with Kevin...that's how we do it (in the year of distribution). That way the employee 401k contributions tie to the W-2 forms. I have had plans checked for this reconciliation numerous times upon IRS audit.

Most large plan accountant auditors have agreed with me upon reading the instructions although I have had a few tell me otherwise. As Kevin notes - I do not change the Schedule H and the auditors make a note in the audit report.

[Bird]

FWIW - I'm with Kevin...that's how we do it (in the year of distribution).

Me too. I'd argue that it's not a liability until 1/1/08. Just because it arose as a result of a 2007 test doesn't make it a 2007 liability (any more than someone terminating in 2007 and being eligible for a distribution in 2008 creates a 2007 liability). Frankly, I think it's flat-out wrong to treat it as a 2007 event.

[JanetM]

I agree with you for the 5500 - I was thinking of the financial statements.