Form 5330: Late ADP/ACP corrections

[justatester]

We are in the process of completing a 5330 for a client who did not make corrective distributions due to a failed ADP/ACP test by the 2 1/2 deadline. Total ROEs were $5000. One of the HCEs who had termed, took a rollover distribution and moved the money to an IRA account before the 2 1/2 month deadline. He was due $1000 of the $5000 in total ROEs. We have notified him that the $1000 was not eligible for rollover and the money needs to be removed from IRA account.

My question is: what amount needs to be reported on the 5330? Is it the full $5000? Or would it be $4000 since $1000 was removed from the plan before teh 2 1/2 month deadline?

Any thoughts would be appreciated!

[fiona1]

My vote would be that the excise tax would be based on $4000. I think that as long as that $1000 left the plan within the 2 1/2 months, then it is considered a correction. Regardless of whether it was rolled over or not.

I can tell you that this is how we operate at my company. Of course, that doesn't mean it's right. I wish there was some more guidance on this...

[BG5150]

Does your total include earnings? The amount that goes on the 5330 is the GROSS amount, exclusive of earnings...

[fiona1]

The question has to do with a distribution that occurred within 2 1/2 months - and I think it's a great question. I think the OP knows that the excise tax is based on the gross only.

Assume this is for a 1/1 plan year - which means the 2 1/2 month deadline is 3/15. There are 5 HCE's all due a $1,000 refund - for a total of $5,000 (gross). One of the HCE's has taken a distribution and rolled his money out of the plan into an IRA and another financial institution. This occurred on 3/1.

Is the excise tax based on $5,000 or $4,000? I can see the argument that because the $1,000 left the plan prior to 3/15 then the excise tax is only based on $4,000.

Does anyone agree? Disagree?

[BG5150]

I say $4,000; send a letter to the guy to have the money returned to him out of the IRA and make sure the proper 1099's are issued from the plan.

(BTW: I asked about earnings because the OP said "total" ROE's.)

[justatester]

Hi,

Yes, the $5000 is the amount of the ROEs not adjusted for gains/losses...(of course mostly losses these days).

So, it sounds like most people would pay the excise on the $4000 taking the position that the other $1000 was distributed prior to the 2 1/2 month deadline.