Participant Paid From Corporate Account

[mming]

This week it was discovered that a participant in a profit sharing plan was paid in 2008 a small distribution (approx. $300) from the sponsor's corp. account by mistake. Would filing a 1099R now showing the plan paying the benefit in 2008 be appropriate? Or would showing the corp. on the 1099R as the payer be better? Should the trust reimburse the corp. account now, and if so, how would it affect 1099R reporting?Given the small amount of the distribution, the sponsor is leaning towards the first option without making a reimbursement because he would just explain it was taken out of the corp. account in error should it ever become an issue. There will also be the issue of whether or not to report it as a distribution for 2008 on Schedule I and whether to show the participant as paid out on the 5500. Payment was made as a taxable distribution directly to the participant. What would be the best way to handle this? All help is greatly appreciated.

[david rigby]

Can a plan sponsor issue a 1099R?

If the EE wants the ability to rollover the amount and/or not be subject to a 10% excise tax, then the payment should come from a plan/trust, not the ER. It appears the ER "messed up"; if not fixed, the EE bears the burden. Although it's a small amount, it would be prudent, as well as a learning experience, to make sure the audit trail of payments is correct.

BTW, this is not a deductible expense for the ER's financial statements.

But, of course, I'm not giving legal and/or accounting advice. The ER should consult the proper advisors.

[PLAN MAN]

Have the funds been taken out of the participant's account? If not, then there is not a distribution to report on the 1099-R or the 5500.

The trust cannot make a distribution directly to the plan sponsor. The participant is entitled to the funds in their plan account and the plan must make a distribution payable to the participant. The plan sponsor should request the initial payment back from the participant and distribute the funds correctly through the plan.

[Bird]

Plan Man, you are assuming that there are individual accounts and we don't know if that's the case. I'm guessing not.

The wrong but very easy way to handle this is to treat the payment as a contribution to the plan and then a distribution from the plan, with the plan issuing a 1099-R. I guess instead of treating it as a contribution you could have the plan reimburse the corporation for the distribution, as if the corporation lent the money to the plan...I don't like that but I think it could be argued that this is actually "cleaner."

One right way to handle it is to treat the payment from the corporation as a random extra payment of some sort, nothing to do with the plan, and issue a 1099-MISC. Then make a payment from the plan as it should have been done in the first place.

I can think of no circumstance where I would have the corporation issue a 1099-R.

Use your judgment.

[Guest Brenda Schachle]

If this is a profit sharing plan and the employer intends to make a profit sharing contribution of. say $10,000 then why not have the employer cut a check to the plan for $9,700 ($300 has been paid to the participant on BEHALF of the PLAN for the employer). The ERC deduction is the full $10,000. So the plan is INCREASED by a net of $9,700 which is correct for a $10,000 ERC and a $300 distr. The participant gets a 1099R from the PLAN for $300. Now, the accountants may not like it -- need notes for the audit trail.