Forfeitures

[Guest ENT]

BNA reported in early November 2012 on a question that was posed to an IRS area manager at an ASPPA conference regarding the ability to prepay expenses with forfeitures. The manager apparently characterized this as a trust accounting rather than tax issue.

Does this create any accounting problems? I assume that a 501(a) trust uses an accrual method of accounting, such that the prepaid expense would not be recognized until the services were performed. I aslo assume the fiduciary would have to exercise prudence in prepaying expenses, particularly where expenses are paid more than one year in advance (e.g., for several years of 5500 reporting).

Has anyone ever seen this done?

[ESOP Guy]

I have never seen expenses paid years in advance. I have seen expenses prepaid. The most common example is if the plan tends to pay the expenses and the plan is terminating. Many of the TPA firms I worked for required a payment of most of the costs of the final work up front. They got burned too many times of issuing final reports and never collecting. But the time spread was months not years. It did at times cross plan years. But most people didn't worry about timing of allocating the expenses as no new people were entering so by and large the same group of people paid early as they did if it had been later.