Unreported rollover

[Cynchbeast]

We found out that a terminated participant in one of our plans rolled over his balance to an IRA in December, 2009. We didn't know about it until now, so of course no 1099-R was issued.

1) Since this is a non-taxable event, what are the ramifications?

2) What if we just skip reporting altogether?

3) Does anyone have any experience of IRS's position on this?

[david rigby]

You might have some control problems as well.

[Cynchbeast]

You mean we can't control our clients? So what's new? But besides that, any experience as to how IRS views a rollover that never gets reported on a 1099-R? Or alternatively, a late 1099-R for a rollover?

[ETA Consulting LLC]

I think the 'control problem' is a legitimate statement. There should be checks and balances to ensure things are done correctly; despite the employer's unwillingness or inability to adhere to the rules.

From a process perspective, the 1099-R reflecting the rollover should match the Form 5498 that will be produced by the IRA. This will show that the IRA contribution limits for the year were not exceeded since the contribution was a rollover. If the amount rolled was less than the IRA contribution limit, there may not be an adverse impact; other than questions on how the taxpayer actually reflected the transaction on their Form 1040.

It "may" not be a bad idea to let sleeping dogs lie depending on the amount of the contribution and where it was rolled. I'd imagine if it were rolled directly into a Roth IRA, the IRS would've already began to kick up a little dust.

Good Luck!

[Bird]

What about the 5500 reporting? I can see a client doing something like that without telling you, but not sure how it goes unnoticed when you prepare the tax return, if you're doing that.

Anyway, if it hasn't been questioned by now (by the IRS) it seems unlikely it will be. No harm no foul as far as the missing 1099-R.

[ESOP Guy]

I too think the "control issue" is the bigger issue. As Bird points out how did this reduction in assets not get noted while preparing the Form 5500? How did this reduction in assets not get noted for a T.H. test? In short I would have thought a reconcilation of the plan assets would have to happen at least once per year.

Just to be clear not trying to be mean or harsh but I think the 1099-R issue which appears to be minor isn't where I would point my focus on at this time.

[masteff]

Statute of limitations (I don't know what that time limit is on a 1099-R, but that's a key factor)

[K2retire]

Statute of limitations (I don't know what that time limit is on a 1099-R, but that's a key factor)

Statute of limitations used to be based on filing of Schedule P. Now that we don't have that any longer, when does it begin?

[david rigby]

K2: it's unlikely the SOL for the 5500 is relevant in this fact situation.

Perhaps it's just me, but it seems that not creating a 1099, although late, is a bad idea.

The "control" issue could be significant: It appears this plan has a procedure that permits a payment, no matter who initiated it, and no procedure that identies the need for a 1099 (and the rollover notice). Not good.

[Cynchbeast]

Thank you all for your input. Included in this discussion was comment questioning how we could do a trust accounting and miss the distribution. This leads to the question of how one reconciles the trust accounting. I would love some feedback on this.

The majority of our plans have at least some of their assets invested in other than a bank (stock, mutual funds, annuities, etc.). Since we do not do daily valuations, ideally the client identifies for us all transactions that occurred during the plan year and provides a year-end statement. After accounting for all contributions and disbursements, including participant distributions, interest, dividend, fees, etc., we then determine the "unrealized" earnings (gains/losses) for the year.

THIS is how a distribution may not be detected. If the sponsor neglects to inform us that a distribution was made, the calculated net gain/loss would just be off by that amount - and not always apparent.

So how do others handle this?

[Bird]

THIS is how a distribution may not be detected. If the sponsor neglects to inform us that a distribution was made, the calculated net gain/loss would just be off by that amount - and not always apparent.

So how do others handle this?

We generally get copies of all statements sent directly to us and reconcile them - that is, go through every friggin' transaction and reconcile the cash account to the penny. We used to have all kinds of forms and whatnot that we used to ask clients about what happened during the year, but eventually learned that it's a lot better to just do it ourselves. (Consistent with my world view that pretty much everyone is a moron. I get a few pleasant surprises but it's better than constantly being disappointed.)

The example I always cite to clients about why we insist on doing this is that once, $30,000 simply disappeared from a brokerage account. Because it was a managed account with a lot of activity, no one, and I mean no one (besides us) was aware of it. (It was transferred in error to another, unrelated account.) That's the only time something like that happened, but we are constantly correcting clients who tell us they contributed "x" when we see "y" being deposited.

[ESOP Guy]

This is why I don't plug unrealized. All I do is balance forward- mostly because I now do just ESOPs but even when I did 4k and PS plans they were balance forward. I once very early in my career I got stuck on a reconcilation and my boss couldn't find it either. So we "just plugged it". We sent the reports out. Within 24 hours we had a mad client asking why we understated his contribution by almost $24k.

I have for a little over 20 years since then reconciled the cash for every account. I have a larger sense of materality then "to the penny". If a client puts his foot down and says they are doing the accounting it is well documented they are taking the responsibility for the numbers. The reality is the client should be able to send you copies (or have the borker/bank) send you copies of all statements. For other investments like limited partnerships where they might send the partners cash it is still going to hit the banks accounts. Likewise, if they are buying real estate or limited partnerships the money is going to start from a bank account. So it would seem like you should always be able to reconcile cash.

I like Bird have found money transfered out of accounts to unrelated accounts for my clients over the years. In fact I once found a transfer for one of my clients that had money transfered to another client of mine. They used the same bank and had the same banker. He knew I was the TPA for both clients. The banker just got confused which client of mine was which when he made the transfer. Since I got the bank statements at the same time I reconciled them the same day. When I got done with the first one I had an odd transfer. So I put it aside and did the next account and it had an odd transfer for the same amount just sign opposite.

[Bird]

P.S. We are steering people to daily valued platforms for most new business but still have a fair number of holdovers that are balance forward or individual brokerage accounts. FWIW.

[Cynchbeast]

I understand the feeling of it being easier to do it all yourself. We have forms for clients to complete and it is like pulling teeth to get the information ... and then often it doesn't really make sense.

But my question is, who pays for all the extra work of you going through statements yourself? Do you charge? Is it built into your fee? Does the client have the option to save money by providing you with good detailed data?

[ESOP Guy]

I understand the feeling of it being easier to do it all yourself. We have forms for clients to complete and it is like pulling teeth to get the information ... and then often it doesn't really make sense.

But my question is, who pays for all the extra work of you going through statements yourself? Do you charge? Is it built into your fee? Does the client have the option to save money by providing you with good detailed data?

Cost can be an issue if you have the really small plans (ie <10 lives). Although as you say they can be the biggest messes. For most it was built in to their annual fee. We tried to get them to send authorize the firms to send the statements directly to us. This allow people to work on the accounting as things were slow. Back when i worked the really small clients Nov and Dec seemed like really slow months. I was typically looking for work so I did the first 10 months of the accounting for my 12/31 plans.

It was easier per say doing it ourselves (and I don't mean this in a bad way) everyone I worked for thought this was the only way we could turn out the right product.

I have never owned my own firm but have been in management positions were I had some responsibilty for billing/realization numbers and I get trying to control labor time. I just think if you aren't finding a way to know the reconcilations are right more times then not you are setting the client up for problems.

What we are talking about is part of the reason I went to work for a comapny that wouild let me work on 500+ life plans. I used to do the quarterly balance forward 401(k) plan for a not for profit hospital that had over 5000 employees. There accounting was simplier then a one man doctors office plans I have worked on in my time.

[Bird]

But my question is, who pays for all the extra work of you going through statements yourself? Do you charge? Is it built into your fee? Does the client have the option to save money by providing you with good detailed data?

Most of the time it is easier/faster to get the statements and do it ourselves. In theory (and mostly in reality), we bill extra when needed.

[Bill Presson]

We get copies of all statements as well. We review every single transaction related to cash flow in or out of the accounts. We don't exactly calculate the unrealized gain/loss like we used to because the forms (for small plans) don't require it anymore. We don't have any balance forward clients that are audited.

We have also had brokers ignore the rules and pay out a participant without us knowing and we've had to file 1099's during the summer for distributions the prior year. But I don't have a lot of sympathy with the TPA not catching it during the trust accounting.

Now if the client was supposed to complete the trust accounting and provide that to you, then it's not your problem to begin with. It's the client's. Just keep that in mind and recommend the appropriate corrective action with the appropriate corrective fees.