Cash or Accrued?

[imchipbrown]

Former client (and someone I'm still friends with)  asked me to look over the mess of the new administrators (rhymes with Daysex).  Plan is a 3% Safe Harbor Non-discretionary.  For whatever reason the 3% has only been allocated to those employees that are deferring.  Last time I checked in on the friend, that battle was still being waged.  It wasn't resolved by the end of 2019 to any extent.  The client is a sole-proprietor with 10-15 long time employees.  So, maybe 12 are still due their SHNDC and the tax return of the Sole-P has yet to be processed. 

So, how does Daysex generate a 5500 for signature when so much is still incomplete?  Does anyone prepare a 5500 before the sole-p's income is known or final contributions receivable are calculated?  It's certain to be in the $60k-$75K range.  I guess, if I'm Daysex, I can say I only report what's on the books on December 31.  Never, ever have I seen this.

[Mike Preston]

A lot of the recordkeepers do cash basis 5500 reporting.

[Bill Presson]

Back in the days when I worked with a couple of firms that did inhouse daily valuation recordkeeping, we filed all our plans on a cash basis. It's very common.

WCP

[Lou S.]

Why kill yourself with accrual accounting and extensions when you can file most of your plans DC very early if you use cash basis.

[Peter Gulia]

Beyond other reasons, some recordkeepers believe that even a simple receivables entry inherently involves some interpretation or discretion, which belongs to the plan’s administrator.  Even if decision-making is with the plan’s administrator, some recordkeepers worry that presenting a draft might be perceived as advice, which might be the unlawful practice of law or might be an unlawful communication contrary to a CPA law.  (I don’t say either fear is right, only that a business might have them.)

[imchipbrown]

I've always hated PS Plans because I've always used accrual.  I've hated Sole-Ps, Partners, Matching of any flavor.  Deferrals that don't hit the brokerage statement until January 2nd.  Come to think of it, almost every plan has some kind of accrual.   Going to Cash accounting would be like stealing money!  So simple!

Can you change horses mid-stream (accrual to cash).  I'm waiting on a Partnership for final SHM and the Sole-P above (with all his problems). 

I'm guessing we're ONLY talking about Forms 5500 XXX here, NOT valuations in the discussion.  I can't help but feel that DC valuations have to include the various accrued contributions.

[BG5150]

Some of my clients insist on the accrual 5500's so the Employer contribution matches the company's tax return.

[chc93]

I've seen accrual-to-cash or cash-to-accrual from one year to the next.  My only thought is that such a change should be done once, and stay consistent for a "few" years... however long "few" is.  Said another way, this should not be changed every year.

[Mike Preston]

3 hours ago, chc93 said:

I've seen accrual-to-cash or cash-to-accrual from one year to the next.  My only thought is that such a change should be done once, and stay consistent for a "few" years... however long "few" is.  Said another way, this should not be changed every year.

It is a change in accounting method that, without approval, exposes the client to the wrath of the regulators.  That said, I don't think it is on the IRS' radar and hence some practitioners do it without thinking about the consequences. 

[Bird]

15 hours ago, chc93 said:

I've seen accrual-to-cash or cash-to-accrual from one year to the next.  My only thought is that such a change should be done once, and stay consistent for a "few" years... however long "few" is.  Said another way, this should not be changed every year.

Agreed, the instructions say any method may be used as long as it is done consistently.

We do everything* on an accrual basis so the contribution ties to the business tax return, as suggested above, and also to make sure everything reconciles.  It would drive me nuts to do a cash basis report (quickly) and then find out that there were errors in the deposits; I'm not sure how you even reconcile in that scenario.  Or maybe others just trust that there are no errors and move on?  That gives me chills.

*Except for one, or maybe two takeovers.  We do financials and accounts on an accrual basis and then convert to cash for the tax return and it creates a lot more work that way.

[Mike Preston]

Cash basis should be very little effort.  Just report consistently with what the financial institution reports. There is nothing to reconcile to.  It is what it is. We have a couple of cash basis that start out taking advantage of the ability to not file if the end of year assets are less than the 250k asset level.  For some reason 1 person plans are sometimes enamored of the ability to put off filing for an extra year or two.

[Bird]

3 hours ago, Mike Preston said:

Cash basis should be very little effort.  Just report consistently with what the financial institution reports. There is nothing to reconcile to.  It is what it is. We have a couple of cash basis that start out taking advantage of the ability to not file if the end of year assets are less than the 250k asset level.  For some reason 1 person plans are sometimes enamored of the ability to put off filing for an extra year or two.

OK, I'm in a bit of a bubble and haven't ever worked for a larger firm, and just do things the way I've always done them.  This isn't necessarily just for Mike but Qs about cash basis reporting:

I assume you confirm that all 401(k) contributions were deposited?  

What about prior year accrued PS, SH, match of any kind?  Is there some reconciliation process to confirm that the calc'd amounts are indeed contributed properly?  

We spend large amounts of time on this kind of stuff and find enough problems to make it worthwhile, I think.  If we just told clients their contribution for 2018 and didn't check it in 2019 (even if we did it for them) I wouldn't feel right.  Every once in a while I think it might be nice to just suck data from a recordkeeper, but then...what would we do all day? ?

[BG5150]

Just because you file on a cash basis doesn't mean you forsake checking to make sure all the deposits were made.  It just makes putting together the 5500 a little easier.

We file many of our plans on a cash basis, but every year, I reconcile out the receivables.

[Mike Preston]

4 hours ago, Bird said:

OK, I'm in a bit of a bubble and haven't ever worked for a larger firm, and just do things the way I've always done them.  This isn't necessarily just for Mike but Qs about cash basis reporting:

I assume you confirm that all 401(k) contributions were deposited?  

What about prior year accrued PS, SH, match of any kind?  Is there some reconciliation process to confirm that the calc'd amounts are indeed contributed properly?  

We spend large amounts of time on this kind of stuff and find enough problems to make it worthwhile, I think.  If we just told clients their contribution for 2018 and didn't check it in 2019 (even if we did it for them) I wouldn't feel right.  Every once in a while I think it might be nice to just suck data from a recordkeeper, but then...what would we do all day? ?

What bg said. The response to all of your questions (except the last one, of course) is "Yes, but it is not related to the 5500 process."

[ERISAtwin74]

If I am right about the company you are referring to...when I started out in this biz, I worked for them.  They don't prepare the Form 5500s....they are all computer generated based on what is in the system.  A 5500 team randomly selects a few to review and confirm the data before sending to clients.