Form 5500 Question - Pre-Funded Contribution

[metsfan026]

Question on how to handle a minor issue.  We have a client who inadvertently deposited a 2025 contribution on 12/30/24 so it's showing up on the 2024 Asset statement.  When filing the Form 5500 would you:

1) Show it as a liability to remove it from the assets
2) Just remove it from the assets and act like it was deposited on January 1

It's not a significant amount, just curious how others have handled it in the past.

Thanks in advance!

[Jeff Hartmann]

Regardless of the client's intent [2025],  I think you have an additional 2024 contribution to include in the 2024 accounting, as part of  year-end Asset.

I don't think you can  "pre-fund" the 2025 contribution in 2024 ......  assuming the contribution would otherwise be deductible in 2024.

 

....  Jeff

[david rigby]

Just a hunch: this plan sponsor should probably want its legal counsel and auditor to review the situation.

[Peter Gulia]

The plan’s administrator, with its accountant’s and lawyer’s advice, might consider these possible interpretations:

If the plan’s Form 5500 reports have been and remain on the cash-receipts-and-disbursements basis of accounting, an amount paid in on December 30, 2024 is a receipt in 2024.

If the plan’s Form 5500 reports have been and remain on the accrual method of accounting:

The Instructions tell a filer not to include a contribution designated for a year before the reported-on year. But the Instructions do not say to exclude a contribution designated for a year after the reported-on year.

If the plan’s trust received in 2024 an amount the employer declared as a 2025 contribution, might this be a prepaid expense?

This is not advice to anyone.

[Paul I]

There are a lot of moving parts to that can spill over into other areas of noncompliance.  Your best shot at getting an IRS blessing would rest on the clarity of the documentation that the contribution was designated as a 2025 employer contribution to be allocated to participants within the 2025 plan year, and clear documentation that the contribution was not deducted on the company's 2024 tax return.  Your legal and tax counsel can offer guidance about seeking some sort of IRS approval not to treat this contribution as a nondeductible contribution in 2024 (which carries a 10% excise tax and would not be allocated to participants for the 2024 plan year).

The following IRS information may help shed some light on the issues although it does not explicitly discuss your situation: https://www.irs.gov/pub/irs-tege/epche903.pdf

You may want to explore the impact of considering the contribution as a 2024 contribution and taking a deduction for it on the company's 2024 tax return.  You would have to check the deductible limit for 2024 (to avoid having a nondeductible contribution), allocate the contribution to participants as of a date in 2024, and confirm that this doesn't cause any 415 problems.

In many ways, the available paths forward are not excessively punitive, but the consequences of moving forward with just assuming the contribution intended for 2025 is okay could become excessively punitive.  This is just a fancy way of saying you should have your legal counsel involved.

[Artie M]

The Form 5500 is merely an information reporting document. It seems that if the amount is in the trust on 12/31 it would have to be reported as an asset.  Work with the auditor to determine the proper characterization (presumably, you are not the auditor).  

The deduction issue is a Form 1120 issue (if sponsor is a corporation).    As noted above, this does appear to be a nondeductible contribution for 2024.  I mean how can it be deductible in 2024 when you say it is a 2025 contribution as "all events" would not have occurred by the end of 2024 to "fix" or lock in the obligation for the deduction in 2024.  Alternatively, perhaps consider returning the amount to the employer in 2025 so that it is not considered a nondeductible contribution.  Most plans contain the standard provision that allows for a return to the employer of amounts due to a mistake of fact or, more importantly in this case, the amount will not be deductible.  See ERISA §403(c)(2)(A) (no parallel provision in IRC but often cited in PLRs and RevRuls); also see IRC §4980(c)(2)(B) ("employer reversion" shall not include ...any distribution to the employer allowable under section 401 (a)(2) ... by reason of mistake of fact, or ... failure of the contributions to be deductible.")  The amount must be returned within the year (seems it should be done prior to filing this year's tax return) to not be characterized as a nondeductible contribution.  Then recontribute the amount for 2025 as intended.   If effective, this could address the issue of the 10% excise tax.  Someone should look at EPCRS to see if there are corrective procedures that may apply to this set of facts.

Not sure how any return of the funds in 2025 affects the 5500 reporting...again talk to the auditor. 

Again just thoughts