5500 Schedule I ESOP question

I'm looking at a 5500 Schedule I that was prepared for an ESOP. Diversification elections were made, whereby assets were transferred to the employer's 401(k) plan. The Schedule I, Line 5b, does NOT show these transfers. It seems to me, reading the instructions (excerpt below) that this should have been reported on Line 5b? They were included on the distribution line on the 5500 itself.

I don't know how critical this is, in real life terms. If it was reported incorrectly, at least it was "reported" - if the DOL audited the report, maybe just an "oops - reported on wrong line" and do amended 5500 form(s)? I have no idea how far back this goes... 

Line 5b. Enter information concerning assets and/or liabilities transferred from this plan to another plan(s) (including spinoffs) during the plan year. A transfer of assets or liabilities occurs when there is a reduction of assets or liabilities with respect to one plan and the receipt of these assets or the assumption of these liabilities by another plan. Enter the name, plan sponsor EIN, and PN for the transferee plan(s) involved on lines 5(b)1, (2), and (3). Do not use a social security number in lieu of an EIN or include an attachment that contains visible social security numbers. The Schedule I and its attachments are open to public inspection, and the contents are public information and are subject to publication on the Internet. Because of privacy concerns, the inclusion of a social security number or any portion thereof on this Schedule I or the inclusion of a visible social security number or any portion thereof on an attachment may result in the rejection of the filing. Note. A distribution of all or part of an individual participant’s account balance that is reportable on IRS Form 1099-R should not be included on line 5b. Do not submit IRS Form 1099-R with the Form 5500.

Did participants receive 1099-R's?  If yes, then they are distributions and not transfers.  Did the 401(k) record them as rollovers into the plan?  This, too, would support treating the diversifications as distributions.  Does the plan document allow for trustee-to-trustee transfers for diversifications and was this an option that could be elected by a participant?  If yes, and the election was selected, then they are transfers.

If you are conservative and there is a need, prepare an amended return.  The amount of time to make the change and file the amendment will be trivial. 

Ultimately, the client should make the decision since they are accountable for the content of the filing.  If you have a good relationship, the client likely will see this as a proof positive that you pay attention to details.  If you have a neutral or troubled relationship, the client will see this as a reason to question the relationship.

B:  Many, many ESOP's offer a participant directed distribution of the elgible diversified funds.  More than likely,  participants elected to rollover their diversified distribution to their employer sponsored 401(k) Plan.  ESOP's offer the distribution option in lieu of operating alternative investments (investments other than Employer Securities) within the ESOP.

2 hours ago, Paul I said:

Did participants receive 1099-R's?

No. So it appears that there are two possible choices here:

(a) it was a rollover, and a 1099 should have been issued, and was not, or

(b) it was a trustee to trustee transfer as Paul mentions, in which case it should have been reported on the Schedule I.

Not really our problem, as we don't administer the ESOP, but I wanted to get it straight in my head. Thank you both for your responses.

3 hours ago, Belgarath said:

No. So it appears that there are two possible choices here:

(a) it was a rollover, and a 1099 should have been issued, and was not, or

(b) it was a trustee to trustee transfer as Paul mentions, in which case it should have been reported on the Schedule I.

Not really our problem, as we don't administer the ESOP, but I wanted to get it straight in my head. Thank you both for your responses.

I think (a) is the correct option here.  ESOP diversification IS a distribution.  Offering participants the convenience of a direct rollover by way of transfer to the employer's 401(k) plan doesn't change the fact that it was a distribution. 

I agree with ESOPMomma to the extent that almost all ESOPs treat diversifications as distributions.  It is unlikely, but not impossible, that the ESOP also can offer trustee-to-trustee transfers.  I am aware of at least one pre-approved ESOP document provider that includes this as an available selection.