Amending valuation during audit

Hi,

Thank you, as always for all the insights.

A DB plan (traditional DB) with owner and wife in plan (both owners) and employees. In early 2022, the plan's benefit formula was amended from 2% of average Compensation per year of service to 3% per year of service. The owner had been battling an illness, and passed away towards the end of 2022. When the 2022 valuation was done (year end 12/31/22 val date), inadvertently the original 2% of comp per yr of service, was still used. This was noticed after the fact, after the 2022 5500 had been filed already.

The 2023 val was preformed with using the amended formula of 3% of avearge compensation. Being that as of 12/31/ 2022 the acrued benefit for the owner was suposed to have been based on 3% of comp, the AB for the owner in the 2023 valuation was input based on the 3% as of 12/31/2022. 

The valuation and filing for 2022 was not amended to properly match the 2022 plan amendnent of 3% of average compensation per yr of service. And therefore, the AB for the owner shown in the 2023 val does not match the  AB shown for him in the  2022 val, (although of course they should match, since there were no further accruals for the owner after the 2022 plan year)

If the 2022 year is under examination, can the 2022 valuation and 5500 be amended now to properly reflect the plans specs of 3%? (as a val should properly match the plan document specs).

Yes, there is a general concept that you can't file an amended 5500 that changes the specs (ie originally filed based on 2% of comp and now amending based on 3% of comp). However, in this case, since the 2023 valuation shows the owners AB based on using 3% for 2022, this clearly indicates that the 2022 was supposed to have been originally filed based on the amendment of 3%?

Thank you for any insights and input.

Just for clarification, was the effective date of the 2022 plan amendment prior to the owner/EE date of death?

Thank you David. Yes the amendment was effective March 2022. The owner passed away in mid July 2022. 

Hi

Just wanted to see if anyone has any thoughts on the original post above. Thank you.

You said, "If the 2022 year is under examination".  Is it actually under examination, or is this a hypothetical question?  Who is complaining that the 22 val was "wrong"?

For a BOY val date, this w/b perfectly acceptable.  Not sure how an EOY val works with mid-year changes, so not sure if they "must" be recognized, or if it is a "may" like a BOY val.  Sounds like you think it is "must".  

"there is a general concept that you can't file an amended 5500 that changes the specs".  I don't agree with this.  You are not allowed to change assumptions, but I think it is acceptable to amend a filing if you accidently used the wrong benefit formula. 

Why do you want to amend it?  Who is making an issue of the MRC being understated?  If you amend it, was the contribution sufficient to cover the increase in MRC?  

Effen, thank you so much. Your thorough and brilliant mind is appreciated , as always.

No one is complaining that the 2022 val is wrong . However, just want to make sure that give in to them a val that is correct,  that they can't question etc. The 2022 MRC is covered either way, both under 2% or 3%. 

It is just that since the formula for 2022 was amended to 3%of avg. comp, then the year end valuation, which calculates the benefits as of 12/31/22, based on the specs in place as of the val  date of 12 31 22, should show the accrued benefits based on 3% of comp.

Currently, the 22 val shows the benefits based on 2%. 

Meaning the 22 val (year end val date) should show the accrued benefit for the owner as $6,500, however, it actually shows the AB as being 4,444. The 23 val shows the AB for him correctly at 6,500.

I appreciate you pointing out that in this case, amending is allowed, since it is not a change, rather a correction of error, as you brilliantly explained it.

Of course, if any one can point out if there is a way to leave the 22 val is, and not  have to amended it, we would gladly do that. Thank you.

Personally, I wouldn't redo it.  Let sleeping dogs lie.  Yes, you understated the liability, but they contributed a sufficient amount to cover it either way.   If someone asks you to redo it in the future, then redo it then.    

The beauty of the PPA funding method is everything self-corrects over time.  I would suggest that you don't apply any of the excess contribution to the PFB.  That way the plan is right where it should be starting in 2023 and no one can argue that your error impacted anything.  Plan was appropriately funded, PFB was not impacted, no harm, no foul.   

I applaud your dedication to making sure the valuation is correct, but in reality, you are probably the only one who cares. Or, go ahead and redo the val and amend the SB if it helps you sleep better.  

As long as your contribution was in the min/max range under both and it doesn't cause any AFTAP limitation problems, I'd save the correct val to the file and provide a copy to the client but unless the IRS comes asking I'd just correct the next year 1/1 valuation and treat it as a data correction with possibly an attachment to the Sch SB to explain any issues. But I also don't see any issue that would be caused by filing an amended return.

Lastly, you didn't say whether this plan covered employees or just owner and wife. If it is owner and wife only, you don't even file the SB with the 5500-EZ so you could just do an amended SB to the file in that case since the EZ itself would not change or need to be refiled as an amended return.

Thank you Effen, and  Lou S. Coming from the senior members of this Forum, the information means alot to me. 

There are employees, and a 5500SF was e filed. I hear your points  re 1. let a sleeping dog sleep and move on and 2. especially since the 2023 val sort of self corrected the Acrued Benefits.

So do you think it is ok, to not amend and to just give the IRS the 2022 val that is based on 2%, with the plan amendment that says for 2022 the formula was amended to 3% of comp, and give the 2023 val (as they are asking for the val for the year after 2022 as well) that shows the self correction? If yes, possibly will do this and not amend. 

I guess, as you are saying when we give the copy of the 2023 SB to the IRS we can include an attachment that states that the 2023 self corrected the 2022 and that the 2022 met the MRC even with 3%? Thank you

Why are you giving the IRS the 22 val?  I thought you said this was not actually under investigation?  My response assumed this was just between you and the plan sponsor.  

14 hours ago, Effen said:

Why are you giving the IRS the 22 val?  I thought you said this was not actually under investigation?  My response assumed this was just between you and the plan sponsor.  

 

Effen, I apologize for not being clear. The 2022 year is under exam, but we have not given any information yet to the IRS. The exam began just recently. Thank you

Then yes - you should redo the 22 val and amend the SB.  You probably should bounce if off your attorney, but I would Include a letter explaining what happened.  

Oh yeah, if it's under examination correct the error as soon as possible.

Thank you Effen and Lou S. It is much appreciated.

I do not think it is an issue ...but just want to make sure.. Is it an issue to amend now...as now that plan was selected for audit  so we are amending? Thank you

The filing needs amending, the audit doesn't change that. Filing an amended return should not be an issue. 

Thank you

Can the 2022 be given in as filed based on 2% and either say it was self corrected with the 2023 filing or don't say anything and if the IRS questions why 2 %  was used for 2022 and not 3%, we can then say that it was self corrected with the 2023, and if the want we can amend the 2022, or not smart to take this approach and  amend and given in the amended filing?

Do what you think it reasonable and in the best interest of your client.

You can always present both options to your client and have them make the call. In the end if all participants are getting the correct benefit, that is no one who should have been been paid out on 3% was paid out on 2% and the actually contribution was within the Min/Max (as you have said it is) under both the 2% and 3% and doesn't effect the deduction taken on the tax return then I don't think the IRS will be overly concerned if you go back and fix 2022 or say the data error was corrected in the 2023 valuation. 

Personally I think the amended filing is the way to go and just give the amended filing to the IRS for the audit. Then if they ask for the original, give them that along with an short statement that actually contribution is within the Min/Max under both the original and amended returns. 

But I'm not the IRS and they could take a different position based on who is the auditor.

Thank you very much Lou S. and Effen.