Final Year of Plan

We're terminating a defined benefit plan, the checks are written to the rollover institutions, all sent prior to 12/31/20.

It is my understanding that the plan can not be closed and a 'final 5500" prepared until either IRAs have been established or the participant cashes a check and the 20% withholding has been paid.

So, 1099s can only be prepared for 2020 only if the plan funds were deposited into IRAs mor cashed their checks in 2020; if done January, 2021 has to be a 2021 1099R.

Correct???

If it was distributed by the plan in 2020, then it is taxable to the participant in 2020 and a 2020 1099-R should be issued. Whether the participant cashes the check in 2020 or 2021 is irrelevant. See Rev. Rul. 2019-19.

That's good to know because I have run across a few TPAs as well as brokerage people who are under the impression the plan can't be closed until all the money is out of the plan.

I think their logic (?) is that as long as the participant has not done anything with the money, it is still a plan asset.

Don't confuse a couple of issues here. If a participant gets a check in December of 2020, then he gets a 1099 for that money representing a 2020 distribution. Regardless of when he cashes the check.

A plan can't shut down until all the money is gone. So money in an account because the check hasn't been cashed IS still a plan asset. That's why wire/ach/certified checks should all be used for a plan termination.

FWIW if a check is outstanding in a situation such as this, we will treat it as paid in 2020 for all purposes - i.e. the balance sheet will show $0 net assets and we'll file a final return.  

14 hours ago, Bill Presson said:

So money in an account because the check hasn't been cashed IS still a plan asset.

I guess I am disagreeing - it's an asset but there is a liability offsetting it.

1 hour ago, Bird said:

FWIW if a check is outstanding in a situation such as this, we will treat it as paid in 2020 for all purposes - i.e. the balance sheet will show $0 net assets and we'll file a final return.  

I guess I am disagreeing - it's an asset but there is a liability offsetting it.

We've done the same on occasion, especially if we're talking about a few days or weeks in to the new year. But what if the check gets lost or if the participant never cashs it?

3 hours ago, Bill Presson said:

We've done the same on occasion, especially if we're talking about a few days or weeks in to the new year. But what if the check gets lost or if the participant never cashs it?

OK, I guess we don't disagree then.  I wouldn't change my position if it is outstanding for a while but it can get...not pretty.

in addition, if not cashed timely, the amount may also change due to 417e assumptions, got to be careful on how long the participant holds on to the check.

15 hours ago, Jakyasar said:

in addition, if not cashed timely, the amount may also change due to 417e assumptions, got to be careful on how long the participant holds on to the check.

I don't know about that

I had a situation where the broker adjusted the 12/31 balance so that the distribution was coded as deducted from the account but the participant did not cash the check until March following the year end. Bird, what would you do in this situation? Just curious.

9 minutes ago, Jakyasar said:

I had a situation where the broker adjusted the 12/31 balance so that the distribution was coded as deducted from the account but the participant did not cash the check until March following the year end. Bird, what would you do in this situation? Just curious.

I know this was directed at @Bird, but I'll add my thoughts as well.

@Bill Presson is correct that money in an account due to an uncashed check is a plan asset.  It doesn't matter whether it sits in the plan's account or if the financial institution holds it in a different account until it clears, it is a plan asset.

In situations where the check is issued in December and clears in January, or we know that $xx.xx of trailing dividends will hit in January, I have no problem making the accounting work so that liabilities cancel out assets, and we can avoid a new plan year just for the sake of a slow clearing payment or trailing dividends.  When those events start taking longer and longer, going in to February, march, or beyond, it loses any nexus it had with the prior plan year. 

I would not treat a check clearing in March as no plan assets on January 1.

I believe it was mentioned in another thread that "client does not want to file a Form 5500 for an additional year". I think we all know that what the client wants to do or does not want to do in regards to reporting and disclosure is irrelevant.

Hi

I agree with you and Bill on the 5500, without question.

My comment was for the recalculation of the lump sum for the db accrued benefit.

I'm not sure which aspect you are asking for clarification on, but IMO if a check is cut in December, it is a distribution then for any/all purposes, and the day the participant cashes the check has nothing to do with the value for DB lump sum purposes, 1099-R reporting, or the 5500 reporting, all showing it as a 2020 distribution, if it is a Dec 2020 event.  As far as the 5500, let's say it was cut from a checking account, and hasn't cleared by Dec 31.  I think a case could be made that the check register would have a zero balance, and whether the check is cashed in Jan or March, I don't see why that matters, so the 5500 would show 0 assets at the end of the year. 

The contrary position is that you should show an asset at the end of the year and a corresponding liability for 0 net assets.  I'm not sure if the gov't software will allow that on a final return.  I'll be honest and say I'm not sure if that (showing the assset and the liability) is absolutely the "correct" way to do it.  

I recall seeing a prior thread here some time ago concluding that zeroing out plan assets with the payable amount shouldn't be done.  I've seen it done both ways over the decades and haven't seen it ever be an issue either way, that is, if the check is cashed close to the end of the year.  I think three weeks may have been the longest I've seen anyone let it slide before mandating another year of admin.

Jakyasar, you have a valid concern, since going into another plan year can require different stability and look back periods, i.e., different interest rates to be used for a calc determined as of a different date.  Making all of these adjustments to a calc can be a considerable revision, and the IRS would probably expect the updated rates to be used, especially if the check is cashed much later that the determination date.  A couple of weeks afterwards can be argued as acceptable, but a large part of this seems to come down to one's risk tolerance.  Six weeks later? Much closer to unacceptable, but how close is OK?     

Hi mming

I always take the position that if not cashed by end of year, too bad, it is next year's distribution. On risk tolerance, possibly will get many different answers. Mine is none.

When you get a statement as of the end of the year, you will see the assets, not a cashed/cancelled check. If want to pay at the last minute, electronic transfer is the way to go.

Bird, I have seen checks cut in December, accounts debited and checks "cashed" in early January. I do have mixed feelings about this but when the investments showed the balance deducted in December, I went along with it, only once and many years ago. Not sure what the outcome would have been if audited by IRS. Never did it with any PBGC termination though, always the date cashed, so much easier/cleaner to deal with.

FWIW

I've got something similar now.

DB and DC plans terminated in November for a one-participant plan, rollovers occurred.  DB plan still shows about 3,000 in residual dividends on 12/31 statements.

Advisor is going to be backdating the transfers out from the accounts as of 12/31, but they will show as such on January statements.

One aspect, from a TPA billing standpoint, is that because the DC plan was completely 0, and the DB plan was under 250,000, that the sponsor technically doesn't have to do a DB 5500-EZ for 2020, but would do a final DC for 2020 and a final DB filing for 2021.

What's the typical IRS point of view on this?  Do they get ornery if there are assets/liabiliies only netting to zero on a final filing, or do they not consider that legitimately "final"?

I think for 1099 purposes, though, I can still show this all as a 2020 rollover.  (Owner is taking the haircut, plan wasn't super close to his lump sum number.)

On the 5500, definitely would not have a break, almost there/done, why complicate it? Billing is up to the TPA discussion with the client. Besides, since the DB plan was terminated in 2020, you still have to do schedule SB anyway so 98% of the work had to be done in the first place.

I will let other chime in on the IRS's position. I do not take the position that assets were $0 as of 12/31/2020 as there will be a January statement showing account balance, backdating or not, it is there past 12/31/2020, this is my take. Better play safe now than sorry later.

4 hours ago, Bri said:

I've got something similar now.

DB and DC plans terminated in November for a one-participant plan, rollovers occurred.  DB plan still shows about 3,000 in residual dividends on 12/31 statements.

Advisor is going to be backdating the transfers out from the accounts as of 12/31, but they will show as such on January statements.

One aspect, from a TPA billing standpoint, is that because the DC plan was completely 0, and the DB plan was under 250,000, that the sponsor technically doesn't have to do a DB 5500-EZ for 2020, but would do a final DC for 2020 and a final DB filing for 2021.

What's the typical IRS point of view on this?  Do they get ornery if there are assets/liabiliies only netting to zero on a final filing, or do they not consider that legitimately "final"?

I think for 1099 purposes, though, I can still show this all as a 2020 rollover.  (Owner is taking the haircut, plan wasn't super close to his lump sum number.)

I recall a discussion where these "trailing dividends" are for investments that were already transferred out of the plan and is now "owned" by the rollover.  So these trailing dividends really belongs to the rollover and not to the plan.  So not plan assets.