20% Withholding not paid until following plan year

Hi, 

Terminated employee in DC Plan elected a lump sum and 20% was withheld as required. The 20% sat in the plan until the following plan year when it was sent to the IRS. The 80% that the employee received as a lump sum was shown on the 5500SF in the year it was received and the 20% withholding was shown on the following year 5500 SF (since it sat in the plan assets until the following plan year).  Are there potential penalties for this and can this be rectified? Thank you very much.

That's not very specific.  When was it withheld (month) and when was it paid (month)?  Whether there are penalties or not would depend on timing and amount.  I probably wouldn't worry about it a whole lot at this point; let them assess the penalties and then pay them.  I think they are based on current rates which are extremely low.

We would have shown the WH as a liability on the 5500 but then again this wouldn't be something we'd have to deal with.  It's ok to report on a cash basis.

Maybe you have done this already but to me you are focusing on the wrong thing. 

I am with Bird what is done is done move on.

I would spend my time figuring out how to change someone's procedures so the withholding is done correctly going forward.   Like I said maybe you did that but at our firm if we found this changing process to stop this from happening again would get 95% of our time and attention and worrying how we reported it on the 5500, fines and so forth would get the remaining 5%. 

If it were me, I'd probably amend the 5500 but I don't think you'll have any trouble there. Penalties if any would probably come from the 945 filing which is going to show a tax withholding liability incurred in the prior plan year and not deposited timely. Did you do the 1099/945 or did somebody else?

4 hours ago, duckthing said:

If it were me, I'd probably amend the 5500 but I don't think you'll have any trouble there. Penalties if any would probably come from the 945 filing which is going to show a tax withholding liability incurred in the prior plan year and not deposited timely. Did you do the 1099/945 or did somebody else?

Thank you duckthing. Is it ok to amend and show the WH going out of the plan in the prior year 5500 even though it was not actually paid until the following year?

I like Bird's suggestion of showing it as a liability. I think the approach you're suggesting could also be reasonable on the basis that the withheld amounts ceased to be plan assets when the distribution was processed. I also agree with ESOP Guy that examining the process is a good idea here. It seems unusual to leave the withheld amount commingled with the plan assets rather than having them sent to the sponsor to transmit via EFTPS.

6 hours ago, ESOP Guy said:

Maybe you have done this already but to me you are focusing on the wrong thing. 

I am with Bird what is done is done move on.

I would spend my time figuring out how to change someone's procedures so the withholding is done correctly going forward.   Like I said maybe you did that but at our firm if we found this changing process to stop this from happening again would get 95% of our time and attention and worrying how we reported it on the 5500, fines and so forth would get the remaining 5%. 

Thank you ESOP Guy

6 hours ago, Bird said:

That's not very specific.  When was it withheld (month) and when was it paid (month)?  Whether there are penalties or not would depend on timing and amount.  I probably wouldn't worry about it a whole lot at this point; let them assess the penalties and then pay them.  I think they are based on current rates which are extremely low.

We would have shown the WH as a liability on the 5500 but then again this wouldn't be something we'd have to deal with.  It's ok to report on a cash basis.

Thank you Bird.

3 minutes ago, duckthing said:

I like Bird's suggestion of showing it as a liability. I think the approach you're suggesting could also be reasonable on the basis that the withheld amounts ceased to be plan assets when the distribution was processed. I also agree with ESOP Guy that examining the process is a good idea here. It seems unusual to leave the withheld amount commingled with the plan assets rather than having them sent to the sponsor to transmit via EFTPS.

Thank you very much. What if the plan was under examination, would it still be advisable to amend ?

I would not bother amending.  If under examination, just explain how it was reported (cash basis).  IMO amending while under examination just makes it worse.

5 minutes ago, Bird said:

I would not bother amending.  If under examination, just explain how it was reported (cash basis).  IMO amending while under examination just makes it worse.

Bird, thank you very much.

I think I brought this up in another thread under the topic "945 for 2020" in Message Board 5500 - 1/13/2021.