Doing a (late) audit for a Company Division Plan from 2001 which merged into the Parent Company Plan at the end of 2001. In doing testing, a number of loans were discovered that were in default, but had never been given 1099s (due to significant personnel turnover and poor controls). Further, a number of these loans were not reported to the successor Parent Company Plan (loans were tracked separately from the remainder of Plan assets).

A few questions or requests for opinions:

1) In preparing the "final" 2001 audit report for the Division Plan (which would have a zero balance), how would you treat the defaulted loans that were not reported to the Successor Plan?

With the benefit of hindsight, would I show this as a transfer to the Successor Plan, and then inform the Successor Plan trustee so they could issue 1099s (showing as a withdrawal from the successor plan)?

I don't think I could show this as a distribution from the Division Plan since 1099s were never issued. Am I wrong on this?

2) Since the 1099s would be issued so late (many loans have not had repayments in over 2 years), would there be any penalties to the Plan Sponsor?

Any thoughts would be greatly appreciated.