BeckyMiller

I don't know the answer to the question, but you might check http://www.403bwise.com/

The cost of the asset as to be reported on the Schedule of Assets Held for Investment Purposes or Reportable Transactions is to be the original cost of such asset, not the prior year's adjusted market value. See page 209 of the AICPA's "Audits of Employee Benefit Plans" as revised for May 1, 2000. The new exception to this general rule is that the cost figure may be omitted for assets subject to participant or beneficiary direction in an individual account plan. This language in confirmed by the instructions to Schedule H of the Form 5500 series.

O.K. S corp. 101. The whole world of fringe benefits in the context of an S corporation is complicated by IRC Section 1372 which says that any 2 percent or greater shareholder in an S corporation is treated as a partner in a partnership for purposes of any provision in the tax code pertaining to fringe benefits. But, this section does not result in the shareholder being treated as a partner with respect to the net income of the S corporation. The shareholder still has wages, reported on Form W-2. It just excludes these shareholders from the benefits of a cafeteria plan, tax-advantaged employer provided health coverage, etc. In this context, the analysis is performed as if the company were a regular C corporation. Wages are $30,000, minimum funding is $60,000. Profits before such contribution, but after deduction for the wages are $30,000. If the contribution is made on a timely basis, the corporation gets a tax-deduction for $60,000 and shows a loss of $30,000. If the shareholder has sufficient basis in the corporation, he can deduct that loss on his personal tax return. If he does not have sufficient basis, the deduction is carried forward until such time as he has basis. This is S Corporation 101, that means that there may be special circumstances that would change the above scenario. Does that help?

Huge question. First you need to address the basic issue - does the business have a sound economic future if there were changes in management, etc? If the answer to that is Yes, then you can look at possible employee ownership or community ownership options. I suggest that you contact the National Center for Employee Ownership at http://www.nceo.org or The ESOP Association at http://www.the-esop-emplowner.org. They both have company members who have gone through this situation and may be willing to share ideas. There is at least one attorney that I know who has extensive experience with these situations. Her name is Deborah Groban Olson. You can reach her at Deb@shared-equity.com. I am sure that there are many other competent attorneys in this arena. I just know that Deb has a special interest in turnover, union situations. Good luck.

In my experience, where the plan pays such expenses, they are typically considered to be a plan expense, not a participant expense. Thus, they would typically be allocated as a percentage of plan assets. Participants with large balances would bear a greater share of the costs, than participants with smaller balances. Frequently, the plan's language will merely discuss an allocation of the net income or loss of the trust, which would be investment earnings reduced by these kind of expenses. But, such allocation is controlled by the terms of the plan. As a participant in the plan, you would also have the right to review the plan agreement. There would generally be an allocation section. There may also be a definition section that defines net income or loss for purposes of the plan. Unfortunately for a plan with relatively few participants (which means less than 200), the costs of terminating a plan can be very substantial on a per participant basis for the reasons noted Mr. Dugan.

If you are thinking split dollar, look at IRS Notice 2001-10, first.

Are you looking at your participant statement that includes a line item for expenses? Do you have more than one entry for expenses? If your employer sponsors a "leveraged ESOP" that means that the plan incurred debt to buy a block of stock. The plan incurs interest expense on that debt and that interest expense is paid with employer contributions or dividends. On most participant statements, you will see additions for the contribution and the dividend, if any. You will also see a deduction for the interest expense. So - that may be the expense that you are seeing and it could be quite large. If your statement specifically says that it is an administration expense, having a leveraged ESOP may still result in these large expense costs in the early years. The plan may have $10 million of assets and $9.5 million of debt, so that all the participants see on their statements is the $500,000 that has been allocated to their accounts. (Note, this is a gross simplification of how ESOPs work.) The plan may have expenses for the annual accounting and reporting, a plan audit, the stock valuation, etc. It would not be unusual to see $25,000 for these expenses or even more. Thus, the expenses are only .25 percent of total plan assets, but 5 percent of what you see in your account. To help you understand this, realize that the law allows you access to the financial reporting for the entire plan. Start with your human resources person and ask for a copy of the Form 5500 for the plan.

When you went to the NCEO web page, did you look at http://www.nceo.org/pubs/401k.html or http://www.nceo.org/library/combine.html Also, the Profit Sharing/ 401(k) Council has survey on matching contributions, etc. you have to be a full member to get the entire survey. However, I don't recall seeing anything in there to that level of detail. We regularly get copies of the other surveys done by the big consulting houses. I do not recall seeing anything on this topic in any of those. This would be the Hewitt, Mercer, etc. folks.

Probably not, but if you get a good 403(B) provider they can figure this out.

Preacher's kid myself, so always willing to help! They do need to remember to create a bona fide document providing for the employer contribution.

Next question - would the priest be highly compensated? The application of the nondiscrimination rules to church plans keeps getting deferred, but it is still good to think in the context of these general rules. If he is not highly compensated, which few are, then you could make an employer contribution to the 403(B) plan for a category of employees limited to non-highly compensated priests. If he is highly compensated, you need to push back on the idea of just adding it to his salary and letting him defer through the 403(B).

Kevin - I suggest that you go to the web page for the National Center for Employee Ownership. It is simply http://www.nceo.org. They have lots of information about company stock in retirement plans, including 401(k) plans. You can do creative stuff with matching formulas, etc. you need to watch out for discrimination testing concerns for some of these ideas. But, that is not what triggered my response. First, I don't think company stock in a retirement plan is something to be avoided. It can be a fantastic benefit for employees. As noted in earlier remarks, it can also be a nightmare. I tell my clients to remember that if they are putting company stock in their 401(k), their employees are going to watch it, closely. And, if it doesn't perform, they have to remember that rather than seeing their shareholders at an annual meeting, they are going to see them EVERY DAY! Second, adding company stock to a retirement plan does not per se trigger the need for a full scope audit. If the trustee or custodian is willing to certify the company stock portfolio, you can still get a limited scope audit. This is nearly always true where the plan holds an actively traded stock. I have seen a few cases where private companies get certifications on the company stock portion of the portfolio. If the addition of the company stock creates an obligation for the plan to register with the SEC, then the limited scope audit is no longer available. SEC filings require a full scope audit.

Under current law, the 25 percent of pay limit includes employee 401(k) contributions and the employer contributions to any defined contribution plans, including ESOPs, 401(k), profit sharing, etc. But keep an eye towards new legislation. There are a bunch of folks in Congress who propose that some or all of the employee salary deferrals to a 401(k) plan should not count against this limit.

All your defined contribution plans must share the 25 percent / $30,000 ($35,000) individual allocation limits of Section 415. In addition, all such plans must be combined for the IRC Section 404 limits of 15 or 25 percent of pay, depending upon plan type. This includes ESOPs, 401(k) plans, profit sharing, money purchase pension plans, etc. Discretionary plans are generally limited to 15 percent of pay. You can hit 25 percent of pay, if you have some old contribution carryovers or if you have a defined contribution pension plan (money purchase plan). Look at IRC Sections 404(a), 404(j) and 415. Watch new legislation, as there was a proposal last year to allow discretionary plans to go to 25 percent of pay and to disregard employee salary deferrals in calculating these limits.

See brand new DOL Advisory Opinion posted to the DOL newsroom last Friday. http://www2.dol.gov/dol/pwba/public/media/...ss/pr011901.htm It says that you can pay these costs from plan assets, if the amounts are reasonable and the plan otherwise provides for such expenses to be paid from plan assets.

Check out the web pages of the National Center for Employee Ownership (nceo.org) or The ESOP Association of America (http://www.the-esop-emplowner.org/). The ESOP Association has a seminar on S corporations coming up on March 1 in Tampa. You can register off the web page.

Diversification is a qualification issue for an ESOP. As such it is eligible for correction under the EPCRS program. The updated EPCRS program was just released in Rev. Proc. 2001-17. Theoretically, this would be corrected like any other failure to make a distribution. (Participant must be given the right to make the elections, they must be made whole, as if the election right had been granted at the correct time, etc.) Whether self-correction is possible or you need to go in to the IRS for relief would depend upon how many years the error has been going on, the amounts involved, etc.

The tax beneficial fringe benefit limits for S corporations are found in IRC Section 1372. The definition of a 2% shareholder is in part (B) which uses the attribution rules of IRC Section 318. Here ownership is attributed up and down the line - parents, grandparents, children and grandchildren of the direct shareholder.

I don't mean to say that the 80-120 rule may not be available in these facts. I am just clarifying that the literal language of the rule could put you outside if the new entrants on 5/1/2000 put you over 120. For AICPA courses that you may find interesting go to the AICPA web page and select CPE. There are three self-study courses that are helpful. One is a tax course, number 732230. There are 2 audit courses, 737101 and 737102. The first audit course does a good job covering the basic ERISA reporting rules. The second course is really just for plan auditors. The AICPA web page is pretty easy to find. It is just http://www.aicpa.org. Becky

I debated with myself about raising this point and the rigid technical side of me won. Realize that in counting the number of participants, the regulation granting the audit exemption applies to "plans which cover fewer than 100 participants at the beginning of the plan year." (ERISA 2520.14-45(B)) This is not the same as the end of the prior plan year. As bzorc notes, the number increases by new entrants. At least some new entrants come in on the first day of the plan year. Now - having said this I must admit that I have never had a DOL agent reject a filing prepared on Form 5500 C/R for this reason. I don't know if they look at it this way or not. Obviously, I would never raise the issue in an audit situation. This is not just my personal perspective. If you look at the AICPA's self-study course on ERISA, it includes a form for calculating the number of participants which starts by adding new entrants. That course was originally drafted by David Walker, former DOL Assistant Secretary for the PWBA.

Need more information. Is the pastor an employee of the church? Are there other employees? What level of commitment towards funding are you thinking about?

Hey - Kip! As much as I adore all ERISA attorneys, I must disagree. When it comes to reporting and disclosure violations, I have generally found that the accounting profession is better qualified to handle the issues. (Obviously, this assumes an accountant familiar with ERISA, not just any accountant, as you would not use just any attorney.) We are all assuming that the original filing was in error. I submit that there may be simply a misunderstanding on the nature of the original filing. It could be that the combined Form 5500 that Thornton observed was a Master Trust filing. Such a combined filing is appropriate for a Master trust. Obviously, it would not be the only filing for these plans - each would have separate filings for the non-financial information. A master trust filing should be designated as such, if it is, I would ask for the separate Forms 5500 for each plan. It is quite possible (and unfortunately more likely) that the assumption is correct and the filings were inappropriate. I just felt the need to stick up for my accounting brethren. If the original filings were in error, we have been successful with filing amended returns. We file both returns for all applicable years at one time, with one cover letter. To date, we have never had difficulty with either the IRS or the DOL with such filings. There is no assurance that this level of forgiveness will last and the comments about looking at the need to use the DOL relief program are very appropriate. Finally, with respect to welfare plans, we see a ton of "umbrella" plans - multiple benefit features under a single plan. As long as the features have comparable eligibility standards, this seems to work fine. We have even used this approach under the DOL's relief program to reduce the penalty exposure without negative feedback from the government.

This question falls into the "clear as mud" world of statutory authority. It is clear that for the sponsor's tax return, the transfer of the property is treated as a sale or exchange. You have already recognized that. What is not clear is whether it is treated similarly by the plan. It is pretty clear in any case where the sponsor has an obligation to fund the plan - such as a defined benefit pension plan or a money purchase plan. Personally, I would submit that such obligation also exists in cases of matching contributions in 401(k) plans or formula based contributions to profit sharing or stock bonus plans. But, other commentators may believe that I am too conservative on that interpretation. One might also argue that where the Board has declared the amount of the contribution to the plan and later decides to settle that with a transfer of property that there has also been such an obligation created which would trigger a prohibited transaction. What is not clear is where the contribution to the plan is totally discreationary and the company decides at the beginning of the discussion of any contribution that it would like to transfer unrestricted property to the plan. (I am assuming that the plan may otherwise hold such property.) We had a client who desired comfort on such transaction in the early 1980s. We applied for a combined advisory opinion/prohibited transaction exemption request. The application was withdrawn after a conference with the Department where they gave us informal advise that they did not think the request was necessary under our facts. I realize that the Keystone case was settled after this experience, but Keystone deals with a pension plan, not a discretionary contribution to a profit sharing plan. For more insight into the Department's position see Interpretive Bulletin 94-3. 29 C.F.R. 2509.94-3(B).

Adding a 401(k) plan does almost nothing to the plan sponsor's financial reporting. So that piece is not an accounting nightmare. Where the accounting nightmare could arise is in the nondiscrimination testing. Again, this does not have to be a major issue, as RLL mentionned it is possible to exceed the 15 percent limit, if the employee salary deferrals are limited to a fixed percentage of pay, say the lesser of 10 percent or $10,500, two segments of the "accounting nightmare" is eliminated, the annual addition limit and the 402(g) limit. If only non-highly compensated employees are allowed to make contributions, there is no testing required. That is a term of law, so someone would need to verify who that is from year to year. If the highly compensated people want to participate, there are some safe harbor formulas to eliminate the testing. In other words, it doesn't have to be all that bad. In today's marketplace the 401(k) is becoming nearly as common as paid vacation days. You can't persuade the folks to change their minds, but you might be able to find some articles that could help. I suggest that you use benefitslink and search under "401(k) safe harbor" plans to see if you can find some good magazine articles. The CFO magazine regularly runs articles on 401(k) plans and providers. That might be a starting place since it focuses on the business need for such arrangements.

Well, it is possible that the attorney is concerned about the controlled group rules and not a specific ESOP or qualified plan matter. Under IRC Section 1563(e)(3), shares held by a IRC Section 401(a) trust are disregarded for purposes of determining the shares outstanding in measuring control. Thus, for these rules, you 4 percent shareholder would be considered the 100 percent shareholder. Surprisingly, under IRC Section 414(B), this rule is disregarded. Thus, for retirement plan controlled group of corporations, the 4 percent owner is just that -- a 4 percent owner. It might help to get the answer to RLL's question about why this is considered an issue.