BeckyMiller

Another good point! Thanks Sieve.

This statement is based upon IRC Section 408(b)(5). It refers to erroneous information provided under subtitle F of the Code. Subtitle F covers the Form 1099-R filing requirement.

I think you have answered your own question. An ESOP is first a tax-qualified plan, so it needs to satisfy all of those rules about participation, non-discriminatin, etc.

Sieve mentioned 415(h) but didn't note what it said. This is a frequently overlooked provision. It says: 415(h) 50 PERCENT CONTROL. -- For purposes of applying subsections (b) and © of section 414 to this section, the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in section 1563(a)(1). In other words, you can have a controlled group for purposes of the 415 limit at more than 50 percent level of ownership, rather than the traditional at least 80 percent.

Hmmm... interesting question. The reference in 133 to voting rights specified that the loan would not qualify unless the expanded voting rights were applied. But in defining the voting rights, it described what the ESOP had to provide with respect to the rights of the securities acquired with the loan. IRC Section 133(b)(7) VOTING RIGHTS OF EMPLOYER SECURITIES. --A loan shall not be treated as a securities acquisition loan for purposes of this section unless -- (A) the employee stock ownership plan meets the requirements of section 409(e)(2) with respect to all employer securities acquired by, or transferred to, the plan in connection with such loan (without regard to whether or not the employer has a registration-type class of securities), and (B) no stock described in section 409(l)(3) is acquired by, or transferred to, the plan in connection with such loan unless -- (i) such stock has voting rights equivalent to the stock to which it may be converted, and (ii) the requirements of subparagraph (A) are met with respect to such voting rights. So, if the loan is paid off, it seems like you don't care about the status of the loan anymore and you may be able to amend the plan to revert to the general voting rights on the shares. But, I don't know that the government would be forestalled from arguing that the expanded voting rights applied to the shares acquired with the loan, rather than just for the term of the loan. Fence sitting, aren't I? I am going to irritate you further by saying that I think there is sufficient ambiguity that you should check with experienced ERISA counsel and perhaps either go for a letter ruling or make the amendment and highlight in your determination letter application. Note, I did look briefly at 411(d)(6) and the associated regulations and do not see where voting pass-through is a protected benefit. But this is free advice, so you need to check into that, also.

I wonder if the reference is to 409(l) (as in the letter that precedes m), rather than 409(i). The comment makes some sense in the context of the definition of a qualifying employer security. For a security to be a qualified employer security, the employee must be employed by a member of a 1563 controlled group. A leased employee, if treated as a bona fide employee of the leasing company, would probably not be employed by a member of such a group. As such, we get in the complicated situation of having to satisfy participation and coverage, but not being able to rely on many of the special ESOP provisions with respect to any securities that might be for the benefit of "leased" employees.

That sounds right. The big issue for these arrangements is the handling of distributions. If they are deferring distributions for 1 to 5/6 years or until the debt is retired for a C corporation, your client is probably o.k. But, if they are making immediate distributions, they could have an issue. The contribution accrued goes into the participant's account. That accrual includes interest and principal that is going to be disbursed in January. But, you only do annual allocations, so if I retired during the year and get a contribution for that year which is to be paid out shortly after year-end, that amount includes funds that the employer is expecting to have to pay principal or interest. How much of an issue is a function of how many distributions they have that fall into this category - get a contribution for the year and get an immediate distribution after year-end. Typically that is a pretty small number. I just wanted to highlight the issue.

I suggest that you ask for the plan's language on layoff, rather than just the SPD. You may have to pay for those copies, but my experience has been that the SPD will not typically provide sufficient detail to answer this question. I am not aware of any special ESOP rules, but I have seen a lot of language on lay-offs that state that the participant is treated as if they were never gone if they return to work as requested following a lay-off. This language is ALWAYS a problem where any lay-off spans year-end and the company then needs to develop a uniform policy on how they handle that language. You can start with the SPD, but do not be surprised if it is not particularly informative.

See Rev. Rul. 81-158. That says that it is the value on the date the shares are provided to the transfer agent. Beyond that you need to go to a lawyer because there is all that stuff about what the document says, following past practices on interpretations of what the document says, etc.

I agree with Sieve on this point. In addition, the plan sponsor is a disqualified person and typically such loans do include some kind of assurance from the sponsor that they would cover the loan. See IRC Reg. 54.4975-7(b)(1)(ii).

This was an EGTRRA provision so it would have the same required date as any other EGTRRA changes UNLESS you were not an S corporation at that time. If your S election was later than that, the amendments should have been in place by the end of your first S year. I don't know that it is entirely clear whether these amendments would be covered by the 401(b) remedial amendment rules because they are not qualification issues for the plan, they merely go to the plan's status as an ESOP. But, I would like to here from other ESOP gurus to see if they agree with that conclusion.

All of this discussion is grounded in IRC Section 404(a)(6) which was interpreted in Rev. Rul. 76-28. Though old, it is still the authority on how the IRS sees this matter. If the 2007 tax return covers the same period as the plan year and is under extension at this time, it sounds as though there would be basis for taking the deduction on the 2007 return. If that return was filed by March 15, 2008 without extension, the deduction would be delayed to the 2008 year. Any facts outside those clear cut-offs need to be specifically examined by the client's tax advisor.

This whole question about business expenses paid by the partner, rather than the partnership and their impact on plan compensation has been bouncing around for years without any clear resolution. In today's world of preparer obligations under new IRC Section 6694 and the need to conclude at a more likely than not standard, for the person preparing this partner's tax return, I would say that they have a real issue. The statute says that for a self-employed person, compensation is their "net-earnings from self-employment" for the venture sponsoring the plan. I don't see that putting the expenses on Schedule C, rather than claiming them against Schedule E income changes what really is "net earnings from self-employment" with respect to the partnership. (Obviously, there is the whole question about whether or not such expenses really are legitimate expenses to be deducted against partnership income or are they really personal business expenses that are only deductible on Schedule B.) BUT, if they are bona fide business expenses deductible from partnership income, they would reduce this partner's income under IRC Section 401©(2)(A) and as such eligible compensation for plan purposes. However, I have never seen this requirement - to get partners to report their net earnings from self-employment as reported on THEIR tax return - enforced in any IRS examination of a partnership plan. When the non-discrimination regulations were updated after the 1986 act, this question was specifically raised and the IRS chose not to take action. SO - what is the answer? There is the technically correct answer and there is what most everyone seems to do. Even under the new penalty provision, the preparer gets the out if they have a reasonable basis for believing that a certain result would be more likely than not to succeed. Can we say that an undocumented non-enforcement pattern creates such a reasonable expectation? Don't know, we just have proposed regulations on Section 6694 at this time and they offer little help on this thorny matter.

I think many of the folks who post to this message board are familiar with the Employee Plans Compliance Resolution System, as defined in Rev. Proc. 2006-27 and have worked with the IRS and their clients under any one of the three basic options. Not sure how it relates to the list that you have provided. Where did you find this list? What is your specific question?

To respond to your first question - whether such arrangement can be an ERISA plan, there are many DOL Advisory opinions on this subject. The issue is who the sponsor is and who funds the arrangement. Where the plan is sponsored by and funded by the employees through some voluntary group, there are several situations where the DoL has concluded that it is not a governmental plan and is subject to ERISA. See for example, DoL Advisory opinions 89-16, 79-39 or 92-19.

I have been concentrated in this practice for over 30 years and have never heard of such a rule. There are some special rules where there are only employee payments, but if the former employer is contributing to the plan, I do not know of any way to get out of the audit for the facts that you have described. BUT, I am eager to learn if there is such an opportunity.

ERISA 412(a) now includes the following: The amount of such bond shall be fixed at the beginning of each fiscal year of the plan. Such amount shall be not less than 10 per centum of the amount of funds handled. In no case shall such bond be less than $1,000 nor more than $500,000, except that the Secretary, after due notice and opportunity for hearing to all interested parties, and after consideration of the record, may prescribe an amount in excess of $500,000, subject to the 10 per centum limitation of the preceding sentence. For purposes of fixing the amount of such bond, the amount of funds handled shall be determined by the funds handled by the person, group, or class to be covered by such bond and by their predecessor or predecessors, if any, during the preceding reporting year, or if the plan has no preceding reporting year, the amount of funds to be handled during the current reporting year by such person, group, or class, estimated as provided in regulations of the Secretary. Such bond shall provide protection to the plan against loss by reason of acts of fraud or dishonesty on the part of the plan official, directly or through connivance with others. Any bond shall have as surety thereon a corporate surety company which is an acceptable surety on Federal bonds under authority granted by the Secretary of the Treasury pursuant to sections 9304-9308 of title 31. Any bond shall be in a form or of a type approved by the Secretary, including individual bonds or schedule or blanket forms of bonds which cover a group or class. In the case of a plan that holds employer securities (within the meaning of section 407(d)(1)), this subsection shall be applied by substituting "$1,000,000" for "$500,000'"each place it appears. So, basically, the rule is the same as it always was except that you substitute $1,000,000 where it previously read $500,000.

See IRC Section 275(a)(6). No deduction is allowed for taxes under chapters 41, 42, 43, 44, 45, 46, and 54. This excise tax falls under Chapter 43 - so that would be non-deductible.

First - it is best practices for your client to actually cut a check to the ESOP for the debt and have the ESOP give the money back. I know it is a nuisance but it makes it easier upon any IRS or DOL audit and it keeps the record straight on who is the fiduciary, at least with respect to that action. Now the entries: Cash into ESOP Compensation cost for the principal portion ESOP interest for the interest portion Cash Cash back from ESOP (if the loan is between the ESOP and the sponsor) Cash Unearned ESOP shares for the principal ESOP Interest for the interest income I am assuming that you have an inside loan, because otherwise, you would have to be cutting checks. At the end of the year, you need to true up this entry for an difference between the principal payments made and the original cost of the shares released. That entry goes between ESOP compensation cost and Unearned ESOP shares and, as noted above, the market value adjustment. That goes between ESOP compensation cost and APIC. If you have to capitalize costs into inventory or self-constructed assets, the ESOP costs are also part of the costs subject to such capitalization.

On voting rights - go to IRC Section 401(a)(22). 401(a)(22) If a defined contribution plan (other than a profit-sharing plan) -- 401(a)(22)(A) is established by an employer whose stock is not readily tradable on an established market, and 401(a)(22)(B) after acquiring securities of the employer, more than 10 percent of the total assets of the plan are securities of the employer, any trust forming part of such plan shall not constitute a qualified trust under this section unless the plan meets the requirements of subsection (e) of section 409. The requirements of subsection (e) of section 409 shall not apply to any employees of an employer who are participants in any defined contribution plan established and maintained by such employer if the stock of such employer is not readily tradable on an established market and the trade or business of such employer consists of publishing on a regular basis a newspaper for general circulation. For purposes of the preceding sentence, subsections (b), ©, (m), and (o) of section 414 shall not apply except for determining whether stock of the employer is not readily tradable on an established market. Since 401(k) plans CAN be stock bonus plans, you should see if this applies. Note that "readibly tradable" is not the same thing as registered.

I can't speak to the registration issue, but with respect to the company's own hedge funds, you need to look at the prohibited transaction rules. The concept of a qualifying employer security is limited to stock, bonds or certain publicly traded partnership units. See ERISA Section 407(d)(5). I am pretty sure that few, if any, of today's hedge funds meet the definition of a publicly traded partnership unit included at © of the regulation. So, it is likely that their own hedge funds would be not be a qualifying employer security and could not be held by the plan absent an individual exemption request. If I am reading this too narrowly, I would like to hear back from the group. As to the question that you did not ask - realize that many hedge funds will spin off unrelated business income, potentially subject to income tax. So, that needs to be taken into account when evaluating the investment. Further, hedge funds frequently do not have a readily ascertainable fair market value. So, whether you are simply valuing participant accounts or having to deal with the auditor of the plan, there may be additional costs incurred to measure value. Finally, if more than 25 percent of the hedge funds units are held by benefit plan investors, the ERISA plan asset rules will apply to the underlying assets, rather than the equity instrument. At a minimum, someone needs to monitor this and if the rule is violated, significant additional costs are likely to be incurred. See ERISA Section 42 and reg. 2510.3-101.

Marcus is referring to an accounting standard that considered the proper classification of securities that have the attributes of both debt and equity. That standard is on hold for private companies with a specific FASB staff position on securities of ESOP companies. The reason is came up is because of the mandatory put option for ESOP shares that are distributed and the cash flow obligation for ESOP trustees where the plan does not intend to distribute stock. That is the repurchase "obligation." With SFAS 150 frozen for now, there is no other GAAP standard that requires the recording of the repurchase obligation. The language that JRN is using is more like a defined benefit plan under SFAS 87 / 158. As a defined contribution plan, ESOP sponsors are not currently required to go there. If this is a potential area of concern for you or your client, keep an eye on the FASB projects with an eye to puttable (sp?) securities or "mandatorily redeemable" securities.

In addition to the unlicensed practice of law issues, ERISA practitioners in whatever guise must also consider the implications of new IRC Section 6694. This has raised the preparer penalties to the greater of $1,000 or $5,000 or 50 percent of the fees charged for the engagement. The penalty is extended to payroll and excise taxes, not just income taxes and it includes "non-signing" preparers - meaning folks who offer advice on tax return matters without actually signing the return. Included within the scope of coverage are returns, such as Form 5500, which do not include a preparer penalty. If you are a TPA who is not authorized to practice before the IRS, do not assume that you are not subject to these new rules. See example 2 in Notice 2007-39. There an unenrolled tax return preparer became subject to these standards because employees were authorized to practice and did sign Forms 2848.

Where some of the confusion arises is because Section 267 sets the attribution rules for certain provisions of the Code. Under this section, there is attribution of stock out of a trust to the beneficiaries without any exclusion for 401(a) trusts. But, I agree that for purposes of Section 1372, there is no attribution out of the ESOP trust.

It will be different for different types of returns. For a self-employed person, for example, the normal due date of the return is 3 1/2 months after year-end, the extension period is 6 months, so the extended due date becomes 9 1/2 months after year end. That would be the due date for deduction purposes. But remember, if the plan is subject to minimum standing that due date is still 8 1/2 months after year end. (A common error!)