BeckyMiller

Boy - the accountants are always in trouble in here. Being one, I tend to try to defend them, but the best answer is always to ask for the source. Which Code section makes the accountant think that is the correct answer? In general, 2 corporations one of which is owned by a completely unrelated person at a 22.5 ownership level would not create a controlled group under Section 1563 or Sections 414(b) or © of the Code. But, there can be lots of detailed nuances that change that answer. So, I would ask the accountant the technical basis for his or her conclusion. There may be one that you didn't consider, the facts might be different or the accountant may just be wrong...

Well - you probably won't find much specific guidance. The right for ESOPs of S corporations to use S distributions to service debt is best described in the legislative history. I think it was either EGTRRA or the Jobs Creation Act. It references Section 404(k) and provides that S distributions on eligible allocated shares may be used for debt service if the return for value requirement of Section 404(k) is met. Some guidance are in the ESOP regs. under Section 4975. But in general, it just comes down to what the plan document authorizes and what fiduciary conduct permits. The BNA portfolio on ESOPs is pretty good on this stuff.

Not sure what you mean by a "disqualified distribution." This is a taxable distribution with no exemption from the premature distribution penalty.

To GSI - ESOPs are not eligible for any of the "safe harbor" formulas. Go into the 401(a)(4) regulations and search by ESOP and you will find a lot of parenthetic notes about "other than ESOPs." You can do a creative formula to allocate ESOP contributions but it must satisfy nondiscrimination without regard to any safe harbor, without imputing social security, etc.

Belgarath - ESOP administration is a very complex world. ESOPs of S corporations are among the most complex. Leveraged ESOPs of S corporations may be the most complex. You shouldn't enter into this blind. Even if they have excellent legal counsel, they are not likely to be up to date on the day to day administrative aspects, basis tracking, 409(p) testing, diversification ilk for this situation. For example, if the profit sharing plan has been in existence for 10 years or more, there is no delay on the imposition of the ESOP diversification rules. So - you may want to resign or subcontract with one of the ESOP administration firms to help you out. Your client can find some information about various firms that do focus on ESOP administration through the ESOP Association of America or the National Center for Employee Ownership.

Sure sounds like the classic affiliated service group to me. Are there other employee? A plan must be adopted by the employer, so you might end up with one plan and 3 employers adopting. See 414(m) of the Code and the related regulations.

See IRC Section 414(t) for one list of welfare benefit plans that are subject to aggregation under the controlled group rules. Then go to each code section to see what nondiscrimination rules apply. Tedious, isn't it?

It is my understanding....(that is always a dangerous term) that the guidance found in the top heavy regulations control. See the T provisions of IRC Reg. 1.416-1. The language in 54.4975-11 that says that any ESOP may not be combined with another plan for qualification purposes is generally considered to be subject to override by later regulations. So, you would aggregate. If top heavy, all plans must meet the vesting conditions of top heavy, but only one plan would need to meet the minimum contribution rate. But, this answer is worth what you are paying for it. I thought there was a ruling or something on this, but I could not readily turn it up.

See IRC Reg. 1.401(a)(4)-11(d)(3) - I think this says you can do what you have suggested.

I think you need to give us more context - participant voting shares in a self-directed account? The voting of employer securities? Trustee duties for voting shares? What kind of assistance are you seeking?

I am so glad that you went to the regulations first. I agree with your reading. Forfeitures should not sit unallocated over multiple plan years. As a plan auditor, we frequently come across these accumulated forfeitures. Sometimes it is because the amount has been "forfeited" out of a former participants account for tracking purposes, but has not actually been forfeited - that is, the participant has not been cashed out or sufficient years of service have not yet expired. That is not my favorite internal accounting system, but not a violation of 415. Once the amounts are a bona fide forfeiture, they should be used by the end of the following plan year unless the amount is so large that there would be a 415 excess. When we find these on audit, the amounts usually are not huge. We suggest that the client go to legal counsel for advice. That advice may be to treat them properly in the current year, allocate in the correct year, submit under EPCRS, etc. I do not recall anyone ever saying - ah, that is o.k. just continue to hold them....

If the plan is subject to a financial audit, the plan's independent auditor should look at the appropriateness of the distribution process in accordance with the plan documents. But, benefit plan auditors are not lawyers and they may not catch each and every issue. There is no requirement that the IRS or the DOL review the termination of a plan. However, they frequently do audit the terminations of ESOPs if there is a fair amount of money involved or something else that makes them wonder. Good luck - I hope your company has competent advisors and that everyone is treated fairly.

IRC Section 514©(9) has an exemption for certain debt financed real estate, but this exemption is limited to investments of 401(a) plans and some charities. IRAs are not included in this relief.

In general, benefit plan auditors - the CPA ones, not the government type, will be easier to work with if you have a SAS 70 report. It allows them to rely on that report in many ways and reduce the amount of testing that they must do. But, relying on a SAS 70 is really only worthwhile to the auditor if the firm has many common clients with you. If you do not have many clients that require an audit or if you do not have many clients with the same plan auditor, the amount of work that it takes the auditor to review the SAS 70 and determine how procedures can be modified is probably more work than if they just come in and do the audit. Having said that, realize that there is an ancillary benefit to you of having a SAS 70. It is a review of your internal controls. A good SAS 70 report lets you know where you are doing a good job and where you have weaknesses. Since weaknesses can mean the potential of costly errors in your work, you might have a business case for having such work done even if the benefit plan auditors are not demanding the work. Now - I have to say that as a representative of an auditing firm, we do tend to encourage clients to use TPAs and other service providers who have clean SAS 70 reports.

The DOL guidance on auditor independence is found at 2509.75-9. This is the basis for the comments above that the auditor may not maintain the books are records. Assembling existing financial information into proper format is not necessarily a violation, though the SEC does see it as such for 11-k filings. The AICPA rules of conduct are somewhat more flexible on what constitutes "maintaining" books and records. But the DOL is on record, at least orally, that they do not like the AICPAs standard in this regard. The DOL recently requested feedback from the ERISA community on the appropriate nature of auditor independence. See http://www.dol.gov/ebsa/regs/fedreg/proposed/2006014913.htm

I appreciate your frustration on this issue, there is very little information out there. But, this is not a great place for this kind of very specific advice. I know you hate to hear this, but I would strongly advise that you get experienced legal counsel on this matter. I suggest that you consider looking for such counsel in places like Minneapolis, Seattle, etc. States that border with Canada are likely to deal with this issue. The ESOP Association has a directly of legal advisors that is available to members. Have fun - Becky

At the last AICPA Employee Benefit Plans conference, Ian Dingwall of the Office of Chief Accountant - the guys that bounce 5500's, reminded the folks in the room that the first line of voluntary correction is to file an amended return. That works as long as you have not received a rejection notice. It also works for the first rejection notice where you have 45 days to respond. But, if this is this year's report, recognize that the time it takes for the DOL to reject a filing has become really short. I have seen these rejections returned in 43 days!

I found a bit of this discussion confusing. The LaRue case is also a real case. You can find it at: http://caselaw.lp.findlaw.com/data2/circs/4th/051756p.pdf

On this point, note the the proposed Form 5500 for 2008 may include a requirement that 403(b) plans subject to ERISA be subject to the financial statement audit, like a 401(k) plan. Thus, when the proposed regulations under Section 403(b) becomes final and if the 2008 reporting rules require an audit, 403(b) plan sponsors will be confronted with all of the same timeliness issues and the scrutiny of those issues. See http://www.dol.gov/ebsa/compliance_assistance.html#section5 for a discussion of the proposed changes.

I feel like I need the sentences diagrammed here. I agree that an uncle is not an ancestor is we are testing relative to B. But, I am worried about your statement that because A owns no shares within the ESOP, he owns no "deemed shares." You need to look at synthetic equity. With the inclusion of any deferred compensation arrangement that is subject to IRC Section 404(b) in the definition of synthetic equity, you are likely to have some deemed shares.

I think the question comes down to whose plan it is. If each subsidiary has a separate plan, then the filing requirement would be based upon that separate plan.

Boy - specific technical question. I would go to the securities counsel that assisted with the deregistration to get an answer to that one, rather that trusting in the always valuable, but voluntary message board.

You did not describe how large a payroll base you have for this company. I agree with stephen's remarks, but just wanted to note that there may be a problem in getting capital gain treatment for the seller, if there is a very small payroll base. See Rev. Proc. 87-22 and a bunch of PLRs that were issued under this procedure.

401(k) plans can be either profit sharing or stock bonus plans. Either basic plan type can satisfy the conditions of ERISA to be an "eligible individual account plan." See ERISA Section 407(d)(3). Plans which are meet the conditions of an "eligible individual account plan" are permitted to invest in "qualifying employer securities." Such investments remain subject to prudence, except they may be exempt from diversification, depending upon how the plan is drafted. Next step is to get good ERISA legal advice and probably securities advise on how to proceed or not.

Just to clarify on Harry O's reference to PLR 9024083 - this is limited to dividends that are being distributed pursuant to IRC Section 404(k). I made an implicit assumption - that I should have made explicit - that you were taking about dividends which had been accumulated in the trust for a number of years. Such dividends would not be 404(k) dividends and my response stands. If, however, we are talking about a current dividend distribution from a C corporation, the PLR addresses the arguments. Sorry for not making my assumption more obvious.