BeckyMiller

I think you are reading the regulation too narrowly. It is referring to the list of items available for collateral which is contributions, earnings on contributions and earnings on collateral. You are correct that there is a disconnect between this language and the subsequent changes with respect to dividends paid on shares that are no longer held as collateral.

Learner - An ESOP participant is eligible to exclude NUA from income if the distribution is part of a lump-sum distribution. Section 402(e)(4)(D) generally defines a lump-sum distribution from an employer plan as the entire balance to the credit of the account made within a single calendar year on account of death, following age 59 1/2 or on account of separation from service. So, if dividends were distributed upon termination of employment and the rest of the value was distributed before the end of the year, you would still get a lump-sum distribution. Otherwise, you need to look at the facts. There is little guidance here except for hundreds of private letter rulings that were issued prior to the 1986 change in the lump-sum distribution tax rules. In general, under the interpretations expressed in those rulings, an individual could take a partial distribution for one reason - separation from service and then take the remainder of their account for another reason - death, following age 59 1/2 and qualify for lump-sum treatment on the following distribution. BUT, this is law by letter ruling which is not all that reliable. Thus, you need to do some research to see what kind of comfort you can get for your client.

Bill - What are you looking for? Technical information on ESOP operations. Technical information on ESOP establishment. An overview of ESOP applications? Legal authority? There are lots of resources in varying forms depending on your needs. BUT, the dark side of a published book is that it doesn't automtically update itself. Prentice Hall / Rosenfeld Launer at one time published a treatise on ESOPs, but it is out of print. The authors picked up the rights and are working on an updated volume, but I have not heard of a targeted publication date. That is at http://www.benefitcapital.com/ESOPBookFlyerBCC.pdf The BNA portfolio on ESOPs is a good source of highly technical information. As others noted, the NCEO has many publications with both technical and practical spins. See http://www.nceo.org/esops/esop_books.html In the interest of full disclosure - I am a contributor to a bunch of these publications.

Dear Student: Not sure how much work you have already done on this issue. But, realize that the 401(k) rules provide for an out from constructive receipt both for deferrals from regular wages and from nonperiodic bonus payments. Thus, it MAY be that this arrangement is covered by a 401(k) plan. (If you look at the Code, you will see that both profit sharing and STOCK BONUS plans are permitted to include cash or deferred features.) Further, any "eligible individual account plan" under ERISA can receive and hold "qualifying employer securities." So, the fact that the contribution is going to be made in kind is not necessarily an obstacle. So - you need to look at the plan. Your are correct that the fair market value of the stock received would be wages reportable for employment tax purposes. Such wages are subject to FICA tax withholding, which is typically done out of other cash wages. Amounts paid in stock, not to the 401(k) are subject to income tax withholding - again typically done from other wages, though in some situations employees will write a check to cover the withholdings. The amounts deposited in the 401(k) plan, if subject to the cash or deferred election provisions of the plan would only have FICA withholdings, not income tax. The employer should not put this on Form 1099 - the payroll tax enforcement folks have a lot of ammunition and tend to be very aggressive. So - you need to talk to your tax advisor - attorney or CPA to work through these issues. This forum is merely a place to get pointed in the right direction - hopefully. I have seen folks pointed in the absolutely wrong direction.

I am not aware of any developments since that old thread. If you are certain that the plan has violated the diversification rules, I would suggest that the Plan Administrator request relief under the EPCRS procedure. As a system of relief, you need to focus on the participant's position. If the company stock declined in value - you will probably need to give them the value as of the date that they could have diversified, plus some earnings rate from that date. If the stock has increased in value at a rate in excess of the earnings rate that the IRS would apply under EPCRS, you might be able to simply grant them diversification now. I would double check to make sure that you have missed the window and that noone else has missed an opportunity, before going into EPCRS. And, as always - make sure the sponsor obtains competent and experienced ERISA counsel. I have seen a lot of EPCRS applications that were naively drafted, so emphasis on both competent and experienced.

First, I would check with legal counsel on the plan language. Was this intentional? Is there room to correct the language at this time? Does the Plan Administrator have any authority to determine the allocation method in this case. Second, realize that the nondiscrimination regulations provide that the exclusion from allocation testing for earnings is limited to "...allocations of income, expenses, gains, and losses attributable to the balance in an employee's account are not taken into account in determining allocation rates." 1.401(a)(4)-2©(2)(iii). In response to a question at the hearings on the proposed regulations, the IRS stated that the allocation of earnings attributable to unallocated shares in an ESOP would be included in allocations subject to nondiscrimination testing. Thus, they must be tested against compensation for nondiscrimination purposes. Because of this, many plans aggregate the dividend on collateral with the employer contribution to determine a participant's share. But, not all plan advisors agree with this interpretation of the language. Does the plan have a determination letter?

See regulation 1.401-10(e)(1) which specifies that a partner may not set up a plan with respect to his or her services to the partnership.

Ahhh... Didn't see that.

For purposes of 409A, they are looking at the trading status of the service recipients securities, not the option. For the best discussion on whether a security is considered readily tradable on an established securities market see Letter Ruling 200052014.

Since the initial post requested input regarding whether such fees could be paid out of plan assets, my advice would be no. The Plan Administrator is supposed to retain the records necessary to the administration of the plan. It is true that if such records had been created on a timely basis, the cost of much of such work could have been an expense of the plan. But, here it sounds like there are going to be extra charges because of the failure to retain such records. That just doesn't feel right to me as an appropriate plan charge. But....I am not an attorney. Just an old ERISACRAT.

Nope - Helga posted a question to an old message stream. Not a new topic. Helga - Open any topic in the section of the discussion board where you want your posting to appear. At the bottom of the page, right hand corner you will see two boxes - add reply and new topic. If you click on new topic it will open a new message stream within that section of the discussion board. Hope that helps - Becky

Thanks Kurt - critical reading is an art, which I apparently failed to apply to the original post. I agree that for a non-ESOP, 409 would not apply. BUT, once the stock is distributed from a non-ESOP plan in complete liquidation of the participant's account, I would think that ERISA would no longer apply. So, the employer would be able to offer liquidity to plan participants in some reasonable manner without tripping over the prohibited transaction rules. Kurt would have a better idea of any state or federal security law matters that might come in play in the employer offers to purchase or offers a put on such securities. I should let you know that we recently worked with a business that distributed illiquid securities to a plan participant without providing any means to create liquidity and the state attorney general sued the plan sponsor under a securities law violation. I suspect the IRS might have some fiduciary conduct concerns, too.

ESOPs provide very formal rules regarding the distribution of employer securities. It is permissible for the plan to distribute stock. If the stock is not traded, the plan sponsor has to offer the participant a put option. The plan may offer the put. For a lump-sum distribution (or other distributions of pre-1987 shares, if plan permits), the purchase price can be paid in installments. The put option note must bear reasonable interest and must be secured. See IRC Section 409(o) and (h). There are no regulations describing these rules. There are some old regulations in 4975, but the conditions are different under Section 409. There are a lot of letter rulings out interpreting these rules. Also, look at the legislative history.

O.K. I was born in 1951! And proud of it. I started with what was then a Big 8 accounting firm, one which sadly is no more. ERISA had just passed when I started and I was thrown at it and stuck. It has been a joy and pleasure to have been associated with a field that has contributes so much to society, such as this brilliant message stream! Holiday wishes of Joy and Peace to all!

FYI - Last year we had an IRS audit on an ESOP of an S corporation where the sponsor had received a substantial cash payment as settlement on a court case. The company chose to distribute most of the cash out as a distribution to shareholders. For about 12 months, the ESOP ended up less than 50 percent invested in company stock. This was after nearly 20 years at 80 to 100 % invested in company stock. The IRS agent proposed to eliminate the plan's status as an ESOP on account of that short-term violation. We were able to overturn the agent's conclusion in part based upon the fact that the plan fiduciary had clearly documented its plan for dealing with this windfall when it arrived. I am not saying that the agent had a leg to stand on in his argument. My point is merely to highlight the fact that because of the significant tax incentive available through ESOP owned S Corporations, the Service may be using this attack.

Hmm.... I guess I would just ask them what they are looking for. The auditor does have a duty to look at prohibited transaction implications. So, if cash was contributed to the ESOP which was then used to purchase stock, they might be looking for the details describing how that was handled. It is possible that they are just looking for the authorization of the transaction. I am a CPA and work for an auditing firm. So, you have to take what I say in that context. But, auditors should explain themselves, just like they expect the TPA to explain themselves. So, just ask what they are looking for.

It is the tax that the trust would pay if it was disqualified. It has nothing to do with all that operational stuff we have to correct. It is just the tax due on any income that would be reportable by the trust under normal trust taxation.

An old ERISA person responding here. Realize that for welfare plans, you do not have to worry about IRS penalties. These reports are only required by Title I of ERISA. So, the only penalties are DOL penalties. My experience with the DOL on this kind of issue has been surprisingly pleasant. If the original filing reflected the Schedule A's for each benefit structure, they have received what they are mostly interested in receiving. I would call Scott Albert at the the DOL Chief Accountant's office and ask him how to proceed. If the correct answer is to file an amended 2003 filing and split it into two filings, I will be very surprised if they penalize the client at all. BUT, they have been surprising me lately, in an unhappy manner, so I would call Scott first. He is a nice guy and actuall takes calls. The number for the Office of the Chief Accountant is found on the EBSA web page at http://www.dol.gov/ebsa/aboutebsa/org_chart.html

If your client goes with an ESOP, it increases the rigidity of the rules - limits the nature of the securities that are qualifying, requires annual appraisal, requires diversification, requires put option, etc. It also may grant them additional tax incentives. A well run individual account plan, however, is likely to look a lot like an ESOP. That is, face many of the same rigidities. They really should get an independent appraisal even though the law doesn't specifically require it. The law does require that the assets be restated annually to fair value. Your client probably needs to provide liquidity, even if they don't face the required put option or diversification standard. We recently picked up a plan that was dealing with a criminal investigation by the state attorney general for distributing non-traded securities out of a profit sharing plan, when there was no market for the stock.... (Elliot has set such a high standard of intervention for these guys!) It is not an area that sponsors should enter casually. Not sure that I have been discouraging enough....

Anyone who wishes to know what the auditor is expected to do in auditing an employee benefit plan should look to the AICPA. The standards are contained in one volume - the AICPA Audit and Accounting Guide for Employee Benefit Plans. It can be purchased from the AICPA for under $70. It is updated annually and includes a description of the required procedures for both full scope and limited scope audits of retirement and welfare plans. But, realize that the auditor cannot advise you in advance of all of the steps to be taken. The point of the audit is to discover issues, if they are there. Thus, some unexpected procedures are likely to be applied. After the fact, however, the auditor should be able to explain why they applied those particular procedures and what they were attempting to discover. I do agree that many auditors, unfortunately, do not know what is required of an EB audit. They may miss required procedures and / or perform unnecessary procedures. When in doubt, have them show you where the audit guide requires that they test a particular item or report in a particular manner. Be advised that many items are left up to the audit firm's discretion or judgement. Also, be advised that there are some fundamental inconsistencies between what Form 5500 requires and what the auditor is required by generally accepted auditing standards or accounting principles to perform. These are annoying, but required for the auditor to issue a "clean opinion." The DOL continues to review any Form 5500 filed with anything other than a clean opinion or the statutory limited scope opinion. If you find that the plan auditor seems clueless, suggest that they join the AICPA audit quality center for more information on how to conduct an EB audit.

Thanks to all.

It is in the regulation project, but the effective date was November 16, 2004. But this is the rule that subjects the employee deferrals to FICA. It also pertains to certain one-time elections of amounts that look more like employer contributions. Not sure the precise context of your question.

I do not know the answer to your question, sorry. But, if your firm is a member of the AICPA audit quality center for employee benefit plans, I suggest you post your question there. More auditors visit that page than this.

But, that section refers to paragraph 5 of that section which refers to IRC Section 401(a)(9)(A) which covers IRAs and 401(a) plans. Hence, my problem.

First - the disclaimer - I am a CPA. I work on plan audits. Now, the soap box? Why not just use prototype plans and get rid of the lawyers? Or do your administration in-house and get rid of the TPA? If your auditor is giving you no value, get a better auditor. There should be real value to the plan audit. The review of the internal controls governing the plan's function should support the duties and obligations of the plan fiduciary. The review of the actual operations of the plan should catch potential operational defects before they get so large that correction is very costly. The auditor should be providing a management letter with ideas to enhance controls, consider other design options, etc.