BeckyMiller

It depends on the economics. If your economics only work with the exclusion from income tax, then there is an issue. But, if the stock is a good investment to a taxable shareholder, it could still be a good investment to the ESOP. BUT, you have to manage the ESOP to both aspects of the UBIT tax - on the pass-through income and on any disposition of the stock. Such ESOPs really need to be designed to make sure that the stock stays in the ESOP and is not distributed to participants. RLL - if the ESOP acquired the non-voting shares before 1978, aren't they still qualifying employer securities for purposes of the plan's status as an ESOP? Not for purposes of the UBIT exclusion or other tax incentives. I am thinking this is true just for IRC Section 4975.

Re: Austin3515 quote, it was Ian Dingwall, Chief Accountant at EBSA at the May 2004 AICPA Employee Benefit Plans Annual Conference.

I've had some experience with this issue. I am not aware of any similar PTE's that have been granted. (Not that I know them all.) If there are not any, you will have to go through the long form application, rather than expedited. You will need to prove the administrative necessity of this action. It won't be a slam dunk. As their name implies - employee benefits security administration. They are focused on the protection of the participants and not the convenience of the sponsor. They are likely to request additional security and potentially require oversight of an independent trustee over the term of the loan. So, your client needs to measure those costs and the time involved when they decide whether to pursue the application.

Since ESOPs are prohibited transactions waiting to happen, your client is advised to move cautiously whenever taking actions that seems to remove rights from the plan. I am not an attorney and even if I was I suspect that I would give the same answer. In this conversation, the plan should be represented by competent ERISA/ experienced ESOP counsel. The trustee (even if totally well intentioned) is negotiating with himself. I guess that is an emphatic NO, maybe just not in the context you wanted...

Going back to the question - there is an old DOL Advisory opinion. I can't remember the number, but it was issued to the Kindel & Anderson law firm, that dealt with this question. If I recall, it implied, but did not specifically hold that if one plan needed the other to be considered qualified under the Code, that the DOL would consider them to be a single plan.

See Letter Ruling 9036039. I think this ruling will answer most of your questions. If not, come back to the post.

Just to clarify - the ability to perform a limited scope audit is not contingent upon the service provider having a SAS 70. The limited scope audit is restricted to plans where assets can be certified by a bank or insurance company. See ERISA regs. 2520-103-5 and -8. A Type II SAS 70 report on the service provider describes for the auditor the internal controls of the service provider and whether they are working. This can reduce the amount of effort that the auditor has to put into the engagement. They will bug you less, but it doesn't create the opportunity for a limited scope report. Just like a TPA needs to decide if the cost of getting a Type II SAS 70 is justified, the auditor needs to decide if it would be less work to perform normal audit procedures or spend the time reviewing the SAS 70 and determining if certain procedures can be cut back. If the auditor only audits one plan that you administer, they are equally likely to do normal audit procedures, as to study the SAS 70 and reduce their procedures.

Here is a great summary of the operational and tax reporting rules for 423 plans. http://www.fairmark.com/execcomp/espp/index.htm

But, for your self-employment income, you might consider a regular plan formula, rather than a 401(k) type formula. The 402(g) cite is to your elective deferrals to a 403(b) or 401(k) plan. If you are the employer and the sole worker for your consulting business, you can make a contribution of basically 20% of your net earnings from self-employment (THAT IS A GROSS SIMPLIFICATION AND YOU NEED TO GET TAX ADVICE.) This is a lower limit, but not included in the $14,000 cap of Section 402(g). There may be other complexities with your 403(b) plan depending on the amount of wages you get from the University. No one faces a more complex retirement plan contribution deduction calculation than a University employee with an outside source of self-employment income.

If the company is profitable, your ESOP might be receiving significant cash deposits from the "tax dividend." If true, you should look at the provisions for managing non-stock assets. I have seen many ESOPs that have very poorly drafted provisions for managing non-stock assets because they never expected to hold anything of long-term significance but stock.

Warning - the UBTI for a qualified plan shareholder of an S corporation includes both the pass-through income and any gain on the ultimate disposition of the stock. See IRC Section 512(e)(1)(B)(ii). The IRS has stated that disposition for this purpose includes a distribution of shares from the plan to the participant. If I had a client that actually wanted to do this, I would challenge that conclusion of the Service. But, this can be an extremely costly step so caution is advised.

If the auditor is not comfortable with the information that you have been provided, have them go to the AICPA Employee Plans Audit Quality message board and post their question. Then they will get the exact same information as you have recieved here from other CPAs. That is the purpose of that section - to raise audit quality. It is www.aicpa.org/ebpaqc. But, the audit firm has to be a member of the audit quality center to use the message board. If they aren't a member of the audit quality center, your client may want to encourage them to join.

See Gerlib v. R.R. Donnelley & Sons Co., N.D. Ill., No. 95 C 7401, 6/11/02. I have historically had good success with this argument where you have clear evidence that it was, in fact, a mistake. Amend the plan and ask for the specific effective date based upon the scrivener's error argument. Include the evidence that the change was unintended.

I am not entering into this fiduciary discussion. That is just too scary for a lowly little accountant like me. I just wanted to note that if you have the CCH tax service on-line. You can get the letter ruling at http://tax.cchgroup.com/network&JA=LK&fNoS...=L&fNoLFN=TRUE&. If you really want it and can't get it from CCH or a comparable service, e-mail me.

I have never discovered any formal requirement to provide the participant with a notice of their right to diversify. The little guidance on this point - 2 notices and the IRS examination manual, do not require any separate notice. In fact, if you look at the IRS manual at 4.72.4.2.14, all it tells the agent to check is whether or not the plan provides for such provision. I would expect a good agent to see if people are electing to diversify, but the manual doesn't say that. Having said all that, I think that it is good practice to give such notices. If you want your ESOP to really work, you need to keep it in front of the folks. The diversification period gives the employer a chance to talk about the benefit.

S corporations are only allowed to have a single class of stock. The only exception to this is that they can have non-voting common that is otherwise identical to the voting common. The ESOP tax advantages are limited to the voting shares - i.e. qualifying employer securities. So, if your client is doing this, I can only assume that they are taking this action with respect to all shares, not just ESOP shares or they are 100 percent ESOP owned. When you say there is a dividend being paid are we talking about cash or stock? A stock dividend is not treated as earnings, it is just treated as a fractional split. If cash and it is a dividend, it would be earnings. I suggest that you get a better understanding of the proposal, an experienced ESOP legal advisor and an experienced S corporation tax advisor. As you have described this event, it makes my hair stand on end with the potential problems. Before your hair stands on end - these are just POTENTIAL problems.

See IRC Section 1042©(7). That is your only restriction, but the S corporation becomes the taxpayer, has to make the reinvestment, etc.

I have seen the plan pay for this expense and I think there is a legitimate argument for many companies that the simple annual valuation update is a normal administrative cost of the plan. BUT, first you need to make sure that the document authorizes this use. Then the appropriate party needs to decide that the purpose of the valuation is for the plan's operations and not for some other corporate or shareholder purpose. Second, you need to make sure that the cost is born by the correct employees under the plan. The plan may, for example, allocate trust expenses based upon total account balance but dividend income is allocated based upon share accounts only. Though it may be rational to say this expense is attributable to the shares, if that is not what the trust language says, you can't just pick to pay it out of the dividends and allocate the net dividend based upon shares. That result would be to allocate this expense based upon shares and that is not what my hypothetical plan document provided.

If the distribution qualifies as a lump-sum distribution, the 1099-R would show the total value of the distribution in box 1, the taxable value of the distribution (the trust basis in the stock) in 2a and the gain in the block for net unrealized appreciation - box 6. Whether or not the corporation needs to issue a Form 1099-B is debated within the ESOP community. The instructions say that you are a broker if you are a corporation that regularly redeems its own stock. If this is the common ways of handling ESOP distributions and you regularly have distributions, you should probably file the form 1099-B

I am not aware of any guidance on the specific interest rate to be used. All the guidance uses the typical waffle words about reasonable interest. Where most of the commentary seems to fall is on the nature of the security that needs to be provided to a participant on the put option loans. You might check the ESOP Association or National Center for Employee Ownership to see if they have any statistics from their members.

It appears that what we have here is a lack of trust. The sponsor is worried about what the TPA will do with the data. The TPA is feeling like it isn't getting exactly what it needs to do the job right... I can see where both sides may have a reason for concern. So - here is a suggestion. Assuming that the sponsor has someone who is reasonably informed about the rules for determining net earnings from self-employment for a partner and willing to take responsibility, have the sponsor send a note to the TPA specifying that for plan purposes the following information has been extracted from the returns and constitutes compensation, earned income, net earnings from self-employment or whatever concept is required by the plan. Then sign and date the note. Don't just stop with the limit on compensation because remember the definition of compensation is after the allocable share of the contribution for employees and each partner. So, to get $200,000 of net earnings from self-employment for plan purposes, you might need $240,000 of earned or more depending upon the cost to fund participants. I don't see that getting the K-1's is any better than this and it may be worse. I have seen an awful lot of wrong or incomplete K-1s and who is to say that the provided K-1 is even the one that was filed with the Service.

Not sure what you are asking... If the company stock is locked up until eligible for diversification, I don't see how that part of the plan would be eligible for 404© relief...

Where there are multiple owners we have seen deferred compensation arrangements in both S corporations and partnerships. It is true that there is no deferral in aggregate, but there may be a change in the incidence of the taxation between owners, between years so it is sometimes implemented. But, for a single owner - other than one preparing for retirement in the near term - I agree doesn't really work to defer any tax. As noted by other commentators, it may serve other compensation planning or transition planning goals.

If Company B bought the assets of Company A, they would have no duties or privileges with respect to the plan of Company A. Company A is a separate legal entity which presumably now holds cash or a note receivable from Company B. It is up to Company A to take appropriate action with respect to the plan. Sometimes we see the plan transferred as part of the purchase. Company B affirmatively adopts the Company A plan as its own. But, that doesn't sound like what happened in your case. And it is not always the best approach. In the interim, Company A will remain responsible for the Form 5500. You should make sure that no additional 401(k) withholdings are being taken from the wages of Company B employees. Somebody needs to look at the documents to see what happened. As always - seek competent ERISA counsel.

I think the BNA citation refers to the old provisions for retaining a fiscal year. The more than 50 percent shareholder rule no longer applies where the shareholder is exempt from tax on the pass-through earnings. See Rev. Proc. 2002-38. Only a 100 percent ESOP owned S Corporation is allowed to use the ESOP year. Now, as to probability of success, my experience is quite dreary. Our success has been limited to the allowable deferral periods - 9/30, 10/31 or 11/30 year ends....