BeckyMiller

This arrangement would be considered an ERISA plan - it provides an ERISA welfare benefit - reimbursement of health costs. But, you may not have a filing requirement. 1. Unfunded welfare plans that have fewer than 100 participants are excluded from filing see ERISA reg. 2520.104-20. 2. The DOL has an outstanding nonenforcement policy for 125 plans that provides that such funds do not have to be held in trust. So, if the employee contributions are simply held by the sponsor, the plan is likely to be considered unfunded. 3. The counting of participants for a welfare plan is different that a pension plan. See ERISA Reg. 2510.3-3(d)(1). Typically, an employee doesn't qualify as a participant in a welfare plan until they make the required contribution.

Pretty technical question for this database, not the kind that folks would typically just chime in on. That is probably why you haven't received a response. Let me say that I have worked on similar situations. The plan sponsor and the plan need competent counsel both for securities issues and for ERISA issues. It is going to be an expensive procedure in any event. FYI - I am not an attorney.

Have you looked at the legislative history or the guidance that the Service issued when the law changed to allowed the participant to elect to take cash or have the dividends reinvested? I don't recall that this matter was addressed. But, it would seem clear that the qualification issue for diversification should trump this language. Thus, the shares are allocated and in the following diversification election period, if the participant is eligible to diversify, these shares should be included in the pool of stock eligible for diversification. See Notice 2002-2. This discusses the concept that the dividend deduction is not available until the participants election becomes irrevocable.... But, I can't imagine that means that they can't ever switch out of stock. I guess I am hoping that one of the other ESOP folks would chime in here....

Remember, an ESOP cannot be combined with a non-ESOP for discrimination testing. See IRC Reg. 54.4975-11(e). You get no cross testing under §1.401(a)(4)-8(b). I know there have been some changes in the aggregation rules on ESOPs that I just haven't looked at recently. So, let's pretend that you can aggregated these 2 plans. I think you still have a problem. There are some old published rulings - around 1970, 71 or 72. That discussed situations where the right to employer securities was limited to a discriminatory group. The conclusion was that this was prohibited discrimination. Now, these are obviously really old. But, it is a concept that I suspect that the service would be inclined to sustain - anything to limit those nasty ESOPs.... You are caught in a quandry however. If it is an affiliated service group, the securities of the ESOP company likely wouldn't be "qualifying employer securities" with respect to the participants in the affiliate. Thus, you couldn't have an identical plan, couldn't use leverage, wouldn't get the same tax advantages, etc. That fact pattern might get you some relief. My advice - check my first concern first. I don't think you can aggregate these plans for nondiscrimination testing. If I am correct, you are going to have to figure out some way to get the ESOP to work on its own. Since your client has legal counsel, they need to look at this issue, too.

If it is a stock sale, then the buyer of the stock steps into the shoes of the owner of the shares. Any obligations of the company continue. The Tax Code, ERISA and economic consequences of those obligations will now effect the share value of the new owner. So, in a stock sale, it is typical to cover these risks in some sort of contingency agreement - holdback, etc. This is just one of many reasons why buyer's tend to want to buy assets, not stock.

The concept of ownership for highly compensated is found in the top heavy rules. For attribution purposes, these rules rely on IRC Section 318. IRC Section 318(a)(4) does attribute ownership to an individual from options. But, I can't prove the answer with respect to non-vested options. So, I suggest you do some research on that point. Note, the regulations are no help at all. you will have to go deeper than that.

Not sure where he has been. I have been missing him too. But, he is "retired" now and takes a lot of cool trips. So, he may just be out of the country somewhere.

Wow - there are so many potential gotchas in this message that I feel like the only thing to say is get competent ERISA/ESOP counsel and get it now. I know it is a small plan, but you probably don't want the whole transaction to blow up in the seller's face. There may have been voting issues on the sale decision - that's a qualification issue. Fiduciary issues on the sale. Prohibited transaction issues on the sale and the satisfaction / default on the loan, etc. etc. etc.

See IRC Section 401©(2)(A)(v). Any self-employed person must reduce their income for all benefit plan calculations by any amount deductible by them under IRC Section 404. No difference for partners or sole proprietors.

The AICPA Tax Division has entered into a discussion with the Service on this matter. Watch for future developments.

I agree with the need to contact counsel. BUT, when you contact counsel, I would draw their attention to the SEC release that was associated with the revision to the filing requirements in 1990. It is SEC release 33-6867. I have found the language in the discussion section of the release much more helpful than the filing instructions or the regulations in interpreting what they apparently meant.

It seems like every ESOP answer includes the disclaimer - you need to get competent legal counsel. And gosh...I am not even an attorney and I am telling you this. The DOL sees ESOPs as prohibited transactions waiting to happen. As such, ESOP fiduciaries need to be very conscientious about every action. Though ESOP fiduciaries may be exempt from the ERISA requirement of diversification, they are not exempted from the other rules, one of which is that the plan be managed with an eye to liquidity requirements. The plan can distribution stock subject to the put, as you have noted. The trustee may be able to use existing cash, the trustee may be able to sell shares to provide liquidity, there is a limited purpose PTCE allowing a short-term interest free loan of cash to the plan, but folks argue about whether this can be used to cover distribution needs. I have seen one letter ruling that discussed an ESOP which advanced cash to fund distributions and treated the advance as if it was a stock purchase loan. But, that is one old (1980 or 1981??) letter ruling and I sure wouldn't advise anyone to take that position without getting sound legal advice. In other words, back to my opening comment.

The simple answer is "Yes." The prohibited transaction exemption for lending to ESOPs involves direct or indirect loans or other extensions of credit between the plan and a party-in-interest/disqualified person. In my experience, most ESOP loans are done through the plan sponsor with or without outside financing to provide the loaned funds. BUT, like any ESOP matter, these are complicated, nit picky events and your client is well advised to put together a strong ESOP team - ESOP counsel, valuation adviser, etc. With respect to the "round robin" effect, it can't really be a redemption of the selling shareholder. The active employees need to retain a long-term interest in the shares. See Rev. Proc. 87-22.

Just to clarify - if your accountant is issuing independent financial statements, it is NOT their job to come up with the FMV of the stock. They just test the value number that management has selected. Having got that off my chest, I agree with the comments that extending the return is typical in this case. Since most private companies only want to value their shares once a year, you can deposit some shares into the trust on January 2 (assuming that the 12/31 value and the 1/2 value would be the same). Round up on the number of shares that you think you may need. Then claim a deduction for the number of shares at the year-end value that meet your objective and treat any remaining shares as a deposit on the subsequent year's contribution. Not precise but avoids the need for making any after the fact valuation adjustments.

Good clarification - tracking basis in shares is the subject of some very, very old and incomplete regulations that were issued in a non-electronic age... They aren't much help.

Yes - there may be a nonallocation year in this situation. Realize that this rule was established to avoid abusive situations where the value of the company is drained by deferred compensation to the disadvantage of the ESOP shareholders. As the proposed/temporary/final regulations under Section 409(p) are currently drafted there is no exception for reasonable amounts of deferred comp., pre-existing contracts, etc.

First - I am assuming that the options that you described are what the plan allows. If true, a series of distributions over 6 years commencing at age 65 should qualify for tax-free rollover with the exception of any minimum required distribution rules if the last distribution comes after attaining age 70 1/2. With respect to a lump-sum distribution, the exclusion is for net unrealized appreciation but that requires that the individual pay tax on the plan's basis in the shares when distributed. Then long-term capital gain on the appreciation when the shares are sold and short-term or long-term capital gain on any subsequent market value adjustments based upon how long the former participant holds the shares before selling. The participant needs to make sure that any such distribution will qualify as a lump-sum distribution. These are complicated decisions and if a fair amount of value is involved, the participant should seek experienced tax advice. Few plans provide for a distribution of stock the day following termination.

You are reading the IRS position properly. Also, be advised that responding on Form 5500 that the plan has non-traded assets whose value was not set as of year-end using an independent appraisal is one of the items that triggers an inquiry by the DOL. I am not saying that is always trouble. But, I don't know any sponsors who really want to have to deal with the DOL. In this case, your plan is so new and the value disappeared so quickly, that I sure wouldn't want to have to explain it to the DOL.... But, with the share price going to zero in such a short time, your client stands a good chance of seeing the DOL show up anyway. So, get competent counsel and make sure that all documents are in good order.

I am so glad!

Whenever a voting pass-through question comes up, I immediately tell ESOP sponsors to look at their articles and by-laws or other documents governing what events trigger a shareholder vote. If still in doubt go to corporate counsel. Also, look at the plan and trust agreements to see if they include any exposition on the topic, expanded voting rights, etc.

The auditing rules governing the withdrawal of a report and submission of a revised statement generally require a pretty significant change. Obviously, I don't how significant this item is to the presentation. BUT, I do know that financial statements leave room for changes in estimates, restatements in the current year for prior year activities, etc. So - I would contact the auditor with the information and find out their response. It is quite possible that a new financial report for the prior year would not be required.

It is possible to offer a 401(k) plan for just one enterprise within a controlled group. You need to satisfy IRC Section 410(b) based upon the eligibility standards of the 401(k) plan when looking at all of the employees of all members of the controlled group, not based upon participation. But, if there are other retirement plans within the controlled group, you need to make sure that offering the 401(k) doesn't disrupt any testing of those plans. It sounds like you might have access to additional flexibility under the separate line of business rules, but my general advice is not to go there unless you have to. Also, watch out for prototype documents in this fact pattern. In some cases, you end up including folks that you never intended. So - yes, possible, get an advisor who know the controlled group rules and the related testing standards.

This is a top of the head response. I don't see why not. Certain S corporation shareholder employees are treated as self-employed for fringe benefit purposes. But, self-employed persons, such as partners in a partnership, are permitted to have HSAs. So - there is likely to be different reporting consequences, but I don't see any reason for a prohibition.

Copies of your checklists, written review procedures, enforcement policies over those review procedures will assist the auditor in trying to asses the plan's internal controls for purposes of setting the audit scope. That is what the SAS 70 - an assesment of internal controls.

Thanks Kirk - you are correct. I was thinking in a C corporation world. Happily, the Code Sections that I cited make the differentiation! (But that assumes that folks actually look at those citations.) As Kirk noted - S corporations do not get the expanded deduction under IRC Section 404(a)(9). Thanks again - Becky