A Shot in the Dark

It is not uncommon for an "S" Corp ESOP to use the full 25% (404(a)(3)) limit for the principal payment and simply not deduct the interest. Chances are the "S" Corp ESOP may not need the interest tax deduction.

I concur with ESOP Guy. It is imperative that your client seek ERISA Counsel with ESOP expertise! When it comes to pass through voting there are some very peculiar rules as ESOP Guys states. If in fact a vote of the participants is required a "Request for Voting Instruction/Transaction Disclosure Statement" will need to be developed and delivered to the ESOP Participants in a timely fashion before the vote takes place. This sort of document is quite detailed relating to the terms of the transaction, etc.

B: Often times in an asset sale the business name will be sold as an "asset" and will become part of the asset sale.

Stock held in the ESOP, (or any other 401(a) Plan) is excluded from the attribution rules. IRC 318(a)(2)(b).

With most of our small employer clients, I start out the plan design meeting by saying: "To start with, we are going to draft the plan in a manner that is most beneficial to you the employer and the business owner." Then I attempt to to hit the hot topics: Eligibility, contribution allocations, distribution provisions, and then other applicable provisions. In other words, I want to tell the business owner or team, how do you get in, what's in it for you and your employees and and how do you get out.

Our office uses FT William for our plan document software. FT William sent an e-mail to our office yesterday stating IRS Approval PPA letters were issued with a March 30, 2018 date. The e-mail also indicated that it would take time to get the software updated and they will be sending out a time table for completion in the near future.

Employer's Cash flow distress would be a valid reason. Perhaps the employer is in violation (or potential violation) of the certain bank loan covenants, etc. Perhaps the ESOP trustee(s) working with the board of directors of the company would determine that necessary contributions to the ESOP for funding the Repurchase could jeopardize the business operations. The appropriate analysis would be made and documented and the change (amendment to) in policy would be communicated to the ESOP Participants. Again, none of this should be done without review of all facts. I believe the facts relating to the interest of the ESOP Participants should be considered as well. Participants who are in death. disability or retirement status, perhaps the policy does not change for them. Maybe the policy is amended for only those in the "all others" category.

If the trustees of an ESOP have adopted a repurchase policy that is more liberal than the law requires and if the language of the repurchase policy was drafted in a manner that allows the Policy to be amended, then yes the policy can be amended. Generally a distribution policy becomes an exhibit to the SPD. The ESOP trustee(s) should take great care in analyzing the need to amend the existing policy, keep written records as to the process of their decision and the reasons why. The Department of Treasury and the Department of Labor are not keen on such amendments and upon any potential audit they will review the Trustee's decision(s) quite closely. Your comment about delaying distributions till retirement or diversification does not make sense. ESOP distribution rules require the timing of distributions to occur over certain time periods following the triggering of certain events.

Austin: I am not sure about Prevailing Wage in a non profit, but most of the non profit's have some form of state contract that we provide administration services usually have some mandatory retirement plan contribution percentage as part of their state contract. For example we provide services to three or four non profits that have state contracts to provide mental heath services. Each of their state contracts require that they provide an X% of employer contribution on an annual basis. We generally use a 401(k) Plan to accomplish the goal because the employer contribution would require that the 403(b) plan become ERISA qualified. All of the non profits we provide services for don't have HCE issues.

Two or three years ago we had a client receive a penalty notice from the IRS for the same issue, failure to submit the W2's for a given year. It was discovered that the corporate controller did in fact forget to make the submission. The client's CPA firm worked with the IRS regarding the issue. The W2's were submitted and the IRS waived the penalty.

Our office uses ASC and has for the last 20 years. Before that and during this time (as we acquired other TPA firms), I have used Relius (Quantech and before that Pentabs). I have also used Datair. If FT William upgrades their compliance software with share accounting we may try that system. In my opinion, Relius is the best, but it is also the most expensive. As a whole I think they all work adequately.

ESOP Guy: If that is the case then I believe code 3 on the 1099 would be correct.

ESOP Guy: The board of Trustees may have ruled on the disability in 2014, but did the ruling declare the Participant disabled as of their separation of service date in 2012. Generally, most of the plans that we provide services to stipulate or define that disability must occur on or before the separation of service of the Plan Participant. My guess is that is probably what occurred with your client.

Charles, the LLC member ( business owner) would complete a deferral election form authorizing the deferral to be made. From the business checking account said deferral amount will be sent to the 401(k) plan as Lou S. indicates. The bookkeeping for the deferral on the employer side will be taken care with the partnership return and the K1.

Mike: I don't know how to do that. The post was dated September 2016 with MOJO, QDROphile and Peter having an excellent back and forth about the topic.

Please ignore this post. I found an old topic and responses regarding this question. My search skills are getting better.

An employer acting in their role as Plan Administrator learns of a pending divorce of a Plan Participant and that a potential Domestic Relations Order may be completed as part of the settlement. To date an order has not been received and the Plan Administrator is not even sure if the divorce has been finalized. The Plan Participant in question is requesting a distribution from the Plan in which they are entitled to receive. Is the Plan Administrator required to inquire about the potential Order prior to issuing a distribution. Must the plan administrator "pump the brakes" on the distribution?

I concur with all of the other Comments. Our firm does not charge a deconversion fee.

Over the last few months, our firm has seen that a few broker dealers require that a 3(16) fiduciary must be secured in order for the investment advisor(s) to work with a 401(k) Plan.

B: Stephen is incorrect in what the ESOP must do: The ESOP is not required to hold the stock for 3 years. It is the seller that must have owned or held the stock for 3 years prior to selling to the ESOP to be eligible for 1042. If the selling shareholders elect 1042, then they are prohibited from participating in the ESOP to the extent of receiving an allocation of the shares they initially sold to the ESOP. 1042 is an individual election by each selling shareholder. It seems the basis of this transaction is the sellers are willing to sell the stock for a little less (versus the fair market value) to the ESOP for receiving the benefit of 1042 (the deferment of capital gains) on the sale of their stock. Your description of the transaction is as I suspected, the sellers are going to hold seller notes (you called them short term promissory notes), which will be paid in full with the proceeds of sale of the stock from the ESOP to the outside buyer. There will be appraisal pitfalls to watch out for regarding each side of the transaction. One would assume that the architect of this transaction (ESOP consultant or legal counsel) is aware of the appraisal issues and have worked them out.

B: There are a lot of moving parts to your potential transaction. As always and as you stated, this transaction is going to require ERISA, ESOP, Tax and corporate transaction legal retention. ERISA counsel is only 1/4 of the legal team. You did not discuss the timing of the 2 transactions. ESOP would require independent/transactional trustee, all of the legal guidance mentioned above, independent appraiser to appraise the sale of the outstanding stock of the existing shareholders to the ESOP, independent appraiser to appraise the value of the ESOP after above referenced transaction (to ensure that the ESOP is selling for not less than fair market value). It is not clear to me that one appraisal firm could value each of the transactions. It might take two separate appraisal firms. That would take the review of the Greatbanc and First Bankers Trust settlements with the DOL. Bank financing would not necessarily be needed (unless required to take advantage of the 1042 election if that is the goal of the selling shareholders). Selling shareholders could sell their stock to the ESOP and carry back Shareholder notes for the value of their sale. The stock purchase agreement and seller notes could include the ability to pre pay the notes at any time. At the sale of the company by the ESOP, the cash deposited to the ESOP for the sale could repay the seller notes. In addition to the above, I would think consideration would be made to convert the "C" Corp to "S" Corp as part of the transaction (selling shareholders to the ESOP) and before the now 100% Employee owned Company (via the ESOP) sold to the outside buyer(s). Allocation of stock to Plan Participants would be an issue. There are not enough details to discuss that issue. Cash would be allocated pursuant to the share allocated.

In addition to the valuation issues addressed in this topic, do not forget about the additional fidelity bonding requirements for holding non publicly traded assets, versus the required independent audit if the bonding is not completed.

Depending upon the length of the revenue stream generated by the sale the assets, the employer may choose to keep the Plan in existence well beyond the end of the the current year. For example, may be the asset purchase agreement is structured as an installment sale, whereby the payment for the assets is stretched over more than one year. Perhaps the client would like to continue to use the plan.

I am not a advocate of ROBS, but our practice does have a few clients using these vehicles. The valuation issue for a start up C corp is as follows: The appraised value of the stock of the corporation is completed simultaneously with the infusion of the rollover of cash used to acquire the stock. You make the number of shares issued equal to the amount of cash used to acquire the stock. For example, $200,000 rollover -200,000 shares of stock issued, one dollar per share. $200,000 of cash in corp. 200,000 share issued. How can one argue that value of the company can be less than the cash on hand if that is sole asset of the corporation.

I have been the marketing partner in our TPA firm for 25 years. I don't believe "retail" marketing ploys work in a professional service business. And I don't believe discounting fees is the way to start a relationship. Here is what I believe works: knock on doors set appointments to meet advisors offer to assist them in their education of retirement plans offer to assist them in their meetings with potential clients tell them you will not charge to complete proposals promise that you will do your best to not embarrass them in front of their clients commit to offer the best work you can tell them if mistakes are made you will do what is necessary to correct