A Shot in the Dark

I don't believe a prohibited transaction occurs when an ESOP Loan defaults. The loan and pledge agreement should outline the process to follow in the event of a default. You might also find language in the loan and pledge agreement that state a default can only occur if the company has complied with the covenant of the loan and pledge agreement relating to making cash contributions, dividends, etc. to the ESOP.

Being a west coast kid, my guy was Vin Scully. But, I had the opportunity to listen to Ernie from time to time. All through the years of growing up, I really respected and was in awe of how the radio announcers could paint a picture so vidid that I could visualize what was happening.

Randy: I would try the National Center for Employee Ownership. They have a host of good articles and "White Papers" on most things regarding employee ownership. Regarding ESP's, On November 16, 2009 the IRS issued Final Regulations. That is always a good place to start. www.nceo.org

Mike: You make a great point. If championships are the sole meausre, Bill would be greatest center. But straight up, prime in prime, Bill would be number three. He isn't tall enough or physical enough to battle Kareem and Wilt. Kareem would shoot over him. Wilt would kill him in the blocks.

Kareem is number 4. Magic Larry Michael Kareem Wilt

Today is the first day, I have been able to access the message boards this week. And from time in time in my attempts, I wasn't even able to get to the benefitslink home page.

RLL is correct. Corey did discuss the topic, listed below in his Employee Ownership Update December 1, 2009. ESOP Account Segregation, Rebalancing Update Some months ago, there was optimism that the IRS would issue some kind of pronouncement on what approach it would take toward ESOP account segregation or rebalancing. Account segregation is where an ESOP company buys the shares of former employees and reinvests that money in other investments until distribution occurs some years later. Segregation is used to prevent former employees from benefiting from increases in share prices and to protect them from losses, arguably a very prudent retirement policy. Segregation can also help free shares for new employees and may be useful in managing repurchase obligation for some companies. Rebalancing occurs while participants are still employees. Each plan year, cash in the ESOP is used to buy shares in the ESOP in such a way that everyone ends up with the same proportion of cash and stock. Rebalancing is appealing to many mature ESOPs as a way to get shares to new employees. The IRS had not been issuing letters of determination for plans with segregation provisions, although there was no official policy to this effect. But in the last several weeks, there have been reports that its concerns have been mollified. One concern was that employees would be impaired in their ability to demand a distribution in the form of company stock. While they could make that demand, if the plan used the cash to buy shares from the company, the basis for those shares could be much higher than it would have been if the account had stayed in company stock. Companies can solve this problem by reacquiring shares from accounts in the plan that have a basis as close as possible to the participant's basis at the time of segregation. The IRS approach on rebalancing is also ambiguous. Rebalancing is not allowed to solve anti-abuse problems in S ESOPs, but many companies do have this feature in their plans for other purposes. Some IRS officials have informally said they may want to evaluate if rebalancing is consistent with ERISA, but there have been no indications that plans with these provisions have faced any specific problems. [/b]

Andy: I/we don't use worldnet. But we have a few contacts that use or used worldnet. I can cofirm their email addresses have changed to att.net. This has happened over the last few months.

In the last two weeks, we have had a few clients recieve the "approved 5558" for the 2008 year as well.

We are a TPA firm that provides services to many ESOP's. We do not provide document services to our ESOP clients. But we have copies of EGGTRA determination letters (sent from the client or their attorney) for cycle B filers. We started receiving copies in October and November of 2009. I hope this helps.

BG: A couple of years ago we as the TPA, took over a moderately large 401(k) Plan from a large bundled service provider. It was a mid year takeover and we received the applicable "conversion file", etc. A couple of months after the end of the plan year our client received a partially completed 5500 in the mail from the bundled service provider. It was a fully completed 5500, but partially complete in that the data only covered the first six months of the year. The cover letter noted that the 5500 was partially complete due to the conversion of the plan and the lack of data. The letter went on to say they were providing the 5500 based upon the information on file, pursuant to the service agreement in place at the beginning of the year. I thought it was very odd at the time, but as I see it now, they were doing what David mentions in his post, they were following their written service agreement. I guess I am saying, I would proceed with the course of action that you mention at the end of your post.

I see that you have made this post a couple of times. I am confused by your question. Let me restate what I think you are asking: Via some form of stock purcahse agreement a selling shareholder agrees to sell his/her stock to an ESOP. As part of the sale, the seller completes some form of seller loan agreement and note. Thus, the employer makes a contribution to the ESOP and the ESOP in turn makes a payment to the seller subject to the loan agreement and note. If you question is: "Is the payment from the ESOP to the selling shareholder subject to a QDRO?", I believe the answer is no.

I agree with all the other posts. Very frustrated. But estatic we are not doing this stuff in house. We uploaded all of our info last night and this morning. I have a receipt in hand and 945's to mail.

Tom: Convoluted is a very good word in this case. I am doing a little research before I answer your question. Here is what I am not sure of: In your example, you note that Mr. A and Mr. B are no longer 25% plus shareholders. I am presuming that you deem them less than 25% shareholders because of the previous sale to the ESOP, i.e. the ESOP owns more than 51% of the outstanding shares of stock. In determing the ownership percentage for Mr. A and Mr. B, I am not sure you count the shares held by the ESOP, ie. Mr. A and Mr. B may still be considered 25% plus shareholders. In your example, I presume that Mr. A and Mr. B will elect 1042 on the second sale to the ESOP.

Tom: The perpetual non allocation is based upon the ownership % at the time to sale. The fact that the 25% or more shareholder is no longer a shareholder is irrelevant.

Tom: The non allocation period relative to the shareholder electing 1042 is the later of the date that is 10 years after the date of the transaction or 10 years from the plan allocation resulting from the final payment on the loan used to purchase the shars for which 1042 was elected. The non allocation period for a 25% or more shareholder is perpetual.

I too hope every one has a happy new year. I really want to thank everyone that participates on the boards. It is an amazing resource to have benefitslink.

John: Perhaps I should not have answered so quickly. Would it not be under 1.125-4?

Yes.

Your Post doesn't note the "S" Corp. Status, but your title does. Ownership of "S" Corp stock is prohibitive in a qualified retirement plan other than an ESOP. In 2004 the American Jobs Creation Act provided for a grandfathering of IRA's that held the shares of banks that wer organized as a "C" Corp. prior to converting to "S" Status.

John: I think option 1. This happened once to one of my clients and about six weeks after the filing, the IRS sent their usual "respond in 30 days the 5500 is incomplete" correspondence. We were not made aware of the issue until we were sent a copy of the IRS correspondence. Becoming aware of the issue prior to acknowldegement from the IRS, my second choice would be option 3.

Kathy: I think more detail is needed before some one can offer advice on this issue: Is the following sets of facts correct: An individual works for a bank. This same individual owns another business and that businss sponors a plan. The plan is a solo 401(k) Plan. As Trustee of that solo 401(k) Plan, the indivdual decides to purchase stock of the bank for which he is employed. Was the stock purichased at the asking or bid price (i.e.) there was no special deal given to the individual? I doubt there is a problem.

Pat: With the separation of service of all of the employees, then presumably all of the plan participants had a separation of service. The plan probably incurred a partial plan termination. Was there a purchae of assets or a business sale between the two entities?

The employer/plan sponsor should complete the 945 and 1099R immediately. I think the penalty for filing past the due date for each is $1.00 a day. If the 945 is not filed, eventually, the employer will receive a communicaton from the IRS asking them to address the deposit (credit) of the withheld taxes.

You will need to review the loan provisions that are established by the plan document and the applicable written loan policy. Some plans do restrict participant loans for "hardship" or "emergency" reasons only.