A Shot in the Dark

Sieve: Since you were a navy guy, I am surprised that you would not understand FUBAR. Go Army. For the football game to.

E: This issue has been visited and revisited. There are many threads and posts that you can review. The fact of the matter is: There are a few professionals that buy into this concept. Google ERSOP(s) And many, many professionals that see this as a nightmare, frought with danger.

Is this post a joke?

Sooner: Perhaps, something is amiss, but for the record, in all of the ESOPs that I work with the appraisal firm will render a "draft" or a preliminary value. The Trustee(s) review and often times that review will create a conversation with the appraisal firm. On several occassions this process has created a revised "final" appraisal. As GMK has noted there are several components that comprise an appraisal. I would not jump to the conclusion that something is wrong. The fact that this has not happened in the past, does not mean anything.

Luis: I presume your example client is a privately held employer. I am also assuming that the appropirate diversification procedures are being followed, required distributions are being made timely, and that the plan document includes the appropriate language. With that being said, the answer to your question is yes. Often times you will find plan sponors of ESOP's or KSOP"s creating a written distribuiton policy that dictates the timing of a distribution based upon the size fo the vested account balance and reason for distribution. When drafting the grid of the distribution policy think of a worksheet, whereby each row defines the reason: 1. Death 2. Disability 3. Retirement 4. All Other The columns would be vested account balance. Generally, as the account balance increases in size, the length of time in which the distribution begins an the lenght of time over which the payout is made is inreased. And again, the distribution policy is developed so that no laws are violated. Dale

Allowing the participant to self direct amount the alternative investment choices selected by the ESOP Trustee is perfectly acceptable. Regarding the distribution of the diversified amount; yes, the distribution is reportable via a 1099 and the other applicable forms and yes the distribuiton is reported on the Form 5500 applicable financial schedule, H or I no different than any other plan distribution.

Lori: Should the ESOP Plan Trustee choose to satisfy the diversification requirement by providing alternative investment options within the Plan, it is the Plan Trustee that must develop the investment policy, select the appropriate investment choices and products. Regarding alternative investment options, the rules are no different than one might find for any other defined contribution qualifed retirement plan. That is why providing a distribution to the eligible participant equal to the diversification requirement is an option used by many ESOP's. The diversified amount is eligible for rollover, etc.

Legal Counsel will be retained, but some basic guidance sure would be appreciated. Back Ground: In the early 80's the Trustee of a profit sharing plan purchased a piece of unimproved property for approximately 30k. Zero self dealing issues and for all these years the property has remained unimproved. At the time of the purchase and through the late 90's, this investment and/or appraised value represented less that 10% of the total trust value. The plan has paid all the expenses to maintain the unimproved property (property taxes, appraisal costs, etc.). Through the 80's and 90's actual appraisals were completed on a tri-annual basis. Since 1999 or so appraisals have been done on an annual basis. Through the early 2000's the property had an appraised value less that 300k. The unimproved piece of property is now setting in an area of the community that has extremely high end developement going on and the appraisal for 2006 came in at 2.1 million. The 2007 appraisal will come in near that value. The small plan audit requirements are in play and the trustees decided to comply with the independent audit requirements. So an independent audit was completed for the 2006 year and will be completed for the 2007 year. Issue: The Plan Trustees have received an offer to purchase the property for 2.25 million by a developer who would like to structure the buy out as follows: 20% down payment. If 40% of the developement on this piece of property is sold in the first year the offer price, minus the down payment is paid at the end of 14th month. If 40% of the developement is not sold by the end of the first year. The offer price minus the down payment is paid not later than the 24th month. The plan nor the owners of the employer have anything to do with the development. Again no self dealing, but comments regarding the offer sure would be appreciated.

jolie: The 1,000 cash out limit as you call it, does not dictate when a distribution must or can occur. In simple terms, the provisions simply indicate that the distribution can occur in a lump sum benefit and without the consent of the participant if the participant fails to consent after being correctly notified, etc. So the answer to your question is no.

When you have employee ownership via an ESOP, it is the Empolyee Stock Ownership Trust that is the shareholder not the individual employees or more specifically the participants of the Plan. Therefore you have to look at the stock attribution rules. I believe IRC code section 1563 or 318 discusses attribution issues. I believe there is no application regarding this issue and participation in a Section 125 is allowed by all.

sgl: More than likely the attorney is inferring that the employer will be maximizing contributions and annual additions to the ESOP and the attorney is presuming there will be little or no room for contbutions to be made to the 401(k) Plan. Many times the employer will want to maximize contributions to the ESOP due to the debt service, etc.

Sully: Nice Attachment.

Not to complicate matters, but I have to ask: Are you sure the ability for the employees to purchase shares at a discounted price was offerred via stock options and not an Employee Stock Purchase Plan? What you are describing sounds more like an employee stock purchase plan. Of course that has all kinds of complications and issues as well.

Dan: Would you please be more specific, i.e. The Plan Amendments were not completed. Or, The Plan Amendments were not signed.

Self Financing is permissible so long as rules are followed. I presume there is some form of promissory note, loan security agreement, etc. that outlines terms of the loan. Interest is deductible for the year in which the interest is paid.

It can be done. There are may issues, legal and administrative that must be reviewed and processed. It will require competent ERISA and securities counsel. Regarding your direct question, the 401(k) Plan must be amended and restated to include all ESOP provisions, thus making a KSOP, as an ESOP is the only qualified retirement plan that can hold "'S" Corp. Stock.

The $500.00 value may have something to do with the PAR Value of the stock. You would need to look at the original documentation regarding the stock issuance. Look at all of the facts and circumstances, but if the Plan Trustees are accepting $500.00 for the redemption of employer stock that is valued at zero, the $500.00 would not be treated as an employer contribution.

I am not sure what sort of cite you are looking for. Does the plan provide for the investment of qualified employer securities? Is the employer publicly traded or privately held? Assuming all of the regulations would be met regarding qualified employer securities, the fact that an employer contribution is deemed be a Safe Harbor Contribution would be immaterial.

Yes that is correct. 1 would be the correct code.

If everyone is happy with 403(b) plan and it is meeting the needs of the employer and the employees, amend and restate MP plan to profit sharing plan to house employer contributions, leave 401(k) provisions out of the picture.

Employer contributions can be made with employer securities, so long as: 1. The plan document has the provisions that allow for that. 2. The employer follows all of the required regulations in making the contribution.

Yes. I don't know any other way to report the taxable distribution to two different tax payers.

Without completing any research, my first response to the question would be to complete two separate 1099's. A 1099R denoting a taxable distribution to the deceased participant or their estate. A 1099R denoting a taxable distribution to the beneficiary. Each 1099R will show the taxpayer and their respective Social Security #.

MLP: In short, IRC Section 318 and 1563, the sections that relate to constructive ownership specifically exlculde stock held by a trust related to a qualified retirement plan. I presume your employee stock ownership plan is qualified. Thus, the stock ownership is not counted when determining key employee, highly compensated, etc.

Lori: Ulitmately, Professional Liability (Errors and Omissions) Insurance serves as protection for our mistakes. But as a TPA firm all of our larger clients require that we have a policy in place. In the last couple of years every RFP that we have answered has required that we have some form of coverage. Not to mention all of the vendors. Not to have E&O would be a marketing and sales nighmare.