Marcus R Piquet

You might also want to ask about whether a discount for lack of control should be applied to the non-ESOP shareholder transactions. The ESOP trust owns a control position, and presumably the shares being sold by the non-ESOP shareholders might be worth less.

Pardon the obvious question - but if your family owns that much of the bank, why aren't you on the Board? Also, does the ESOP allow for distributions in the form of stock (rather than cash)? If so then I don't see why that wouldn't work - several specialized IRA custodians will accept non publicly traded stock.

So sorry for your difficulty. I agree that the company must be struggling, and if I were you I'd be worried if you'll ever get paid at all (in the event of a total business failure). I'd suggest you mail a Claim for Benefits in writing, preferably by mail, certified, and with return receipt requested. By law they will need to respond to you with a specific denial of benefits, which you can appeal. This will help you build a case. If you want to play hardball you can also request an in-person meeting, and threaten to contact the DOL if your meeting request isn't honored. You should also request the most recent SPD, along with any SMMs thereto, and to review a copy of the current distribution policy. They may be relying on the financed securities exception to explain the open-ended delay. If so, you should ask when the loan(s) is scheduled to repaid so that the exception will expire. Good luck to you and to Hobbico. I hope they can turn things around.

I've heard of plenty of pushback from Cincinnati when this is left as purely discretionary due to the "definite written plan" principle. While the anti-cutback exception clearly allows for changes here, in my opinion it should be done through plan amendment or revision to the distribution policy (which should be explicitly incorporated by reference in the plan doc).

I take a minority view that it generally makes no sense for an ESOP that already owns 100% of the stock to buy more. The employer can continue to provide a stock benefit through recycling or simply contributing additional shares. That said, I don't see how this would be a solution to your problem anyway. The obvious solution seems to be a loan write-down as was already suggested. This would solve your 404 issues. For some guidance on this, you can read PLR's 8612081, 9447057, and 9237037.

Thanks QDROphile.

I have a client who is considering using the ESOP for safe harbor matching contributions. Other clients have used their ESOPs for safe harbor nonelective contributions, but I don't yet have a non-KSOP making matching contributions in the stand-alone ESOP. The regs show that this is permissible. §1.401(k)-3(h)(4): "Safe harbor matching or nonelective contributions may be made to the plan that contains the cash or deferred arrangement or to another defined contribution plan that satisfies section 401(a) or 403(a). . ." The ASPPA DC-2 book states, however, "If this option is used [i.e., contribution to a different DC plan] it will typically involve the safe harbor nonelective contribution." (as opposed to the safe harbor matching). My experience so far lines up with the comment in the DC-2 book. But why is that? Shouldn't be very difficult to calculate the proper match based on the 401(k) deferrals, and designate that portion of the ESOP contributions accordingly. Obviously there are other issues to deal with, but do any of you have any experience about why a safe harbor match might be a bad idea as opposed to a safe harbor nonelective? Thanks! Marcus

Here's an easy one. The loan agreement stipulates that loan prepayments are applied to the front end of the loan instead of the back end. If the loan is prepaid, you essentially have a payment "holiday" until you catch up to the original amortization schedule.

Not only that, if the missed distribution would have been paid at a higher value if it had been paid timely, you ought to pay that missed installment at the higher value.

See Rev. Proc. 2006-46. One of the automatically-approved tax years for an S Corporation (under the "sufficient business purpose" category is the "ownership taxable year." Section 5.06 of the Rev Proc defines a Permitted Taxable Year as 1) the required taxable year (i.e., December 31); 2) a natural business year, 3) the ownership taxable year; 4) a tax year elected under §444 (i.e., September, October, or November, with an annual deposit requirement); or 5) any other taxable year for which the taxpayer establishes a business purpose to the satisfaction of the Commissioner. Section 5.08 of the Rev Proc defines an Ownership Taxable Year as follows: For an S corporation or electing S corporation, an "ownership taxable year" is the taxable year (if any) that, as of the first day of the first effective year, constitutes the taxable year of one or more shareholders (including any shareholder that concurrently changes to such taxable year) holding more than 50-percent of the corporation's issued and outstanding shares of stock. Under principles similar to §1.706-1(b)(5) for determining the taxable year of a partnership, a shareholder that is tax-exempt under §501(a) is disregarded if such shareholder is not subject to tax on any income attributable to the S corporation. Tax-exempt shareholders are not disregarded, however, if the S corporation is wholly-owned by such tax-exempt entities. An ESOP is a tax-exempt entity under §501(a). If it owns anything less than 100%, its ownership is disregarded for purposes of defining the ownership tax year. However, if it owns 100%, then its ownership is not disregarded. The S corporation can therefore retain the ESOP's tax year end, no matter what month that is. No annual deposit under §444 is required. We have dozens of S Corp ESOP clients with non-calendar year ends under this provision, so I know it works. One word of caution. In almost 50% of the cases that we've done this, the IRS does not correctly process the Form 2553 and automatically assigns a Calendar year end. This is a simple oversight on their end since the use of this provision is so extremely rare in their eyes. In all cases I've been able to simply place a call to the entities division in Ogden and have the situation corrected over the phone, with a corrected notice sent to the client shortly thereafter indicating the desired year end. Good luck! Marcus

Some do not realize that if the ESOP owns 100% of the outstanding shares it is not necessary for the sponsor to change to a calendar year end. It is permitted to retain the year end of its sole shareholder. This only works in a 100% ESOP ownership scenario.

Sure - here you go. Not an easy case to find, and, so far as I'm aware, the only one that addresses the issue of whether inserting a delay into your distribution policy results in a cutback under §411(d)(6). Marcus Lee v. Builder's Supply ESOP - 411(d)(6)(C) anti-cutback, timing.pdf

I agree with ESOP Guy with respect to 415. If you want to read up on it, see §415©(2), Regs 1.415-6(b)(2), CB Notice 2002-2 Q&A 6, and PLR 200243055. It's nearly universally accepted that dividends paid on unallocated shares must be currently allocated to participants (or passed through). I recently helped a client go through a VCP filing because they had neglected to allocate these dividends to participant accounts but simply held them in "suspense" along with the shares to which they relate. I know of one ESOP attorney with a contrary opinion, who believes that these dividends should be able to be held in suspense, and allocated to participants when the corresponding shares are released and allocated. Let me know if you want me to put you in touch with him.

Belgarath, I've seen it done both ways, and I've also seen plenty of plan documents that aren't explicit on this point. If you allocate the accrued contribution as cash/OIA, then you'll need a rebalancing/reshuffling transaction in 2013 to replace the accrued cash with the released shares. If you allocate the accrued contribution in the form of the committed-to-be-relesed shares, then you avoid the rebalancing transaction in the following year. Where there is the ability to exercise discretion, I typically suggest the latter approach for two reasons: 1) Easier for participants to understand - avoids the need to explain a rebalancing/reshuffling transaction; and 2) It mirrors the GAAP concept of doing this on an accrual basis from the sponsor's financial reporting perspective. Your 3,000 shares would be disclosed by the sponsor as "committed-to-be-released shares" in their ESOP footnote disclosure. Review SOP 93-6 / FASB ASC 718-40. Good luck!

Hello, TPS. Excellent question! I spoke to FinCEN, the division of the Department of the Treasury with authority over the FBAR (Form TD F 90-22.1). The agent and I read through the relevant regulation together (31 CFR 1010.350, see http://www.law.cornell.edu/cfr/text/31/1010.350). Our joint interpretation: 1) An ESOP trust qualifies as a "United States person" under §(b)(3) of the regs. There is no exemption for qualified retirement plan trusts. 2) A reportable "financial interest" by a "United States person" includes the ownership of more than 50% of the stock of a corporation under §(e)(2)(ii) of the regulation. Accordingly, if the ESOP-sponsoring corporation has an FBAR filing requirement, and the ESOP owns a controlling interest in the corporation, the ESOP trust also has an FBAR filing requirement. I put a call into the IRS also to see what they say. Otherwise we have five business days to take care of this for the 2012 calendar year.