ESOP Guy

I know the House just passed like 2 weeks ago by a wide margin the Retire Though Ownership Act. I haven't heard if it was signed but leading up to it all the noise was the POTUS was favorable to the act. You best best is to see if the ESOP Association's legislative updates along with ESCA, which is the S Corp ESOP, group. They are both very active on the legislative front.

Has anyone ever seen this be an issue? I don't mean not getting the filings caught up under DFVC but just excluding people who would be an A in one year and a D in a subsequent year just being left off. I would put only A's on the prior years that are still haven't been paid in the current year. I want to say I have done that when it was just missed 8955-SSAs and not 5500s. We just got them all caught up net net in the current year. I have never seen it bite a client.

I have to admit it has been over 12 years since I had a 414(s) failure in a 401(k) plan I worked on. I just a few months ago had an ESOP that failed and we did a general test on it. That was shy it was fresh in my head. Sorry, I can be more help and sorry for slow reply. I have been so busy getting read for a vacation I haven't come around here much the past few days.

You can try and pass the General Test with the compensation excluded (that last part is the part I am least sure about) and if that passes. I do know you can do the General Test. The other thing you can do is find out how aggressive people are willing to be on what de minimis is. I have seen some attorneys allow as much as a 5% point spread. I know not answering your question. I don't have a good resource.

I don't private message people very often so I could have done it wrong. But I sent you a message with my email address. If you would email what you are willing to share it would be appreciated. And yes the one day per year valuation does change things. I often ask clients to see if the people wanting the QDRO will send a draft of it to the plan and me to review. The topic of the date picked is easily the most common area of comments back from me. In my mind it is easy however from the plan's perspective. To use a simple example a 12/31 PYE plan if the split is based on a value on any day other than 12/31 the value is in effect the prior 12/31. When I point that out the date often times changes to a 12/31 but which one was most likely a point of negotiation.

I would love to see a copy of this out of just plain curiosity. I have worked on ESOPs for about 30 years and I don't think I have ever seen a QDRO that splits the nonvested portion of the balance ever. If willing can I get a copy just to read?

I don't think in all the decades I have worked on ESOPs I have seen a QDRO that splits non-vested shares/balances. In this regard they look like any other DC plan QDRO the QDRO give the method to split the vested balance only. In fact I am not even sure how this would work. What if the participant leaves before they become fully vested a year later you would have to make sure the Alt Payee forf also. Sorry, maybe I am not getting it but this sounds like this split might be over thought.

Sure

Wow this went ESOP negative fast while I was out. You want to help low income employees ESOPs really show a positive. They typically have higher retirement balances than companies without ESOPs. https://www.esop.org/infographics/economic-benefits-of-esops-employees-companies.php I quote the from research found at the link below. https://www.nceo.org/research/research-findings-on-employee-ownership#:~:text=S ESOP companies' retirement contributions,to 31% for 401(k) plans. This 2021 study by the NCEO found that workers at S corporation ESOP companies had more retirement savings and more employer-side retirement contributions both before and during COVID-19, compared to companies offering only a 401(k) plan. S ESOP companies' retirement contributions were 2.6 times that of companies offering only 401(k) plans. Additionally, the vast majority of total contributions to these ESOPs, 94%, were from employers, compared to 31% for 401(k) plans. Controlling for size, industry, and region, the study found that average S ESOP participant retirement balances were $67,000 higher than the comparison group. The study also found evidence that ESOP companies retained or created more jobs during 2020, again controlling for size, industry, and region. The great part about ESOPs is you have to worry less about if the employees have the income to contribute as the vast majority of ESOPs are fully employer funded and as you can note above they tend to have a 401(k) also. Research on S Corp ESOPs and how they offer greater benefits. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://esca.us/wp-content/uploads/2022/04/EY-ESCA-S-ESOP-Analysis-2022.04.2257.pdf And yes there are some failures but after 30 years of working on ESOPs my experience is the number of ESOPs clients I have worked on minting millionaires to ESOPs leaving employees in bad shape because of lack of diversification or bankruptcy is no contest. You can claim selection bias as those companies that do well last the longest to be a client. But in all seriousness I don't know of anyone who works with ESOPs on a regular basis that doesn't wish their employer wouldn't sell the company to an ESOP. It is a deal they would gladly take. In fact that is their one weakness in my mind. You have to find an owner willing to sell the company to the employees.

At this link the National Center for Employee Ownership (NCEO) has a study (about half way down the webpage) of their study that shows employee owned company's lower income employees have larger balances than non-employee owned industry peers company employees with same income. Sorry, I am a true believer in employee ownership and ESOPs after working in the industry for around 30 years. But data like what they have says policies that support ESOPs and other employee ownership is good for all employees including lower income employees. I don't know if this conference had people from organizations like NCEO and the ESOP Association but I can tell you the NCEO's staff desires to talk to anyone who is willing to listen on why they think the evidence proves ESOPs are good for employee retirement security. https://www.nceo.org/research/research-findings-on-employee-ownership

Regarding the fiscal question this plan was a 1/31 PYE. What they had was a person terminated on 1/31/2026 and was over 73 at the time. They were asking me what was this person RMD amount. I pointed out an RMD that needs to be paid for 2026 is based on the 12/31/2025 balance which in the case really mean the 1/31/2025 balance since ESOPs are valued only 1 day a year. To me the key to understanding RMDs for fiscal year plans is to remember RMDs are always computed on a calendar year basis. What was your balance on the previous 12/31. I just don't think that is clear enough and there are just enough fiscal year qualified plan year ends for it to come up regularly. Thanks for reading my thoughts.

For qualified plan give a few examples of fiscal years. I just had a call with the new CFO at one of my clients that has a fiscal year. I was walking him through the logic of how to compute the RMDs for payments this year because they have a 1/31 PYE. It would be nice if a publication made the following super clear for qualified plans: 1) The rule that allows you take an RMD out of one IRA for every IRA does NOT apply to qualified plans. I end up with a couple financial advisors arguing with me every year because I don't know what I am talking about when I tell them the ESOP has to pay the RMD and it can't just be taken from some random IRA. 2) The first dollar out of a qualified plan has to be the RMD in a year one must be paid. No, you can't roll a payment you are getting in April to the IRA and you are going to take the RMD out by 12/31. Thanks

Who is this demand coming from? If it is a state child welfare agency trying to collect back child support see if you can get a notice and read it carefully. It will mostly use language that is very scary but when read carefully admits they can't force a plan to pay. It has been my understanding that a state agency can't make a qualified plan pay absent of a QDRO. I have seen several that when read carefully it was clear it was a clever bluff. I would make the client get an attorney to give an opinion but there is a good chance the plan can't pay legally. But most likely the TPA isn't qualified to make that legal call. And yes I have see plans ignore a state agency on this and nothing happen after the plan attorney said they didn't think the state could make the plan pay the benefit and nothing happen.

What I can tell you if a Canadian has to file a return from Canada to get some part of the 30% refunded to them they will almost certainly have to hire an accountant in Canada who is a specialist in this kind of cross boarder taxes. And I know this from experience as I was part of mistakenly withholding 30% on a Canadian. It was such a difficult process for him to help keep goodwill with the client, who was a large client, we agreed to reimburse this guy for the cost of the accountant. In our case ESOPs delay payment long enough often times the person doesn't have W-2 income in the year of payment. So the filing was exclusively for this payment. I realize you tend to focus on the plan but if the client cares at all about their alumni are treated they might not care for a 30% withholding policy. I will leave it to others who know more to decide what the law says but we rarely question a W-8Ben if the client seems to agree the person is living on the other country and they should be paid based to an address in that country.

ESOPs can be a bit different here but we only will do #3 if we think our understanding of the assets and income for that part of the 5500 is materially correct. With an ESOP since the largest assets often times is a stock that needs an appraisal a client that doesn't send in a census tends to get get the stock price timely also. But if we haven't gotten bank statements, brokerage statements.... and we won't send a 5500 that simply rolls the prior year's numbers forward. I get more and more DC plans are daily valued and the TPA can have access to the recordkeeper platform so you might have that. But we would have a discussion if we have nothing and we think the counts could be materially wrong also but we are pretty hardcore on the assets. There is a perjury statement the client is signing on the 5500 and we won't help a client make a materially wrong statement at least knowingly. At some point these people need to be adults with their plan.