ESOP Guy

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.

Wow and good luck with this one.

Sorry for slow response. There is no ESOP specific exception.

Prior discussions on the topic. It really depends on the typic of document. However, we keep documents forever. It doesn't come up very often but now and then being able to determine how things should have worked back in the day is needed. And as you can read proof a person's benefits have been computed correctly and/or paid is pretty much forever.

You are correct the term "W-2 contractor" is a contradiction. Independent contractors have their income reported via a 1099 and employees have their income reported via a W-2. Also, this isn't something that is negotiated or decided or agreed upon. There are objective tests to determine if a person is an employee or independent contractor. The tests can be as clear as mud at times but hard to determine isn't the same thing as people get to just pick. My guess if these people had their income reported via a W-2 the company is stuck treating them as employees at this point but wcc is correct first the company needs to figure out if these people are employees or not. That determination isn't the TPA's job.

Don't forget to look at the promissory note. Back when I did 401(k) work and ESOP work our standard promissory note we gave clients to use this trigger for payment upon termination was in the note. It was a matter of contract law not Qualified Plan law that it happened. The participant agreed to the term when they signed the note.

Are you willing to share the industry you work in? If they are holding the cash after you have been segregated out of the stock it typically means they want to slow down your ability to use your ESOP funds to open your own business that competes with them. You see this with certain types of engineering and IT firms mostly as the primary asset in those business is really the skill of the people. So if you leave, and your in this kind of field, you take your knowledge with you and only need enough funds to pay your bills until you have built your company up. You can see how slowing your ability to get the funds can put a damper on this. Harsh but true at time that is why companies show down the payment. I once helped a company that was a lawn service that included landscape design and its own small farm to raise trees.... They put a 5 year delay even if the person was put into cash because they got tired of guys leaving in the fall, cashing out and by the following spring had taken the money to buy a truck a few lawn mowers and trimmers. The guy was calling up the clients he used to service offering to cut their grass for less than his old employer. Management said "enough of funding out competition every fall". They put a 5 year hold on the distributions. Like I noted before the other reason can be if the stock price has done very well slowing down the payment can slow down the number of ESOP millionaires in their 50s to early 60s deciding they can retire early. Once again a bit cold but true. The above are the two biggest reasons for holding a person's all cash account in an ESOP. It is more philosophical than anything else. It will be hard to get those answers from them for obvious reasons. It will most likely be said a different way. Your problem is holding the fund for years like you describe is all legal choices on the company's part. You can ask and pester them but there is no fighting and winning on this topic.

Add me to the voice your firm is doing too much work and opining on things it shouldn't. We do not normally get and wouldn't look at if we got the divorce degree. Our job is to determine if the DRO is a QDRO. We are not domestic relationship lawyer and we have no interest in getting between to spouses in the process of ending their marriage.

Add my voice to walk away. Some revenue isn't worth the cost of dealing with their issues and attitude of not care about small things like the law.