ESOP Guy

Despite the list of authorized providers we just filed a 5330 electronically using FT Williams (although I guess it could have been via the government's system) a couple of weeks ago. I just made sure I liked the numbers and passed it on to someone here who knew how to do it but I am sure it was electronic. I believe it was agreed we could have done paper but we did file electronically. It was for a PYE 2024 ESOP.

There has to be a bona fide separation however. If there is an agreement the person will be brought back you can't pay them a benefit. The classic example is a person who is terminated with the understanding once they get their benefit paid they will be rehired. This isn't exactly the same but if there is some kind of commitment to bring this person back after a given period of time I have my doubts. If this is a layoff and it is simply if things turn around we will take you back there would be a bona fide separation. I think you need more data regarding this.

Number nerds hanging around here? I doubt that.

The question of when a person enters or re-enters a plan and if they get a contribution are two separate questions. I am constantly telling clients to stop mixing the two together. You first decide if the person is a participant. If not, they can't get a contribution. If so, you see if they meet the requirements to get a contribution allocation. So yes a person can re-enter and if they work too few hours not get a PSP contribution.

The other topics/questions seem pretty well covered so I am going to reply to just this part. This comes up in the ESOP world a lot. I have 4 12/31/2024 ESOPs that are audited plans and still don't have their 12/31/2024 stock price yet. Obviously they aren't going to be ready to file a complete 5500 by the 15th. Up until a few years ago we wouldn't hardly bat an eye at the idea of put a pdf letter saying the auditor's is ready we will file an amended return once it is ready. Not anymore, our firm's rule is a hard we will only file with that attachment if the client or auditor writes that attachment and gives us written instructions to file that way. Our only recommendation is file late an DFVCP. Management is very clear on this. Why? It hasn't happened a lot but it has happened a few times the government has taken the position a 5500 without an audit report is an incomplete return and said the amended return wasn't an amended return but the first legit, and late, filing. They have sent a penalty notice with a very large number on it. So far we have gotten them to waive the penalty by writing a letter. The simple fact is while the odds of that happening seems very low the cost is very high. The DOL penalty is a few grand/day with no cap! On the other hand the worst you pay under the DFVCP is $4,000. The risk of getting hit with that DOL penalty is just not worth it regardless how small you think the odds are. Our management will not allow us to put our firm at risk of having to pay that kind of money by a client saying, "but xyz firm told us it was ok". Just thought I would add that to this discussion. See https://www.newfront.com/blog/form-5500-updates-participant-count-win-and-large-plan-filer-warning I quote: There have been rumblings in the retirement plan industry of informal DOL comments suggesting that the ability to “negotiate” the penalty is going to be much more difficult going forward. Apparently, the DOL intends to crack down on the “file without the audit” approach unless the amended return is filed with the complete IQPA attached before the Rejection Letter is issued (for those keeping track – that is before the 30th day after the extended filing deadline). If the employer is not 100% certain that the IQPA is going to be completed by the end of October or first week of November (for calendar year filers), be aware that this approach may start costing significantly more than Option 2 and there will be little room to negotiate down the initial assessment.

And doing them all at once is the least costly option as the max amount is based upon filing with the DOL not forms.

A few quick questions: 1) How sure are you these are shares in a 401(k) plan and not a KSOP (A KSOP is an ESOP with a 401(k) component)? It makes a big difference. A KSOP would have the same rules as an ESOP about distributions. 2) It sounds like these shares aren't publicly traded. If that is correct how are they setting the price? 3) If a 401(k) plan and these are just a choice of investments I guess they could allow in-service distributions for people who want to move the shares to a SD IRA. This is so unusual I would want an ERISA attorney look at it also. I really do understand your concerns.

I think the 2-4 BIS situation was addressed in the Ferenczy article linked and in the rule itself, and most likely the base document description of the Rule of Parity. It says: Another optional election that can be made is the Rule of Parity. If a plan has this rule, it applies only to individuals who were not vested in any benefit when they terminated employment. Under the Rule of Parity, a rehired employee’s prior service is disregarded if the employee’s breaks-in-service exceed either the number of years of service s/he had prior to the breaks, or five years—whichever is greater. If the employee’s breaks-in-service do not exceed the greater of those two periods, the service prior to termination must be counted for eligibility purposes. I can't imagine your plan document doesn't repeat that rule some place. I just think it is hard for a person to have 2-4 years of service in any kind of plan that is making any kind of contribution to have no vested benefit. But since a 4k plan employee deferrals count as a vested benefit that makes it all the rarer. For this reason I prefer once a participant always a participant plans. Attempts to use the rule of parity adds a lot of work and complexity to keep out what is typically a pretty small percentage of all rehires.

There is no way to do what the client wants if the former employee even had $1 of employee deferrals in the 401(k) plan. The Rule of Parity says it only applies if they never had a vested balance with the old service. See the older discussion of the topic. Hope that helps.

When did you do the filing? If today it can take some time to show up on EFAST2. Did you pay the fine? That now takes time for the DOL website that computed the fine to acknowledge the filing.

No, as in does the document say they can be different or not?

In terms of conferences find out which chapter of the ESOP Association covers your area. They all have local conferences with good breakout sessions. Since they are local the travel costs aren't too bad typically. There are regional conferences related to the ESOP Association. The Midwest Conference is in the Chicago area this year in mid September for example. If you, or your employer, are willing to spend a little more money than: If you work for an ESOP company or a company thinking about an ESOP look into the National Center for Employee Ownership (NCEO), noted by another person. Look into becoming a member. Once you are a member you can get discounts on their books. I believe they still have monthly webinars for members. Their spring conference is a great learning environment. The reason I note them if you are an ESOP company or a company looking into ESOPs is their spring conference has a very large proportion of their attendees from ESOP companies. That allows you to meet and talk to the executives from other ESOP companies. You will find they are very willing to share their experiences and network with you. If you are on the TPA side of things the NCEO can still be great for first learning as they have a lot of basic sessions since so many companies show up. However, the large ESOP Association conferences have the best advance technical sessions. They have some fall conferences. They are the most expensive to go to in terms of conference fees and travel typically. Also look into: The Beyster Institute https://rady.ucsd.edu/why/centers/beyster/index.html The Ohio Center for Employee Ownership (even if you don't live in Ohio) https://www.oeockent.org/ More and more states are funding their own centers for ownership so check your own state. The Ohio one is one of the best and oldest. They put out all kinds of publications and have their own conferences. Hope that helps.

Just had a similar conversation. As I noted in that thread I would say a person hired met the requirement on 12/31. We have plans here that say once you work 1,000 and 12 mo they enter back on the 1/1 of the calendar year they meet the requirement. We have people who are hired on 1/1/2023 we would have them enter on 1/1/2023.

I don't understand your example and question. If the plan says you enter on the entry date coinciding with our next following meeting the requirements the next entry date is 1/1 not 12/31. There is no coinciding on 12/31. On the other hand if we have a plan that say a person enters retro back to the first day of the plan, 1/1 for a calendar plan, I would say the person who met the service requirement on 12/31 enters retro back to 1/1 of the same year. This isn't hypothetical we have clients where I work that is how we advise out clients to handle a 1/1 hire who worked 1,000 hours in a year with a retro 1/1 entry date.

For what it is worth this is what I am thinking about. https://www.law.cornell.edu/cfr/text/29/2530.202-2 I quote (you can use link to read full context) For example, in the case of an employee who begins employment in January 1977, the employee's initial eligibility computation period begins on January 1, 1977 and ends on January 31, 1978. If the employee completes 879 hours worked in the initial eligibility computation period, the employee is treated as having met the plan's service requirements for eligibility to participate as of December 31, 1977. If the plan provides for semi-annual entry dates of January 1 and July 1, and the employee has met any eligibility requirements of the plan other than the minimum service requirement as of December 31, 1977, the plan must provide that the employee commences participation as of January 1, 1978. You can claim it isn't the best example as it is talking about a situation where a person hired in Jan is assumed to be a 1/1 hire but note it does say that a person meets the requirements by 12/31. The ERISAoutline seems to pick up on this and agrees you if you meet the requirement by the day before the anniversary date you have your year of service. I have always explained it you have to count the day they were hired as day 1. If you count from 1/2 to 1/1 of the following year you get 365 days. So a person who is hired on 1/2 has 1 year of service on the following 1/1. If the plan says coinciding with you enter you have it made. My 10/2 person has 365 days on 10/1/2024. Note documents don't say 1 year anniversary it says 1 year of service so you don't count like a birthday or anniversary.

I have a client whose plan document says: A person enters the plan after 1 year of service with quarterly entry dates. The plan is clear you enter on the entry date coinciding with and next following meeting the entry requirements. A person hired on 10/2/2023 has 1,000 hours by 10/1/2024. I would always say this person enters on 10/1/2024. My client is asking for a cite. I really am thinking there is an IRS regulation that covers this situation. I just am not finding it. Can I get some help from the smart people out on this board? Does anyone know if it is in the regulations and where it is? Thanks in advance

I fully agree the document might not do it on its own. That is why I said "start" there. I do find some plans do answer this question. I find most do answer the question of earnings if the person pays back their distribution and need their forfeitures need to be restored under that fact pattern. I would at least consider, but not make it the only factor, how it treats forfeitures in that situation as part of my decision. After that if you still don't have a good answer I would see if the sponsor is willing to get their opinion. In the end I have seen plenty of plans to give earnings in this situation but I haven't found a clear rule from the IRS or DOL. So I go through the process that starts with the document.

This is a questions whose answers has to start with: What does the plan say? Does it stay restore the person or restore with earnings?

I am with everyone else. They have covered the law so I have only one more question: Why are you putting yourself in the middle of two divorcing people? I try as hard as I can to stay out of that position with all my clients. Divorces can be high emotion situations were people get nasty. Leave me out of it as much as possible is my position 100% of the time.

I am not even going to try and answer the distribution question. That is just a classic example why these kinds of assets should never be in these kinds of plans but you know that already. Regarding the stock's value. Since this isn't an ESOP they are technically no legally required to get an appraisal. However, both the trustee and Plan Administrator as fiduciaries are REQUIRED to ascertain a fair market value of all assets in a plan ANNUALLY. And simply guessing isn't a valid method. Since the Dr is most likely the trustee that person needs to be able to document on what basis the stock was been valued every year and it sounds like they have failed at that. That is the start of the legal mess this plan is in. My advice to you is to get something in writing from the trustee directing you on what they want the value has been determined. I might even ask them to give a brief description of how they came up with that value. If they aren't willing to do that I think you should seriously ask yourself if you need this in your life. Yes, I get landing client is very hard and asking one to go away is very hard to do. This sounds like a huge mess. But picking numbers like $2/shr or $17.57/shr out of thin air is a failure on the part of the trustee to do their fiduciary duty. That is a pretty serious problem for that person if the DOL or IRS catches it.

Make the person who wrote that provision tell you what it means? Sorry, but more attorneys need to made to be called out for writing vague provisions in plans. I know there are some wonderful attorneys who read these threads but a pet peeve of mine for years has been how disconnected some ERISA attorneys are to the practical issues of the provisions they write. Throw it back at them to tell you how to implement it. We are Third Party Administrators. We aren't paid to fix these people's messes. Off soap box now.

I get your point but since the context was vesting unless there is a very unusual vesting schedule a person can be credited with 1 year and 364 days of service and will still be vested the same as having 1 year of service. I don't care what the exact service at that point. The person doesn't have 2 YOS is what you need to know.

It wasn't my client but if my memory was the IRS or the DOL took the position that the first filing wasn't complete and rejected the amendment. Sorry, I don't recall the details better but that event is what made management here change our somewhat casual willingness to file without an audit report and amend later.

Yes, they have. It hasn't happened a lot but we have had clients get caught in this. We no longer recommend they do this but file late and DFVCP file. The fines under that program are so small compared to if the 5500 gets declared late. We will do the file and amend later but they have to give us written direction so we can raise that as a defense if they get hit and come looking to collect from our firm.

The real problem is you amended one of the key data points that their computers use to track 5500s. To the computer the amended return look like an amendment to a return that didn't exist. You should be able to get it fixed once you get the situation in front of a human. It won't be easy because since Covid working with the IRS has been hard. However, with persistence this will most likely end with no penalty.