ESOP Guy

I am getting pretty rusty on 4k plans as I haven't worked on one since 2012.... But do you have missed deferrals strikes me as a better question? If the plan was adopted and people entered the plan they should have been given the ability to defer and it sounds like they haven't been give any such election. Or am I not understanding something?

I 2nd this. We do it for any client that is small or even kind of close to failing this test. This fact pattern is a set up to fail at some point in the future without good planning and even then it might still do it.

They can do all of this. They can distribute the shares and have the company repurchase them. They can in effect put in dividends/S corp earnings distributions. The hard part with a plan with small with both of those ideas is making sure you don't run into 409(p) testing issues. Remember 409(p) testing is an every day of the year test. You have to pass this test every day of the year. So if you distribute shares and months later they contribute some of them back you have to show you passed on the test on the day the shares were distributed and when the new shares were put into the plan. In fact with a plan that small 409(p) tends to be a problem. With only 17 people with balances 409(p) testing has to be a bear with that ESOP. To answer the original question if I understand it correctly "yes" they have a deductability problem. Even though an S Corp ESOP doesn't deduct they have to stay under that limit and not deducting the contribution does NOT solve the issue has been my understanding. So I believe they owe the excise tax on the excess contribution. We never allow your clients go over that limit if they are asking us how much they can put in based on that understanding at the firm I am working at.

Most of your questions seem like general legal questions but the price question. Why would the price be zero vs the appraised value?

Some of it is the people who decide these things aren't the same people who have to live with those provisions. With the clients I work with it is often times a CEO, attorney and maybe some kind of consultant helping set up an ESOP. They don't ask HR or the TPA they are thinking of hiring for their thoughts. So the consultant or lawyer says this provision makes sense for this or that reason and it is legal. The CEO thinks that makes sense. So you end up with a staffing firm that hires hundreds of people a year with a 60 day eligibility you enter on the day those 60 days are up with compensation from entry provision. When I sent a list, that took a long time to create, to HR asking for over 200 people's comp from date of entry which was a different day of the year the head of HR demanded the plan be amended. The CEO looked at how many man hours getting the data was going to take, HR was saying they were going to have to hire some of their own temps to do the work, he agreed to amend the plan. What is legal and smart are often times very different in this business. I feel what you are talking about is what I am saying.

It is the volatile market problem. I used to do nothing but pooled balance forward plans. Back in 2008 we had a hospital that had to amend their plan that allowed for in-service distributions based on the last annual valuation. A doctor figured out in Oct 2008 he could get his Dec 2007 balance by asking for an in service distribution. He told his fellow doctors and started a run on the bank. It was going to stick the people who didn't take a payment in 2008 with all of the 2008 losses. That is not a good/fair way to run a plan. The plan was changed to you can get 70% of the last valuation balance with a true up after the next valuation. They even hired us to do quarterly valuation updates.

This is the answer to the, "what is the harm" question.

I get the recordkeeper tends to want the TPA to "approve" the payment in the sense you think it is complete and accurate.... I would stay out of the approving business in the sense making the go/no go decision. As others have said get someone at the plan sponsor to put in writing to pay or not pay these people. If they can't or won't do that maybe they will final solve the issue of no trustee that is an employee. I am pretty sure my bosses would back me if I told them I am not going on the recordkeeper's website and saying pay these people without written direction from the plan sponsor.

You can use Reliance Trust Company to do it all. If the client really wants to write the checks they should talk to the bank they deposit their payroll withholding or just their bank if they outsource payroll. At this point I think just about everyone is required to electronically pay withholding. That however requires someone to do things like the Form 945, 1099-R with the 1096......

As I understand it once it gets to the IRA it does. That first RMD from the plan doesn't.

Yes, that is how we do it. So someone is saying they need to make their termination date 1/1 to get an allocation under a last day rule it sounds like. If they got comp and hours for 12/31 I don't see how you don't say they weren't employed on 12/31. What were they being paid for if they weren't working that day????

I am not sure I fully understand the question. Is the question: Since he terminated on 12/31 he wasn't active on 12/31 and if he had wanted to be active on 12/31 they should have quit as of the following 1/1 or is it a different question?

Just to be clear this is a DRO and it was a court that approved it? I ask because I see on a regular basis state departments of family services make claims they are the legal right to get plans to pay child support and they make it look a lot like a DRO. Read very carefully it can be found they are not a DRO and in fact if one thinks about the language used is is actually kind of vague on the actual authority the state is claiming they have. This is always about child support. So any more my radar goes off when I hear child support and dispute.

Yeah, I have never found good guidance on how to test this if it was decided it had to be tested. I know way back we basically did a very binary 1/0 test. If the person was getting the better benefit they got a 1. If they got the lessor benefit they got a 0. We averaged the HCEs and the NHCEs and it was within 70%. I know that is the coverage ratio test but we had something that showed the HCEs were well represented in both groups.

The prior thread with a spreadsheet that computes the amount. I assume you would still need to update the monthly interest rate that is based on one of the US Treasury bill/bonds. We have put numbers in this spreadsheet and what is coming off our software and get the same results.

Am I reading this right? The retirees are being paid slower than regular terminated people? If true that is odd if nothing else. I have seen plenty of plans that pay the retirees faster than normal terms and no one tests them. So I am thinking even if it is backwards it might not need testing. What makes me uncomfortable ( and maybe you) is the HCE that is getting the fastest payment is a former owner. The timing of the change looks odd if it was done the exact year that person can get paid. But if the attorney is signing off on it we would get the attorney's opinion in writing and move on. You can have class based differences like this. They just better not change is again in the near future were say everyone has to take installments after a former 5% owner got a lump sum. That would strike me as very risky.

Or as you say they don't use the terms right. They could be simply asking for you to make sure if a person gets to 1,000 cumulative in any given quarter and leave their job they get vested in the current year.

I think the fact that it is non-discriminatory is too little reason to say this is fine. You have to follow the plan's provisions. I doubt there is a plan provision that says fees can be taken from any given participant's account only. If a case can be made saying it can be done based on a plan provision fine but in all the decades I have read plan documents I have never seen a plan's allocation provision that says this can be done. This is plan admin 101 here. It has to be both legal AND in the plan document not just merely legal for a plan to do it.

To state again the key is to preserve the MP characteristics of that money. The big one is the MP money has a lot more rules on when and how distributions can be offered than a PSP. That can be a bit of a pain as you have to make sure people are trained to not just treat this money as part of the PSP. Back when I did those decades ago it was like running an MP within the PSP except no more contributions were being made to that part of the plan.

It isn't uncommon to see it in the forfeiture section. Can I suggest if you have a pdf of the document to search for the word "deem" and make sure that provision isn't hiding some place in the document? When I convert a new client in or get a client that is starting a plan that is one of the several word searches I run on the document as I write up a personal summary of the plan provision. I am a bit shocked at all the different places that provision is hidden.

Can't you just do an in-service distribution to get most if not all of their balance in the qualified plan into the IRA? Starting the next year they can have at it. The current year RMD out of the qualified plan has to be paid obviously. Sure, you might have to amend the plan to allow in-service distributions and you will have to allow anyone besides the owners who meet the requirements of the in-service. I would only open the in-service to anyone who is 65 or older if I was going to do this. Short of that I am not aware of away around it.

I have heard that before but I don't think so. If we take that logic one more step what is the value of the stock the second after the transaction closes? Isn't it the amount of cash divided by the number of shares? I capital transaction that sells shares isn't supposed to increase or decrease the value of the shares if it happens at FMV. It does lower EPS in active companies but if the new shares are bought at FMV the increase of cash on the balance sheet is supposed to offset the decrease caused by the effect of EPS going down. I would add a company with no assets or operation can have value. If the idea for the business and expected management are set up you can make a legit claim there is an expectation of future earnings the stockholders will benefit from. In the end appraisers will tell you the value of a stock is the net assets plus the present value of the future earnings. The big unknown is what is the future earnings to do the present value calc on. That is why ESOP stock appraisals always look at management projections. They use other methods to benchmark and make sure that method is grounded in markets if possible but the big driver of any ESOP appraisal is the projections of the businesses earnings.

Strictly speaking a ROBs is nothing more than a 4k or PSP with employer stock in them. The stock price is the issue. ESOPs have a clear legal requirement to get the stock appraised once a year by a professional. Other plans it is simply part of the fiduciary requirement to run the plan right. I have seen ROBs in action over the years. I have seen PSPs with employer stock in them over the years. None of them got full blown appraisals annually like ESOPs do but they all had an objective method of getting a value that was more than someone's guess. None of them blow up in people's faces. On the face of it if you can show the plan is using FMV and follow the rest of the rules the idea is legal. But the stock price is a minefield that can easily get you as others noted. So anyone setting one of these up needs to know there are real risks here. I would add all of them that I have seen and had as clients allowed all the employees to get some of the shares. That is another criticism of ROBs. They don't actually share the ownership with the employees as the initial rollover is the only cash that buys shares. I think that helped make them more acceptable to regulators.

If you have a pdf of the plan document, AA and base document, I would search the words, "Alternate Payee". Most documents make it pretty clear that the AP can be paid immediately if the QDRO calls for it. I guess I have never had anyone question what part of the law says you can write a document like that.

You would be better off asking such a plan specific question of the plan. Most state plans I am familiar with, which is a pretty small number, all have people you can call or e-mail with such questions.