ESOP Guy

I found some older threads, and I don't think there is a reason to think anything has changed but... 1) I have never seen an election form for a plan that allows one to take a lump sum distribution out of the plan talking about rolling the amount over to another qualified plan vs just an IRS if the person is terminated. I know it is rare for a terminated person to even have a diversification, but in this case they have the 55 and 10 yop before the plan allows them to take their money out as a terminated person. But there is no reason it can't be rolled to another unrelated qualified plan if so desired is there? 2) Can you write the ESOP diversification provisions so only employeed people can transfer the money to the employer's 401(k) plan? Or put another way can you force the terminated employee to take a distribution as their diversification? Once again I suspect they will want their money, but if they have been paid from the 401(k) plan it would be a pain if you were obligated to set up a new account. 3) Related to #2, it would be the ESOP's provisions that are change to make that restriction correct? Is where you can send your money a protected benefit? Thanks.

short answer is "yes" they count. long answer here is a quote from the instructions 1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit. You will note all it takes is they are ELIGILBE TO ELECT. they don't have to make an election. As an aside, you may say being someone who works for a TPA I have a conflict of interest. You may want to rethink they whole doing it for "free" ourselves way of thinking. If you get this wrong the penalties and other problems will quickly cost you thousands (and it is plural) of dollars. And this is just one thing that could go wrong. edit small typos

IF the $44k is for TPA work that seems high, but one could only know for sure by seeing the service agreement. If the TPA is running a call center for example that could change the answer rather quickly. On the other hand if it really is testing, 5500, working with the auditors etc ... you could do much better with a fixed fee agreement. I would send out RFPs to a number of different service providers and see what comes back in terms of cost.

RMD issue aside for this conversation. If he really wants to do this and he really wants to minimize the tax withholding issue couldn’t he do the following? 1) Take the money from plan and roll it to an IRA 2) Take money from IRA, which doesn’t have 20% withholding 3) Roll back into IRA within 60 days, or maybe even the original plan (I would have to think about it, but it seems like it would be a conduit IRA to plan concept.) More paperwork as he has to open an IRA for the sole purpose of putting money in it for a day or two. Maybe he could use an existing IRA-- depends on exact facts. Obviously, he would need to take the RMD first with this set of actions.

These amendments aren't my strongest area of knowledge, but I thought there was a min. amount of time you had to keep the provision in place if you did this. If so, that would tend to make it a little more difficult to use every year wouldn't it?

When is the last time you got an opinion from the plan’s attorney regarding what “de minimis” is for 414(s) testing? I have seen plan attorneys who will defend a 5% point spread. This is more true if it seems like a onetime thing instead of a new trend. I have seen some that will defend the 5% spread the first time it happens and amend going forward. In short the IRS has never given good guidelines on what is a 414(s) failure, so one might want to see what everyone is willing to “risk” in this regard. On the other hand I have seen people insist the spread needs to be less than 1% point.

Austin; My understanding is "no". You in effective give them a lien on the account that is securing the loan. So you are borrowiong your own money back. But you can not withdrawal the money unless the loan is paid off. That is the reason the loan is so cheap. Like I said in my other reply I have a credit union that will give you a 5 year loan secured by a 5 year CD for the CD rate plus 2%. The only rational reason I can think one would do this is: 1) You don't want to pay the penalty to break a CD. 2) I guess I could give the bank a lien on one of my CDs to let one of my children to have a loan

You don't stay married for 25 years by responding and finding out if she is cute.

Got same e-mail from same person-- for what it is worth.

Bel I assumed you were the ESOP company not the TPA, but based on your comment on loan interest it appears you are the TPA. You might want to think about the NCEO webinars coming up on repurchase obligations. Of note the May 16 webinar. You will note the webinars cost $150 which seems high. That is the NCEOs way of getting your to join. You can have a single person join for $90/year and that person can go to the webinars for free. But the 16th one talks about way to fund the obligation, which is a fancy way of saying paying out distributions. This might help build your knowlege base. http://www.nceo.org/main/meetinglist.php/id/1

Both are allowable. Which is better is a more difficult question. You need to talk to someone who has some experience with the question and knows your plan. It would seem like your TPA ought to be able to give you better guidence. Here is the short of the two: Cont leave shares in plan: pros: keeps allowing current employees to increase their ownership, or if new employee start owning the company. If having broad based ownership is a major goal you want to do this. You are using pre-tax dollars to fund the payments as cont are deductable the are other pros but that is the big one and I want to keep it short cons the level of contribution tends to be dictated by people leaving not your business plan (althought there are way to manage this) By this I mean one year you might put 5% of comp into the plan next year 15% the next 1%. If the ESOP is an employee benefit you might want to better manage your costs for example Taking shares out of the plan pros: like any share buy back it will casue the share price to go up, although with less shares the total value will not change. You don't ever have to buy those shares from employees ever again. In theory the two methods should get the same repurchase obligation as one has high share price and the orther has more shares, the effects are the various people are different. If you go to ESOP conferences you can find people who have projected out the differences. cons on of the differences newer employees don't get shares, so the rising share price only benefits current shareholders, which is typically older employees. So the newer employees are working and not sharing in the benefit of the company profits You are using after tax dollars to fund distributions as this is not deductable You can only buy shares from the ESOP for so long. Someone has to own the company so you can't buy 100% of the shares. This is the very short version. I have a whole power point presetation I use for your clients as they enter this phase of the ESOP's life. You ESOP TPA should be able to help you get all the factors in front of you for an informed decision. Another thing to look at there are ways to use dividends to get funds into the plan and under the right conditions the dividends can be deductable which isn't normally the case with a C corp. You don't have to answer this, but have you looked into changing to an S corp ESOP?

I can't see any reason to NOT use prime. The loan is 100% secure. The plan can never have a loan loss from a plan loan. It is a risk free (from default) loan. You could make a case it is as safe as a gov't bond of the same length. In short a 1 year or less loan in my mind could reasonablely have a <1% rate like a T-bill. Make no mistake I am NOT saying do that because I think the rule makers don't buy my line of thinking, but to say you have to charge above prime makes no sense. The only risk in that loan is interest rate risk. The regulator's are just using their feelings instead of logic in my humble opinion. Edit is below Ignore the above. Prime is more likely. I just double checked my credit union. they will give you a loan secured with a savings account, which pays .2%, for 2.2% (ie rate plus 2%). That is below prime, but above T-bill rate. But prime plus is not what is commerical. But like I said the IRS makes the rules so do what is safe, not what is right in this case.

Thanks Tom learned something new today. I don't know if I have ever seen a case where the doc allowed it or the current year's forf weren't large enough. But in this case both appeared to happen.

bumping back towards the top.... any thoughts out there?

We have a PS plan. A person terminated was paid out fully a few years ago and was forf. They have been rehired and everyone agrees he could repay his distribution and get the amounts forf back when he was paid out restored. We use the Relius document. As I read the base document it looks like the restore should be funded in this order: 1) current forf 2) current plan earnings (this is a pooled asset plan) 3) current contributions Can you really use the earnings from a pooled plan? There aren't enough current forf. I always thought the employer just had to kick in more money to the plan if the current forf were not large enough. I am having a hard time wrapping my mind around the idea I can take earnings from the other people which is going to include people who did not benefit fromt he orginal forf.

Yes http://benefitslink.com/modperl/qa.cgi?db=...ibtax&id=19

I used the 2011 page 16 although I checked and 2010 seems to be the same. http://www.dol.gov/ebsa/5500main.html

While I understand this is a frozen plan I would point out the directions to the 5500 defines participant as follows: The description of ‘‘participant’’ in the instructions below is only for purposes of these lines. An individual becomes a participant covered under an employee welfare benefit plan on the earliest of: the date designated by the plan as the date on which the individual begins participation in the plan; the date on which the individual becomes eligible under the plan for a benefit subject only to occurrence of the contingency for which the benefit is provided; or the date on which the individual makes a contribution to the plan, whether voluntary or mandatory. While normally in a frozen plan that would only mean people who have a balance. However, in this case haven’t they met the conditions of 2nd point above? Aren’t they “eligible under the plan for a benefit” regardless if it has been funded correctly or not? In a non-frozen plan someone who got a PS allocation on 12/31/2010 even if not funded until 7/31/2011 would still be a participant on 1/1/2011-- as an example of someone without a balance who counts.

This says March 2012. http://www.irs.gov/retirement/article/0,,id=117588,00.html I for one am glad I would rather get my small plans 5500-sf and 8955 done at the same time this year. It will be interesting to see how long it will take the software vendors to get the form out in the software.

Lou/ others: I am probably flirting with beating the dead horse here, but I am being misunderstood. (Sorry if in fact I have crossed the line and the poor dead horse is being beaten. I thought I was being helpful, but clearly I failed in that regard.) Simple example: HCE A rolled an $100,000 distribution upon plan termination of ABC 401(k) into an IRA at Really Big Brokerage House (RBBH). He first got a 1099-R reflecting that fact. Now it has been determined that A should have gotten a $1,000 refund from the plan because of an ADP failure. As Lou points out ABC 401(k) needs to reissue the 1099-Rs per the instructions he is talking about. That is the easy part. A wants or needs to get the $1,000 out of the IRA. So he asks RBBH to issue him a check for $1,000. RBBH is going to want to issue A a 1099-R because money is leaving the IRA. So A will end up with 2 1099-Rs for the same 1,000. One from the 401(k) plan and one from the IRA and he should not be taxed twice on the same money. And I have found it is next to impossible to get the brokerage house to issue the check without a 1099-R being issues.

And like I said if the ADP/ACP test fails and refunds are needed those people put their money in an IRA the amount of the refund would have to come out of the IRA. It has been many years since I had that happen with a plan termination , but I recall it was a pain because the IRA people didn't want to send the money out of the IRA without sending a 1099-R. And of course they were not going to put a code on that 1099-R saying the reason for the distribution was testing failure.

I am assuming you are talking about ADP/ACP testing. The excess can't be put into an IRA. So if the testing fails and refunds are called for the HCEs would have to get that money out of their IRAs.

Austin: Nothing official but …. I worked on a plan like you describe back a few years ago. The per capita expenses were such that all but the biggest balances lost money every year. The small balances even in a good year for the stock market would not grow the account more than fees. We kept telling them that fact would raise alarms with the DOL etc. We convinced them to simply terminate the plan. We had offered to look into helping them set up a Simple or some such plan that I know next to nothing about those types of plans. But to me that company is not doing there people any favors with the fees that high. My guess is they can set up a plan that would allow their people to keep more of their money.

What does the plan document say? The document is going to control if this can be done or not. It would be rare to see a document that allows in-service distributions in an ESOP except for disversifications and maybe at some age like 65. Just out of curiosity are you a participant in an ESOP? If so, start by reading the Summary Plan Description you got from your employer? If you don't have one ask for a new one. It will most likely answer your question. edit: minor typo

SoCal is correct about the PT. Only ESOPs can hold S corp stock without the PT. Also, if earnings flow through to the trust from the corp it would have to pay unrelated business income tax (UBIT). Once again only ESOPs can hold S corp stock and not pay that tax.