ESOP Guy

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.

I have not seen anything authoritative on the subject so I can not give you a cite. However, I lean towards saying "yes' the rules apply. If you use mutual funds in the ESOP for diversification and they have participant direction it seems like the rules apply. As an aside this is just another reason to have all ESOPs written so the diversifications either go to the company's 401(k) plan (if they have one) which is set up to handle this kind of stuff already, or to an IRA. Either way it stops being the ESOP's problem. The few ESOPs I work with that keep the cash in the plan I try and convince them to change the plan and just leave the stock and uninvested cash in the ESOP. So far only one holdout and they are starting to talk about changing. edit: minor typos

I think this would require some notices. We use Relius forms and documents. For the distribution notices they have a section where you have to spell out in detail if terminated employees are going to pay a fee that is applicable to just them. If I remember correctly that was added a few years ago because of a rule change. So at a minimum it would seem like they should all get new distribution forms that spell out the fact if they leave the funds in the plan there is this new fee. That might not be a bad thing anyway. Maybe that will get them to take the money out of the plan and then everyone can be done with them. There might be more I am mostly doing this from memory.

I have an ESOP client that in the 2/28/2011 pye give a person a contribution for the pye 2/28/2010 as a self correction. This person was a rehired in the 2010 pye who should have re-entered upon rehire and worked >1,000 hours. So they should have been given a pye 2010 contribution. I have now found as we were estimating the pye 2012 contribution a person who was rehired in the 2011 pye who worked >1,000 hours. So this person should have been given a pye 2011 contribution. So if one self corrects the same problem two years in a row that would seem to not work for self correction. What is the risk? After all a VCP filing would demand the person be corrected exactly as we would self correct. It seems like the risk is VCP might demand a fine be paid to avoid disqualification. Any insight would be helpful.

Tom: I get what you are saying. I will double check to make sure nothing in the allocation section says you can't allocate beyond 415. By the way it is a Relius prototype we are using. QDRO: I think I now get what you are saying, I may have been dim in the past. But to make sure here are what seem to be your main points: 1) There is a way to correct (assuming nothing in the document says what Tom is saying) under self correction, but self correction by definition means limited use and you put in place procedures to avoid in future. 2) Outside of self correction you are stuck. 3) And I think this is where I was confused. The regulations are written such there ought not to be a failure because you shouldn't be allocating in excess of 415 ever. And since there shouldn't be a failure that is why you need self correction, the regs don't allow for a correction. And yes I now see what you are saying if you are past year end there is now way to not allocate 401(k) money to avoid 415 limit as it is already in the plan, so you would only fail to allocate ER money. Let me know if you think I still don't understand you correctly. Thanks.

I really don't want to beat the dead horse here, but this stopped being a theory question and now is a practical question. I just had a client who simply put too much money into the plan. If we allocate it all some of the HCEs would be over the 415 limit. If I understand some of you we can't refund with earnings 401(k) money, but have to stop allocating PS money. Why do you guys think that? Can you quote something or give me a specific cite? I keep going back to the document, the IRS site I linked to earlier. This is the example from rev proc 2008-50 here: Example 22: Employer G maintains a § 401(k) plan. The plan provides for nonelective employer contributions, elective deferrals, and after-tax employee contributions. The plan provides that the nonelective contributions vest under a 5-year cliff vesting schedule. The plan provides that when an employee terminates employment, the employee's nonvested account balance is forfeited five years after adistribution of the employee's vested account balance and that forfeitures are used to reduce employer contributions. For the 1998 limitation year, the annual additions made on behalf of two nonhighly compensated employees in the plan, Employees T and U, exceeded the limit in § 415©. For the 1998 limitation year, Employee T had § 415 compensation of $60,000, and, accordingly, a § 415©(1)(B) limit of $15,000. Employee T made elective deferrals and after-tax employee contributions. For the 1998 limitation year, Employee U had § 415 compensation of $40,000, and, accordingly, a § 415©(1)(B) limit of $10,000. Employee U made elective deferrals. Also, on January 1, 1999, Employee U, who had three years of service with Employer G, terminated his employment and received his entire vested account balance (which consisted of his elective deferrals). The annual additions for Employees T and U consisted of: T U Nonelective Contributions $ 7,500 $ 4,500 Elective 10,000 5,800 Deferrals After-tax Contributions 500 0 _______ _______ Total Contributions $18,000 $ 10,300 § 415© Limit $15,000 $ 10,000 § 415© Excess $ 3,000 $ 300 Correction: Employer G uses the Appendix A correction method to correct the § 415© excess with respect to Employee T (i.e., $3,000). Thus, a distribution of plan assets (and corresponding reduction of the account balance) consisting of $500 (adjusted for earnings) of after-tax employee contributions and $2,500 (adjusted for earnings) of elective deferrals is made to Employee T. Employer G uses the forfeiture correction method to correct the § 415© excess with respect to Employee U. Thus, the § 415© excess is deemed to consist solely of the nonelective contributions. Accordingly, Employee U's nonvested account balance is reduced by $300 (adjusted for earnings) which is placed in an unallocated account, as described in section 6.06(2) of this revenue procedure, to be used to reduce employer contributions in succeeding year(s). After correction, it is determined that the ADP and ACP tests for 1998 were satisfied. I just don't see where you guys are getting your idea from. Not saying you are wrong, I am worried you are right and I am wrong. But what are you reading that I am not reading?

One of our client's just decided to take what he wanted for his RMD. It was $20k > the RMD amount. The plan does NOT have an in-service provision. What is the correction? I suspect it is treated as a distribution without a distributeable event and needs to be paid back. That seems to be my memory of how it was handled the last time I heard of one of these. Any cites would be helpful. I assume once again rev proc 2008-50 "overpayment" section is what is going to govern here, but want to make sure.

QDRO-- as a rule you tend to know this stuff really well, but in this case I can't find anything that talks about you can't fix def because they are already in the plan. Can you point me in the right direction? I have looked at Sal's book, read rev proc 2008-560, I even found this IRS webpage that was last reviewed/updated a few days ago and none of them seem to be saying what you are saying. I am not saying you are wrong, I am saying you are normally right but I would like to read more and can't find that "more". http://www.irs.gov/retirement/article/0,,id=204360,00.html

See Erisa's reply... If I understand what he is saying he is saying what I see all the time. I have seen plans that say something to the effect: If annual additions exceed the 415 limit you reduce the annual additions and then it gives the order of reduction. I have seen plenty of ESOP companies with 401(k) plans in which both plans say if annual additions exceed the 415 limit you make the correction from the 401(k) plan, and that plan says you take 401(k) deferrals out as the first source. (To keep it simple assume no match so one doesn't have to worry about forf match on returned def.) In short I have seen plenty of plans that are drafted such that the employee money is sent back first and only after that employer money is taken from an account in case of 415 failer: Simple example: In the ESOP because of the large loan payments A gets $40,000 in annual additions and that person also defered $16,500 for 2011. The combination of plan provisions are written such that the 401(k) plan would give back 401(k) deferrals to get this person under $49k. We tend to call that writing the plans so it maximizes everyone gets the most "free money". I have seen PS plans that are 4k plans also have the same provisions within the plan-- 4k back first. I have never heard an objection to that method. I will admit it has been years since I have had this kind of conversation also.

VCP submission under EPCRS. And get the document drafted differently. As the conversation here is making clear there are ways to make this work better then a VCP but it needs to be in the document.

bump to top Any thoughts out there?

We have a S.H. 401(k) that uses the safe harbor match to meet the safe harbor provisions. This very small plan has 5 NHCEs and 2 HCEs. It has a last day and 1,000 hour provsion for the P.S. contribution. 2 of the 5 NHCEs worked <1,000 hours, but both have entered the plan in years past. So the plan fails 410(b) coverage testing. It fails the ratio test and the ABT. Can this plan do an 11g retro amendement to the PS portion to change the allocation requirements to 900 hours for the 2011 plan year, which would get one of the NHCEs a PS cont, and not mess with either the 2011 or 2012 Safe Harbor election? If I understand an 11g retro amendment correctly by making it now they would be required to keep the 900 hour requirement through the 2012 plan year, so it seem like either the 2011 or 2012 Safe Harbor election could be at risk. Thanks.

I tried a search sorry if this is out there. I have a real mixed record on this board's searches. How does one answer Box 13 if a plan has a PS plan and only does PS contributions but will not know if they are going to make a contribution for 2011 until this coming summer? Are these people active people in a retirement plan? It is a 12/31/2011 PYE.

One of the things I tend to ask clients when they ask me these questions is to ask them questions about other "markers" of them being terminated or not. 1) Did they give this guy COBRA notice already? If so, that would seem to indicate they think he is terminated. 2) Can he apply for unemployement benefits currently? If so, that would seem to indicate they think he is terminated. 3) Is the person subject to recall? If so, it seems like it might be more gray. I think you get the point. It might help to look beyond just the plan to decide if a person is terminated or not.

I am not sure if this helps or not. In the instructions under "how to file" there is a note about using a non-standard format for page 2. My understanding is that allows one to create a spreadsheet with the needed information and file that instead. I don't know if there is a count max or any other limit. We were able to import our large SSA data into the form and sent in some large number of pages 8955s.

Give some thought to the loan paperwork itself. The promissory note might need to be changed. At this point it is a contract between the part and the old plan. They might need to sign a new payroll authorization form to allow the new company to take the payments from their check. Not sure on any of this. I don’t work with loans as much anymore as ESOPs have become more of my thing. But I used to work on 401(k)s with loans and I seem to recall people tended to look at them as merely a qualified plan perspective and forgot the loan was a series of contracts also.

Here is my two cents. While I really appreciate the idea you are so well informed. In fact I wish more of my client were as well informed as you. You need to get off the advice board and pay for advice in this case. When someone pushes the limits like you it pays to have someone who knows your WHOLE situation review the facts. I might be telling you the obvious, but just in case I thought I would say it. But the excise taxes and penalties for over contributing to plans can become very expensive quickly. Getting advice from someone who knows the all the facts is cheap insurance in my mind. If your CPA/tax person doesn’t feel qualified to handle all this qualified plan “stuff” talk to your actuary. He either he can help you or he will know someone who can handle this. You need someone who knows Defined Benefit and Defined Contribution limits and planning. (Since you are saying you can't find good advice I suspect there are TPAs on the board that could give you good advice for hire. Full Disclosure I am NOT one of those people as I don't know Defined Benefit Plans well enought so I have no self-interest in this comment.) By the way one of the questions I would ask is if you can set up a Defined Contribution plan along with your Defined Benefit plan for your self-employed income. This can SOMETIMES be done, but there are limits to this kind of doubling up. I work with exactly one client who has a Defined Benefit Plan and a Safe Harbor 401(k) plan. But the 401(k) plan is very limited for the owner, but the contribution rate isn’t zero either.