ESOP Guy

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.

Tom to be clear my question was just a question not a chanllenge. I wish I could convince people here to use something like the Fire system to do these things electronically. I can't find quickly what gave us the idea that a signature from the client has to be had before you file using Fire or another system. But to our way of thinking IF signature is needed then you might as well send the paper form to the client and have them sign it and mail it in. So it sounds like the answer is to do more research on this topic with the IRS. To answer your 5500 question with Pension Report we can know if the client signed with a PIN and we get the feedback if the DOL accepts it as valid. So to our way of thinking that is a valild electronic signature. We do recommend they do a wet signature. If you take the position that the thinking around here is a bit inconsistent I might agree with you. Like I said at the beginning none of this is a chanllenge. I am looking for a better way to do things. And to me getting to a point were we can comfortably file all these silly forms electronically in one or two big batches sounds better then sending all these paper forms we are currently doing.

Tom: You may have answered this already, so sorry if a repeat. I did a short search to see if it is a repeat. Our understanding of the electronic filing requirement for the Form 8955-SSA is the client is suppose to still sign a paper copy even if you file for them electronically. The culture around here is one we would need proof they have signed before we file electronically. How do you know they signed the paper copy, or is the culture around your place of work one where if you merely send the paper copy to the client that was enough (you guys assume they signed the copy sent to them) to do the electronic filing?

GMK If I remember correctly you have an ESOP and I am an ESOP geek. My your New Year be filled with rising stock prices and easy repurchase obligations. ESOPGUY

It has been a very long time since I have had one of these and it was in a DC plan, not a DB plan. But decided what Q&A 8 means for you. http://law.justia.com/cfr/title26/26-5.0.1.1.1.0.2.50.html just in case the link doesn't work I am refering to §1.401(a)(9)-5, Q&A-8, If you have Sal's book it might help to start there on this question.

In most but not all cases the T.H. test is across all plans. But if somehow you could test the two plans separately I don’t see how you can just transfer the balance from one plan to another. What is the reason for the transfer? Just because one moves from an eligible class to an ineligible class doesn’t mean you lose your right to participate in the first plan. And while both plans are with the same company and in many ways it is all “one happy” family I am just not sure one can make that transfer. Do the documents allow for this kind of transfer? I have had clients with union and non-union plans. If someone moved between groups they always just had balances in both plans.

That's a rhetorical question, right? I'm not sure how I got here, but it's too disconcerting to think about. In any case, to everyone, Happy Holidays. No its a question that is ignored in the employee benefits community. Fulfilling the duties of a plan fiduciary/trustee is time consuming and filled with unexpected risks. There are too many ways to be be blindsided or be found liable for another person's illegal activities. A few years a financial advisor was a fiduciary to a qualified plan for the purposes of investing plan assets. However the plan admin/trustee was siphoning off assets by making false entries. After the trustee took off with the assets the plan sued the financial advisor as a co fiduciary even though the advisor did not have any involvement in plan administration. The court found the advisor liable as a co fiduciary because the advisor received the monthly statements of the plan assets and did not conduct due dilligence to review their accuracy. Now why would any one want to be a trustee or fiduciary? Mbozek has a point here. This idea that a co-fiduciary can be held 100% liable for any other actions by a fiduciary is what has gotten all the stock appraisers in the ESOP world riled up. The proposed DOL rules would make anyone who appraises closely held stock a fiduciary. The DOL says it would make the appraisers more accountable for the price they are giving. While one might not object to that idea but what appraiser in their right mind is going to make themselves liable for actions of people they may not know exists. You go to some of these ESOP conferences and the appraisers are saying they will leave the business. They will just do appraisals for Estate Tax, and buy/sell purposes.

Rblum50 you are in a tricky spot. I am not trying to insult your intelligence by telling you something you may know, but I am inclined to mention this. This sounds like one of those situations where if you cooperate you may make people happy and you get out of bad place cheap and easy. However, if you cooperate and don’t filter it through a lawyer and things get worse you could find your “helpful” words coming back to haunt you in court. Like I said not trying to state the obvious or insult your intelligence, but I have been in that place before. All I can say is when in that place I have typically went with the risk of make people happy and got out of the situation cheap and easy. But we started from that point forward always reviewing anything we said, and more importantly wrote, with he lens of how will that sound in court with a hostile lawyer trying to convince people to interpret my words in the worst possible light. And we tried to write as little as possible. Honestly, I would think about stopping all e-mails about this client if you have staff working for you. People tend to write too informally in e-mails and write lots of opinion in them. One reads more and more how e-mail is what gets people in trouble in court because people forget that e-mail is forever and lawyers can and will go after them if it comes to it.

This used to come up all the time in balance forward plans when the market moved one way or another in a big way. The simple answer is "you follow the document". So use whatever weighted average the plan calls to use and use it. And I suspect that the plan says you start with beginning balance and the cont rec'ble was part of the beg bal. If this guy shared in a loss on his cont rec'ble that is how life works. If it had been a large gain he would have shared on the gain. It really is follow the document, follow the document.... in this case let the numbers fall where they fall and don't over think it. edit: typos that made my 1st answer almost unreadable.

This discusion isn't very old. But we had a small client pay a little over $1k with no withholding. It is a Dr. office is this is the first payment since the mid-2000s. As far as I can tell the client isn't at much risk as seems to be the concensus in the thread. But if someone knows of anything else we need to know about I wouldn't mind a heads up. We are planning preparing the 1099-R as the distribution was done show no tax withheld. As an aside my memory is the same as Bird's. These rules were set up to give a one year boost to gov't revenue by taking it from a future year. (Warning ideological soap box coming) One of the reasons our government is so screwed up is because that actuallymakes sense to those people. I swear one of the best changes that could happen is if someone in our political leadershop made Uncle Sam use GAAP. That kind of shift would not change the income statement, just be prepaid revenue on the balance sheet. Enough of my CPA rant.