ESOP Guy

Company A has two plans. Plan one is for union employees. Plan two is for non-union employees. During the year people move from union status to non-union status. The company’s record keeper is moving the account balance for these people from plan one to plan two. Can they do this, or are they kicking people out of a plan against the rules? (Assume there are people with a balance >$5,000) Also, note both plans still exist so this isn’t a plan merger. What about a former union employee who has terminated and for reasons unknown is moved from plan one to plan two. This seems less like to be ok. Not sure at this point if the plans are the same in terms of provisions. But for now assume they keep track of the BRF like vesting on the moved amounts. (It is a firm audit client and the audit group is wondering about this.) Does anyone have a hard cite for one way or the other?

My father found a house for sale near him. He thinks it would be a good investment. He was thinking of bringing my brother and myself into the deal. Currently, the best place for me to get the funds for this would be my wife’s IRA. From what I am seeing here it would be safe to say this is a high risk concept because of the PT rules. Can this be done? I have done some reading. Would forming an LLC and having the IRA buy the 100% of the LLC and then having the LLC be a partner in the venture help at all? My guess is no. The IRS if nothing else can look beyond the form to the substance of any deal and the substance of the deal is still a PT. But I thought it was worth asking people here. As an aside he is much older than my brother and myself. Assume we hold the house until he passes. Would my inheriting a portion of his share be an added PT issue? I suspect while it comes with its own set of problems the real answer would be to take a loan from my 401(k) account and just buy into my portion of the deal.

Bird: I am happy to be told I am wrong, but doesn’t the 50% rule only apply when the loan is made? (Assume a participant directed 401(k) plan) For example, if one had a $20k balance and took out a $5k loan, and then took out a $12k in-service distribution the loan is still fine. However, I did go back and looked at the DOL regs and here they are: § 2550.408b-1 General statutory exemption for loans to plan participants and beneficiaries who are parties in interest with respect to the plan. (a)(1) In general. Section 408(b)(1) of the Employee Retirement Income Security Act of 1974 (the Act or ERISA) exempts from the prohibitions of section 406(a), 406(b)(1) and 406(b)(2) loans by a plan to parties in interest who are participants or beneficiaries of the plan, provided that such loans: (i) Are available to all such participants and beneficiaries on a reasonably equivalent basis; (ii) Are not made available to highly compensated employees, officers or shareholders in an amount greater than the amount made available to other employees; (iii) Are made in accordance with specific provisions regarding such loans set forth in the plan; (iv) Bear a reasonable rate of interest; and (v) Are adequately secured. I don’t see how this loan is adequately secured. Even if the 50% rules only applies when the loan is taken out it appears this rule applies the whole time the loan exists. So, I agree with Bird it is a PT, but for slightly different reasons. For what it is worth I don’t think a DB fiduciary can get out of being a prudent investor just because the employer, who may be the same person, will be the one that pays. But I am not a DB expert by any means. While the same person might wear both the “plan sponsor” hat and “plan fiduciary” hat they are two different jobs and both need to be done right. So I don’t think the fact the risk is low because the sponsor will in the end be the one that pays works either.

I am going to answer your question with a question. ( I think I understand your questions) What happens in the following situation? The person takes the 100% in-service distribution spends the money and then quits. How is the plan going to collect the remaining loan balance, there is no longer any payroll deductions? If it doesn’t collect everyone else in the plan takes a hit. This doesn’t sound like the plan’s Fiduciary is doing his job. There is no rule related to participant loans that stops this idea, but Fiduciaries are required to be prudent investors of the plan's assets and this doesn't sound very prudent. Edit fixed typos

Datair just this year made Pension Reporter accept cents in both the amount subject to the tax and the amount of the tax. Don't get me wrong. I think these small amounts are silly. But most of the cost to the client is computing the lost earnings and allocating them, not the tax form. That cost is chump change compared to the rest of the process.

There have been other IRS personal that are on record within the last 12 months as saying there is no De minimis regarding this tax. To answer you question there are other threads on this board, one within the last week or two that talk about the DOL rules about their De minimis. You have to give a notice to the employees http://benefitslink.com/boards/index.php?s...c=35750&hl=

Dale you are being kind. There is a perjury statement with the signing of the Form 5500, and by knowingly answering a question wrong is perjury. I would add I agree with Dale on everything else he said.

I try and avoid answering a question with a question. But since no one has answered I am going to do so. What are you trying to figure out? I am just not sure I understand you question.

Two things: 1) I have found the DOL’s EFAST2 help phone line very helpful in figuring out errors. You can call and they will talk to you about the error and give you some insight as to what the problem is. 2) This sounds like a problem I have a few times last filing season and once so far this year. When the person set up their user id, PIN and password they did not finish all the steps. In all the cases they got their user id and PIN then stopped and did not set up a password. The fix was for them to go to EFAST2 website and get a password. The way to do that was to try and log in and say you forgot your password. They will have to answer their challenge ?. After that they can make a new password. But a PIN is not valid if they don’t have a valid user id, and password. Best bet is to call DOL number and ask for help to determine how to fix the error message. So far I have gotten the right advice every time. EFAST help desk # 1.866.463.3278

If I think I can find a fund that will do it and not eat my son's lunch in fees sure. My thinking is when he hits 16 he will be able to get more work so it can grow from there.

I just double check the Sch SE and if you have <$400 in SE earnings you don't file the form and pay the tax.

The income must be 'earned'; either paid on a w-2 or on a 1040 (Schedule C less 1/2 self-employment taxes). You cannot contribute allowance. As a rule of thumb, if you didn't pay FICA, then you don't consider it as income for IRA purposes. Good Luck! Yeah, the local soccer league claims the teenagers that ref their games are all independent contractors. (I suspect they are misclassifying them, they should be employees in my mind.) By the way the wet spring we had cut into his earnings. Does anyone know if we have to file a return for him to establish he had earnings? As a rule if your self-employment earnings are below some number you don’t have to even file a SE tax return and unless the fall season goes well he might be below that number.

As a side comment the IRS still hasn’t agreed to the idea of putting the excise tax in the trust if <$100. So even if you can do the DOL correction method it is possible the IRS could come along and make the client pay the excise tax again with late penalties. There has been at least one IRS phone Q&A session this year where they restated it is their position there is no De minimus amount for this tax and you always have to file the 5330 in their mind.

This might be pushing it….. Is the value of the note readily determinable? If so, could the plan pay the benefit with the note as an in-kind distribution? Once the former employee is paid 100% of their benefit they are no longer a party in interest. This assumes the benefits is the same value or of greater value then the note in question. If the asset is worth more than the benefit this wouldn’t work. After the distribution of the asset has been made, couldn’t the former employee then sell the asset to either the PS plan or if the employer has the money to the employer? I know the PT rules tend to not only look at the form of the transaction, but the substance of the transaction so this could be risky.

TPApril: While it is true that money put into an ESOP to provide liquidity for distributions can be a contribution, it could be a dividend paid on the stock for example. Not all money going into an ESOP to fund a distribution is a contribution. I believe that you are making an apples to oranges comparison in this case. No one would call money going into an ESOP to fund distributions as a reimbursement. One could look at this way. The ESOP sponsor could put money into the ESOP, via contributions, even if there are no distributions and then years later when there are distributions you use that cash to make the payment. There is a buy/sell between the participants that is going on. My point is regardless if the cash addition/distribution happens in the same year of different years the accounting requires some people to get an increase in shares in exchange for some portion of the cash in their account. The expense example is different. The times I have seen this happen the full intent of the sponsor was to pay 100% of the expenses for everyone. I realize intent and legal isn’t the same thing. In this case the transaction doesn’t require a change in anyone’s account. The money can come and go and no one’s account would have to change. With the ESOP distribution example most if not everyone’s account will change in some manner. Either they are selling cash and buying shares, or they are the person being paid from the ESOP. So while on the whole the nothing changes in the ESOP, the cash went in and the cash went out—that nets to zero on the whole, within the group the details have changed. In the ESOP example the shares staying in the trust have to be spread to everyone who has cash in their account. How any given account gets cash is independent of the distribution (payment). In the case of the expense reimbursement the cash is being put in because there is an expense to be paid, and the employer does not want the employee accounts to take a hit. Like I said I have never seen cut and dry guidance on this, but I think my position is reasonable. And one of the things I have found over the years is when you are reasonable and treating the NHCEs fair when the rules isn’t clear, the IRS give one a lot of slack.

Lou: Unless the company is just determined to merge mid-year I would suggest doing the merge at 1/1/2012. I believe, someone please confirm this, the rules that give you a grace period for coverage testing extend to the ADP/ACP test with purchases. I am doing this from memory. It has been a very long time since I merged two 401(k) plans, but I would look into that if you think the company is willing to merge as of 1/1/2012. I am very willing to be told I am wrong about the grace period for company purchases extending to the ADP/ACP testing, but that is my memory. (Ok, can I hedge my advice any more then I have?) I can’t imagine the cost of merging at 1/1/2012 is much difference then 9/2011.

I don’t believe there is a place one can point to for official guidance. I never count employer reimbursements of fees as contributions. I don’t show them coming into the plan or going out as an expense for the 5500 series. I have always gotten the plan auditor to sign off on this. I don’t recall a plan I worked with that did this being audited by the IRS or DOL. I will add all the plans that this happened to them it was because the trust company said they could not bill the client directly. Their system required the plan to be billed was the claim. I suspect the trust company just wanted their money faster so they took it from the plan. The trust company did not show the reimbursements as contributions either. It was just a “misc in” amount that equaled the fee amount.

There is no good answer to this question. I have had ERISA attorneys advise my clients that 1% is the max, and another 7%. 5% strikes me as pushing it, to put it kindly. I had a client years ago that used commissions and they had a version of your problem. When the economy was good enough of the salesmen were HCEs to make the test pass. The economy would slow down and they would all become NHCEs and they would fail the test. Your client might be setting themselves up for a bigger headache then they realize.

This is an interesting question. There was a recent court case where an ESOP administrator knew the company was in negotiations to sell the company for 6x last appraisal and he started pushing the terminated people to take their distribution. The administrator knew the sale was more likely to happen then not happen. The court took a dim view of this behavior to say the least.

Sorry story time: The one time I had a client in this situation this is how it played out. A bank teller was caught stealing. She pleads guilty to stealing hundreds of thousands dollars. The bank’s attorney got the local DA and judge to go along with this plan. The judge told the defendant she would get sentence A if she deposited her ESOP distribution into an account with the bank. Then she had to sign the bank account over to the bank. She would get sentence B is she did not reimburse the bank. I suppose it is obvious but sentence B was much harsher then A. Strictly speaking she made a free will choice about her benefits. It sounds like your client might want to look into something like that as a solution.

Austin you beat me to the question you asked. I would be curious also which regs people think the IRS is upholding? Like I said when I did this years ago, maybe around 10 years ago, both client’s ERISA attorney blessed the plan. If I understand this conversation the IRS is not enforcing the regs, but a contingent hypothetical. Well, IF the plan were to stick around, and IF the person where to come back to work…..

For what it is worth one of the greatest gifts a grand parent can give a kid, in my opinion, is a gift to fund a roth at those ages. My 15 year old just got his first job. I am hoping between my dad and I we can fund a roth for him for 100% of his earnings. Imagine 50 years of compound earnings tax free. That assumes that my son doesn't at some point take the money and run. He will have that control at 18.

In the examples I saw with my clients the forfeitures were allocated to the active employess at a special allocation right before the plan termination. What the business owner wanted to avoid was what he saw as a windfall for ex-employees who just so happen to still have money in the plan. The windfall being the increase in vesting even if they hadn't worked for years. The owner didn't have a problem of giving the full account balances to the current people. But in his mind the people who left had made their choice already. Might not be the law, but it was the way the clients saw it the two times I had the situation

David: Why would a BIS be important in this case? It has been years since I have seen this done but… Years ago I had more than one client that amended their plan from forfeit after 5 BIS to upon payment. Then the plan made a push to make payments just to do what the original question is asking about. That is to say they made the push to pay everyone out and then they signed a resolution to terminate the plan.

No employer should be allowed to get away with this and the TPA should either get him to fix it or resign. As long as the discussion seems to have gone to the TPA responsiblity I will add my two cents. I just don't see it as the TPA's job to be the plan sponsors parent. We can inform and that is it. I just don't see a duty to resign because of this. I worked on client that didn't put the money in the plan for years. It turned out the CFO was no good. Once the owner knew of the problem he put the money in with back earnings. We are TPAs not parents.