ESOP Guy

You have to study your document. It is going to tell you how to treat rehired people who forfeited in the past. The plan document is the only way to get the correct answer.

I just went through this with a client. Tom is correct. There is a correction method. In the case of the client I worked with there had been an employee education meeting before the year started. Everyone was putting in at least a 5% 401(k) contriubtion thus will get the full S.H. match. The correction appeared to be give the notice to the people who didn't get it. It was still a safe harbor plan for 2011 is our understanding.

Without more facts no one can tell for sure if it can be done or not. Also, you will find people on this board, me included, are slow to give hard answers questions from people who have a grievance against a company or service provider. We just don't look forward to being dragged into a fight. Thus, my answer is, "maybe". ESOPs do have a well known exception to the general rule that stops a company from changing its form of payment. Without all the facts one can't know if the exception applies here or not. I would suggest start by talking to the person in charge of handling the ESOP at the company and just ask your questions in a friendly way. They might be able to answer your questions to your satisfaction if you talk to them. (my edits were small grammar fixes)

This is true. FWIW, using both years of service and compensation as the basis for contribution allocations, you may wish to consider whether the higher paid employees are mostly the same people who have been around the longest, and more importantly, whether they are likely to continue to take the lion's share of the contributions for the next 10, 15, 20 years. Consider how that could affect testing, employee relations, and like that. Yeah, that formula worked so well in part because that company had a number of very long term rank and file employees. In fact that plan had a factory worker who had been there since he graduated from high school. As a percentage of compensation he was getting a larger contribution then the newly hired CFO. That was the other interesting fact. Since the family had sold out of the company and they had been the management, the new upper management had relatively short tenure with the company. So you are correct a years of service component like I described will be more dependent on demographics.

This is clearly an example of someone trying to be too clever. The problems noted above could be solved by giving the 1-3 year group a 0.5% contribution. I would guess that the additional cost would not be very large, but it solves a number of problems. Or use an allocation formula that uses years of service since you are already doing general testing to prove non-discrimination. I once worked on an ESOP that 25% of the contribution was allocated on years of service for vesting/ sum of all eligible person’s YOS for vesting. The remaining 75% was on compensation/compensation. It was truly amazing how much more it rewarded the long term employees vs a simple compensation/compensation formula.

The easiest way to think of this is to remember the goal is to get the person back to where they would have been if the extra match wasn’t ever put into the account. That is clearly the IRS goal with the correction methods. With that in mind it becomes clear why the earnings should come out with the forf. match. The only way to get a person’s account back to where it would have been if the match had never gone into the account in the first place is to adjust for earnings. To Tom’s example I have always understood it if $1,000 in match needs to come out but the earnings was a $50 loss you would only take out $950. Once again that puts the account back where it would be if the “error” had never happened in the first place. A person should neither benefit or be hurt by a mistake including too much match because of a test failure.

Maybe I do not understand the question. But why do you think you have to file an amended return at all? My understanding is a one person plan CAN file a Form 5500-EZ, but is not REQUIRED to file a Form 5500-EZ. You always have the option of filing the longer form, which it sounds like they did. I believe the correct answer is do nothing because nothing was done wrong.

The attached is from the IFILE system instructions. The vendor software we use (Pension Reporter by Datair mirrors this) you will see the first thing listed is accountant’s opinion. Later there is a financial statement. It is my opinion that “accountant’s opinion” is the better place to put the attachment of the auditor’s opinion. EFAST2_IFILE_User_Guide_1_.pdf

This is the very short version of the answer to your question. An ESOP that owns 100% of the stock of a S Corp sets up a tax free entity. The S corp does not pay taxes because it is an S Corp and the income passes to the stockholder(s). The ESOP being the sole stockholder is a non-tax paying entity in this case. People were setting up ESOPs and making the S corp election to avoid taxes and not offering broad base ownership to the company employees. These rules were intended to encourage broad base ownership of the company. Classic example a Dr. or lawyer in a sole practice was setting this up and their practice was not paying taxes. This was not the intent of the S corp ESOP rules. The link on abusive S corp ESOPs is about trying to avoid the various rules that are trying to stop those abuses. As for the link to ROBS that is the IRS’ position, but read it carefully. They never say it can’t be done. I agree with the problems outline here. The objection that new businesses go under and people will lose their retirement funds is a “nanny state” objection, not a legal one. I know plenty of people who have been laid off since 2007 who have spend all of their retirement saving supporting themselves while trying to find a job. Why shouldn’t they be able to take the risk of starting a business or franchise with this money? The “nanny state” somehow thinks they will be better off staying a wage slave, sorry that is not a valid objection.

This is a different topic. Your link relates to S corp ESOPs which is not the same as this topic.

You need the final audit report, sorry. I have 3 due next Wed and I don’t have the final reports yet either. Oh, the attachment is more likely called the Auditor’s Opinion.

I struggle with this as I started this thread, but... I think you can get out of the VFCP for such a small amount. See PTE 2002-51. The DOL has a de minimis amount, but not the IRS. So I think 15% of $.35 is due the IRS, or $.05 in tax is due. I know I am glad the deficit will be reduced by the huge amount. Oh wait it will cost more to process then sent in...

The ERISA book by Sal says the IRS admits they can be done. There are difficulties, and any research will show the IRS doesn't like them. But then again the IRS doesn't like S corp ESOPs and there is nothing they can do about it. The law is clear on both of these topics, difficulties-- but it can be done.

$64.25 ought to be enough to buy an actual lock box. They they can store all those gov't bonds in a nice safe place.

This strikes me as a violation of the benefits/rights/features rules. You would have to test this every year to see if make sure HCEs were not benefiting more than NHCEs. I am NOT endorsing this, but throwing this idea out for comment. I once saw a plan that wanted to do what is being proposed. Instead of using balance they did it via a backdoor. The plan administrator went to his TPA, the firm I worked for at the time, and asked how much would the TPA charge extra for each brokerage account added to the plan. My boss said $500/year/brokerage account. They amended the plan to say if you want a brokerage account you had to pay the $500/year added cost. The plan administrator figured he could even add to his defense why should everyone pay for just some people’s desire to have this extra feature. By the way most of the plan fees were paid by the plan. The net effect of this is only people with very large balances were going to ever pay $500/year in additional fees. My boss thought this was a great idea. I had a 401(k) account that allowed brokerage accounts, but they only charged $50/year extra. I think this might work, but I have never decided 100% if this is a good way to do what is desired. Namely, only allow people with large accounts have self-directed brokerage accounts.

If the IRS was smart at this point they would just waive the whole 2009 requirement for the 8955-SSA and tell you to put it all on the 2010 form. But I can't imagine they will be that efficient. Bureaucrats just love their forms too much.

I have found over the years there are plenty of good ESOP people. There are plenty of good daily 401(k) people. There are very few good daily 401(k)/ESOP people. There are practical issues often times. People expect their 401(k) money when they terminate very quickly. ESOP distributions can take a long time because it takes a long time to get the new stock price. (I am assuming the stock is not publicly traded) Is the plan going to make 2 payments or hold the 401(k) until the ESOP is ready? Do you hold 401(k) statements to add the ESOP data, or issue two statements? That is a sample of the issues I have had with KSOPs. On the other hand if you can cut the number of audits in half that alone can save enough to make many of these issues worth dealing with them. I would add I once worked with a daily KSOP with a publically traded stock. Since both assets had a daily market value that worked really nice.

How big are the unreported assets in relationship to the reported asseets? For example, if the unreported assets are $20k and total previously reported assets was $2-3 million I would not adj the bb, but just wash the difference in earnings when adding the missed assets to the eb. If the unreported assets are $500k and total previously reported assets were $600k I would have to think about it harder. I am unaware of any offical guidence on this subject. I am of the opinion this industry "over thinks 5500s". There is no tax due with these returns. If the amount isn't very material do what is simple in my opinion. I know plenty of people who think I am too relaxed about 5500s with that opinion. And once again this is my opinion I know of no offical guidence. The strict answer I suspect is amend all open years. But that just moves the bb problem back to a closed year.

Read you document again very carefully. I have not seen one that doesn't answer that question within the eligibility section of the document. I suspect the group that says he enters when rehire is correct, but the answer is in the document.

The plan document should tell you how to allocate those dividends that are attributable to the suspense shares.

And the goofy part of all this is how little the form changes from year to year. Update the dates issue the form, how long does that really take? Even the new SSA if you look at it vs the old form. Does it really take years to make that few changes? My first job was with the IRS and now you know why I left. At times my current job's pace is too fast. But the IRS was always just too slow. I had to make myself slow down to "keep up" with those people.

Most plans are run for the benefit of the participants. This one sounds like it is run for the benefit of the commission earners.

As far as I can tell, no you are not missing a thing.

You are asking a large questions. It is kind of beyond the scope of a chat board. Whenever I run into people who are thinking about ESOPs I tell them the same thing. Start by going to some of the ESOP Assoc. or NCEO conferences and just meet and talk with people who have set up an ESOP. I interact with the NCEO more than ESOP Assoc. but if you become a member they have great material and free webinars through the year. Do your research. Get a handle on the concept known as repurchase obligation. This becomes the obsession of most ESOP companies. The repurchase obligation is the cash flow needed to pay terminated employees their benefit. The company has to make sure the ESOP will have enough cash to pay people their benefits. That seems like the big issue for any ESOP company. To give basic answers to your questions the ESOP can buy the stock directly. Most likely that is the best tax situation for the company as it can use after-tax dollars to buy the shares.

I use the method found in b