ESOP Guy

You have the date wrong. It is 8/1/2011. But yes they set the due date while the form is still a draft. http://www.ebia.com/WeeklyArchives/Statutes/20487

2nd the motion on get the attorney now. A little money spent on the help with the QDRO will pay for its self. The attorney is likely to think of things you haven't thought of yet.

Then go back to BG's question and your answer. How many people had a balance as of 1/1/2010? If <100 no audit, if >100 audit.

Go the www.irs.gov. Search for publication 590. Read about Prohibited transactions in that publication. It should pretty clear why you can’t do what you want.

For what it is worth I wouldn’t tell her anything that is just proposed and not decided. I would add I have seen plans that in the months leading up to the plan termination amend the plan to forf everyone who is terminated. Having to wait until 5 BIS is not a protected benefit. The plan forf those people, reallocates the forf to benefit the current workers, not give the “windfall” to the former employees.

This is a good company that will do various search methods. The will do the gov't search methods for you besides using non-gov't sources. Afterwards they will give you a letter stating the search met the DOL regs requirements for a search. Not that expensive. No I don't get a commission. Over the years I have had a number of client use them with sucess. http://pbinfo.com/

And for your 2nd example the right answer is $75,000. The point of the calc is to make the person no better or worse off. If their vested balance before the dist was $80k and they take $5 out, the new vested balance is $75k. So use the absolute value for the distribution number.

I believe, also, you are being tripped up by the idea the payments from the company are the distributions that are the 1099-R event. The plan will issue the 1099-R for the value of the shares in the year they leave the plan. If the person sells all/some/none doesn't matter, he owes taxes on the full distribution. So in your case it sounds like it will be possible that the taxes due in year 1 will be > then the cash recieved by the person. So if the person gets $10,000 in shares in year 1 he gets a 1099-R for the $10,000 as gross distribution and taxable distribution. If he sells part of them for $2,000, or sells all of them for $2,000 in cash and an $8,000 note he still owes taxes on the distribution in year 1. The 1099-B would reflect either $2,000 in sales proceeds or $10,000 (the $2,000 cash and $8,000 note). After that his basis in the shares is what he has already paid taxes on, in the example $10,000. GMK is correct is stressing one should only pay taxes on this stock once, and the practical reality is most of those taxes will be paid in the year they were distributied from the plan. The 1099-R will reflect the taxable amount as the FMV of the shares in the examples you give that don't have NUA issues.

If it is a 401(k)/PS plan and not an ESOP any flow through income from the company will be subject to Unrelated Business Income Tax (UBIT). I know 100% of the people will not agree with me on this, but my personal opinion is someone who owns >5% of stock in an account of a qualified plan is not a HCE by ownership. After all that person isn’t a 5% owner. The trust owns the stock. And the person with the stock in their account doesn’t actually have full rights of ownership. The trust and trustee can have many of the voting rights for example. If anyone has a cite to prove me right or wrong on this point please share it. I have not found anything one way or the other that I can point to. Also, while it is a VERY bad idea to not get an annual stock appraisal only an ESOP is required to get one. If this is a 401(k)/PS the trustee can use any method they believe to be reasonable to value the assets. You would have to check the box on the 5500 that says you have unappraised assets whose value is not set by a market. This seems like an audit flag to me. But I have met ERISA attorneys who are prepared to defend their client’s not getting an annual appraisal as client currently. Not getting one with the buy/sell is reckless in my mind as it could create an expensive PT. But allowing only one person to make this kind of investment is the part that is going to be the most problematic. Have they thought about a loan to the company with warrants/phantom stock right/stock appreciation rights – ie a form of non-qualified plan tied to the price of the stock. It would seem like that might work better then a qualified plan. Unless the only place the buyer had enough money to make the investment is in the 401(k)/PS plan. Sorry, should have added the PT issues is most likely a deal killer besides issues listed above. You just don't see Employer S corp stock outside of an ESOP.

In regards to #4 I know of a few trust companies that specialize in working with ESOPs that would say you would issue the 1099-R from the Plan and the 1099-B from the company. They would tell you for your 1040 you would show the distribution like you normally would. Then for the 1099-B you would show the gross proceeds for the part sold and a cost basis would be the basis for the fraction sold. The basis would be what you already paid taxes on. Example: A is issued $1,000 worth of shares. To keep it simple he puts all those shares to the company for $1,000. You would show on the 1040 a $1,000 distribution. (Skipping NUA issues etc.) Then on the Sch D for the 1040 you would show the sale of $1,000 with a $1,000 basis, and no realized gain. From what I could tell this is the most conservative answer. And so the trust company had an interest in making sure they were safe. And the fact was the cost was shifted to the client as they would charge the client to issue both the 1099-R and 1099-B. So you can see why they would take this position. The client pays to keep them safe. But their position isn’t irrational. As you say the rules here are a little vague. I have found when this trust company made a mutual client do this the problem was the people getting payments. They would call up mad because they got 2 1099s for the same distribution, they did not figure out the basis for the Sch D. So they would call me demanding to know why they had to pay taxes on the money twice. So your way seems rational, and simple. So my vote has been for your thinking, but I see the other side’s argument. Oh, I tend to agree with Marcus on #1 - #3.

In regards to point #3 I really thought there was more at stake than a deduction. I thought if you can’t allocate enough shares by value it can’t be done. I double checked a couple of my client’s ESOP documents. They all say if you can’t meet this test it can’t be done. It sounds like you have tried the more standard solutions so here is a lead to a possible “out of the box” solution. Do you have access to the Aspen Publishers ESOP Book? In the 2010 version of the book Q12:21 makes an interesting if vague comment. It says: If a deficit exists because of the fair market value rule, the employer will have to contribute additional shares to the plan to make up the deficit….. It goes on to make a number of qualifiers. But does that make it sound like one could use treasury stock to make up the difference? You now have heard 100% of what I know about this possible solution. I just remember reading that comment years ago. I tucked it in the back of my brain in case I needed it. I have never followed up on it. I have never had need to try using treasury stock to solve this problem. If anyone else knows about this solution, or if you find out more about this solution I would be interested in knowing. Not much to go on, sorry, but it might lead down a good path.

Your question is a little hard to understand. Is the problem you are using dividends to pay the ESOP loan and the value of the shares release are worth < the amount of the dividend?

This discussion thread should answer most of you questions. I have looked for a MADITORY contribution there is a clear self correction method out there. But if it is a discresionary contribution as a practical matter the contribution becomes a current year employer contribution as far as I can tell if you get much past the deduction deadline. http://benefitslink.com/boards/index.php?s...&hl=deposit

Does anyone know if using this note in an IRA will create Unrelated Business Income Tax issues? Here are some other ideas you might want to look into to get the owner some of his money without the IRA idea. The Put note rules seem to be such that one just doesn’t see this done much. I think you will need to find outside or asset security for the note. Is the owner still within his diversification period? If so, have him take either the25% or 50% he can take out via that method and work on the rest when the company/plan has the cash. Before he retires would it be possible to add an in-service withdrawal provision allowing people > x age to take 20% of their balance/ year. He would be able to get one in-service withdrawal. Down side of that idea is then other people could get a withdrawal and that might start a “run on the bank” such that the cure is worse than the problem. (Metaphor alert in that last sentence.) If this guy is an owner he could just wait to take his distribution. After all he knew his retirement plans and could have influenced how the company spent its money so that it was more prepared for this. I realized some of this could be the economy. I have several ESOP clients suffering currently. But we do regular liquidity studies for them so large distributions don’t sneak up on them. Those studies include asking large balance holders what their plans are. I suppose plans could also change, ie he got sick suddenly and that forced his plans to change. Obviously, don’t know the details, but if he was a major stockholder he had some say on how this situation happened. But waiting would allow the company or plan to accumulate the needed cash. Lastly, the final solution to any ESOP’s cash flow problems is sell the company. I have seen more than one company be forced to sell itself because of this problem.

You don't give much in the way of facts. But another idea you might have looked into so this isn't much help. But just in case.... If they can get a loan they could releverage the plan. If they can't get a loan because of the money problems then the case that the loan on the put needs to be secured by something besides their good word is that more strong.

I would add if it can be done without violating anti-cut back rules use the 5 year installment option to pay people out of the ESOP. ESOP are allowed to pay people over a 5 year period. Many document are written to allow that option to be used. You are paying people over 5 years without the loan, needing to secure the put option. Also, is this a S corp then you have a new set of problems. This is going to be hard to solve via a chat board.

Given the new set of facts I would add you might have a problem of giving investment advice without the proper investment licenses. PT issue could be an added bonus problem. This new firm I work for get a $15 check from one of the platform providers if they roll over to them. So far I have never heard anyone in management think those $15 checks are worth enough to make an effort to encourage anyone to roll to their funds. So I am not sure there is a conflict in fact. Although I get the idea of a conflict in appearance might exist. As such if it were up to me I would end the practice. Risk/reward seems out of balance.

Ok, I think I have a grasp on how this is suppose to work. My client simply forgot to deposit the 2009 match. He would like to keep his promise to all his employees. Is there a correction method to do that? The hardest people are the terms with no compensation in either 2010 or 2011. They can't have an annual addition so they would seem stuck. Can this be fixed via a correction method?

You know back in the ‘80s my cost accounting teacher asked the class one day, “what is the perfect score on the CPA exam?” Someone bit and said, “100%”. He said, “no, it is a 75”. His logic is a 75 is the minimum score to pass. No one ever asks you what your CPA exam scores are, they simply ask you if you are a CPA. So if you score a 76 or higher on a given section you simply studied too much. Here it is 2011 and my CPA has opened many a door and no one has ever asked me my score. By the way I got a perfect score on all but one section of the test. They should tell you your score. I would have been curious if they had not told me my CPA scores by section, as evidenced by the fact I can tell you over 20 years later what my score was.

Thanks

Does anyone have the cite for the ADP/ACP test part of the above? I know the cite for the other parts. Thanks

This answer needs to be double check. I only had one client in the after 2001 with after-tax money in the plan. When they started allowing after-tax to be rolled into IRA’s I thought they changed the rule for rollovers. I suggest you read 402©(2). Here is the section quoted below: (2) Maximum amount which may be rolled over In the case of any eligible rollover distribution, the maximum amount transferred to which paragraph (1) applies shall not exceed the portion of such distribution which is includible in gross income (determined without regard to paragraph (1)). The preceding sentence shall not apply to such distribution to the extent— (A) such portion is transferred in a direct trustee-to-trustee transfer to a qualified trust or to an annuity contract described in section 403 (b) and such trust or contract provides for separate accounting for amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or (B) such portion is transferred to an eligible retirement plan described in clause (i) or (ii) of paragraph (8)(B). In the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to paragraph (1)). I believe the highlighted portion says you treat the taxable portion as going into the IRA first. But given my limited experience I am willing to say double check me.

We do it here. For some we make copies of the brokerage statement. The asset list can be almost an inch of paper. I have a hard time believing this is what they had in mind. But it seems to be the literal rule.

Or to be a little less trusting. What if he takes the loan out and the QDRO comes in saying she gets 100% of the benefit. The trustee would have a real problem. Are you sure they can trust their employee? I have seen people do worse in a divorce then what I have just described. I would never recommend the client doing this deal.

I saw joint and thought joint checking account.