ESOP Guy

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.

Maybe I am not understanding your question, but here goes the answer to the question I think you are asking: But from a legal perspective the participant doesn’t own the account in a 401(k) plan, or any other Qualified Plan. To me this isn’t about the Code, it is about the legal form of the plan. All the assets are owned by a trust. There is both a trust document that describes the trust’s operation, and a plan document that describes the plan’s operation. Often times the plan and trust document are written as one document. Obviously, the two documents follow the rules set out in the Code. But it is the documents that define what is going to happen. A participant obviously has an interest in his account, he has rights under both the plan and trust document, but that person doesn’t own in the legal sense anything. The reality is no 401(k) document is going to give a joint interest in a benefit; the company is only interested in giving an interest to their employee. The only rights a spouse is going to have are found in the rules about beneficiaries, QDROs etc. I hope that helps.

Where do you find these clients that lead to your questions? Do they hold comittee meetings on how to make the most complex and stange plans around? Please read the humor in my questions, but wow these last few questions.

Although most documents will even tell what to do if the person due a payment is believed to be incompetent. Having said that what if might tell you is if there is a person you are satisfied is a POA you can make the payment to that person, for the benefit of the person due payment. At which time the questions still stands. I would start by asking for paperwork from the POA that would allow you verify they are the POA. I would then follow the other advise given, have an attorney look it over.

Maybe the lesson here is if minimum wages laws don't apply always pay the wife $1/year. You then have paid service.

I will admit what I know about S.H. 4K plans would fill a small pamphlet. I was curious about the term triple stack match, a term I had never heard before. I found a rather old thread discussion what these were and the rules behind it. They seem to be commenting about your question. The real question is, “have the rules changed much since this was written?” But here you go. http://benefitslink.com/boards/index.php?s...0&hl=Triple Stack Match&st=0

By the way if you say she should be in the day she first gets paid because she had the years of service and hours already how does that change prior year's testing? After all you are saying she worked >1,000 in those years, she had 1 YOS, just no comp. Should she have been a zero on the ADP test, a person on coverage? One might reply that would tend to make the test better, which is true. But you didn't put her on those years because you didn't think she was an employee those years. Now you are saying she was. I think you are opening bigger can of worms then you think if you let her in. Sorry, you just got a stream of thought written here.

For what it is worth you are correct. You would think this is addressed some place. But it isn't and this issue seems to come up alot. What I have and most of the people I have worked with over the years have solved this issue is look to other parts of employement law/practice. For example, did this Dr. ever set up his wife with the other reqiured or optional hallmarks of an employee. For example, do the other employees including the Dr. all have benefits given to all employees? If she did not have them that would seem to indicate they really didn't treat the wife as an employee. I will admit most of the time it isn't a spouse of an owner this question comes up so some of this is less relevant. Honestly, it doesn't sound like they ever treated here as an employee and now you are looking for a way to rationalize doing so. The problem is if you are wrong you just let a HCE into the plan too early. On the other hand if you recommend to keep her out for a year and you are wrong you have keep a HCE out of the plan too long. The bigger risk is in letting this person in too early, not too late. The IRS is going to challenge too early, not too late.

You;'ve just violated the unspoken code of a TPA. NEver EVER do a refund that you don't have to!! Even if you make 10 cents on the dollar when you add up all the tiome you spent You have different clients then when I used to do alot of 401(k)s that had refunds. Those people so resented giving their employees any more money they would always take the refund. This was back in the days when you could really abuse the cross-tested rules (early '90s) and those people were the reason we now have the cross-tested rules we have.

You need to give more detail on the type of plan. ESOPs hold S corp stock all the time. For what it is worth only an ESOP is the pass through income exempt from the Unrelated Business Income Tax. So even if the another plan can hold S Corp stock you have an UBTI issue. That is why S corp ESOPs are so popular. If the ESOP owns 100% of the S corp stock no one pays income tax on the business income. I should add there are very complex rules regarding S Corp ESOPs. So before anyone goes off and thinks of setting one up you should talk to an ESOP expert. ESOP Guy, thanks for your answer. I have another question. The ESOP exception for s-corp stock under Section 4975(f)(6)(B)(ii) appears to work one way (i.e., sale from shareholder-employee to ESOP). Is there another exception out there for the reverse (i.e., ESOP to shareholder-employee)? Randy you are reaching a point where I think it is ill advised to form your positions via a chat board. I have never seen an ESOP sell shares of an S corp to one of the S Corp shareholders. The ESOPs I have worked with have tended to be a method of helping the current owners cash out. Given the cost a PT problem can cost someone a the use of an ERISA attorney here who can know the whole set of facts sounds like cheap insurance against future problems. Sorry can't be more of a help.