ESOP Guy

You would be better off asking such a plan specific question of the plan. Most state plans I am familiar with, which is a pretty small number, all have people you can call or e-mail with such questions.

My issue is I can't think of a fact pattern where a SH contribution would be in Box 1 much less in Box 1 and not 5. So either the W-2 has an error as suggested or the fact Box 14 is exactly the difference between Box 1 and Box 5 is a very odd coincidence.

I think your assuming the box 14 amount is the difference between Box1 and Box 5 is flawed. I think the better theory is that is just coincidence. There are a lot of things that can cause a difference between Box1 and Box 5 that aren't reported on the W-2. All Section 125 deductions come to mind as a common difference that aren't reported on the W-2 any place. Your plan document ought to define compensation. If it says taxable income from the W-2 or something that means that I have always understood that to be Box1. It has always been my understanding Box 14 is just an informational box.

Yup the term "1099 employee" doesn't legally exist. You are an independent contractor (IC) or an employee. As pointed out ICs are issued 1099s and employees are issued W-2s. More importantly this isn't something you get to just decide or negotiate. Either a person is an employee under the law or they aren't. If they are an employee issuing them a 1099 just means you are breaking the law by not treating them correctly not that they are ICs. So to answer your question: ASSUMING the ICs are legit there is no coverage issue as they aren't employees and most likely are excluded by the plan provision that allows IC to be excluded. The bigger problems come into existence if the assumption they are properly treated as IC is not right. As pointed out is how much are you responsible for the IC vs employee determination? Also, assuming this plan has a provision that say if the IC are later determined to be employees they are still excluded will make coverage testing a problem. So what do you and your firm need to do to make sure you are protected if this goes bad.

I would tell the auditor. Depending on the size of the plan $22k will be declared immaterial by the auditor. Besides give the size of the mess, they are still working on 20018, you are going to need the auditor's help.

I would think you need to look at the plan's definition of hours here. For example: If this is just pay for work in 2020 that didn't get paid until 2021? It seems most plans would say this the hours that go with that pay are 2021 hours. Likewise if this is vacation pay that is paid to this person in 2021 my guess is there are hours that ought to be attached to the compensation. If there are comp and hours in 2021 I find it hard to say this person didn't render service in 2021 for these purposes. I can't cite anything to go there but that is my thinking. I guess deep down what I would really do is figure out which way to do the coverage test that this person hurts the test the most and if it still passes document that fact and move on. I would only spend any time on this if this one person is the difference between passing and failing. At which time I might ask the client if they are willing to get the plan's attorney to opine on this topic. That is sort of the practical answer. I get some times working it out now helps when it matters more in the future. In the end this is just grey enough you could most likely make a good case either way.

Yeah I forgot about standardized prototypes. I haven't worked on that kind of a plan document for over 15-20 years.

As far as I know there is no exception or rule that allows for the return of the funds. I can tell you also if I were faced with this situation I would be saying and my bosses would be agreeing: we want something in writing from the counsel before we help do this. We want written direction from the plan sponsor and trustee also. We would want pieces of paper we can pull out to protect our firm if this gets bad.

I agree with the above but find the "OR" the most interesting part of this whole thing.

I assume the issue is a lack of a SSN. I get an undocumented person might not feel comfortable going to the federal government to get a number but it can be done. An undocumented alien can apply for ITIN no questions asked. https://www.irs.gov/individuals/individual-taxpayer-identification-number I quote the website: They are issued regardless of immigration status, because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code. ITINs do not serve any purpose other than federal tax reporting.

Define certified. Do you actually get them to sign something saying the census is true and complete? If so, I have never worked for a place that does that in all the decades I have been in this business.

Have you tried to simply Google 401k TPAs near you? Get a local firm which most likely does this line of business. A lot of people I know pretty much run their whole TPA business model on small plans like this.

The whole 1099 employee is typically something I mention but didn't' this time as it is clear the original questioner has no control over the determination. As an observation back in the '80s my first job was as an IRS Revenue Agent. If we saw a situation where a person's job basically didn't change but they went from employee to IC we would challenge the change the vast majority of the time. To us it was simple. If there were an employee and there was no meaningful change they are still an employee. For some reason a lot of people have gotten it in their head this is something you can decide and negotiate. The employee status determination is a legal determination. The rules aren't always the clearest but there are tests and if they say they are an employee they are. Like I said none of this is your control so I am mostly just on my soap box. I will get off now.

You have to take it away. If you read the document closely it will have a provision telling you what happens if a person is given a contribution in error and I can't imagine it says anything but take it away. Read the document closely I am sure that provision is in there and what it says. If you are using a prototype it will be in the base document. Failure to fix is a failure to follow the document which can disqualify the plan. Maybe one of the lawyers that come by here can tell you if you can do some kind of correction that allows you to amend the plan document to fix this. But my guess is if you can do this the change won't be worth it. I seem to recall it might be possible to change the eligibility for everyone to something short enough to allow this person into the plan but that would mean you would have to do it for everyone.

It sounds like they are retired per the plan document given what you said in your first comment. But double check the plan's definition of Normal Retirement Age and Date to confirm. But it sounds like they terminated after both NRA and Normal Retirement Date.

They are claiming he isn't an employee by putting him on a 1099. So he can't be treated as an employee for plan purposes and isn't on the tests.

As far as I am concerned when it comes to 8955-SSAs follow the saying: when in doubt D If you aren't sure the person was reported on a prior 8955-SSA report them as a D if they meet the criteria. The fear people come back with is: well if I report a D that wasn't an A won't we be admitting we failed to report an A and the IRS will.... I have NEVER seen that. On the other hand you can search Benefitslink for all kinds of threads where someone got the letter and demanded the plan prove they were paid. If you read the rules carefully the plan is supposed to keep enough records to prove that forever. It happens a lot with a change of TPAs but it is the plan admin/sponsor's job to keep the records not the TPA's. In short I have never seen any downside "when in doubt D" but I have seen people spend a ton of non-billable hours trying to figure out if a person has been paid to their satisfaction. Yes, most people who get those letters accept the plan saying, "we shown you aren't due any benefits" but you get the hard cases now and then.

I have always understood this had to be included in the tests as long as the pay was for hours worked and not some of the other kinds of post severance comp. It has been a while since I have done 4k plans but that is my memory. Where I see a version of this is we typically would say where I work if an ESOP says there is no hours or last day requirement for retirees we would give this person a small 2021 ER Discretionary Contribution allocation since this has to be included in comp.

it has been a long time since I have seen such an exclusion but I thought if you did this it was subject to 414s testing as the general rule was you had to include post severance comp that was for working and would have been paid had they not terminated- as opposed to unpaid vacation pay or sick pay paid after termination. So this exclusion isn't a statutory exclusion. Put another way 415 comp includes trailing pay for hours worked and 414s says 415 pay is a safe harbor. That exclusion takes you out of the safe harbor of using 415 pay. Like I said I am doing this from memory so I am happy to be told I am wrong.

Read the plan document very carefully! It will define Normal Retirement and Normal Retirement Date. Reading those definitions will answer your question. They will most likely tell you when a termination is a retirement under the terms of the plan or not. This is not a question of law or rules. Nor is a retirement decided by the person or the plan sponsor. Either they are retired under the definition in the plan or they aren't. The plan document is all that you need to read to know your answer!

I have an ESOP where the family that sold the stock to the ESOP received warrants when the sale was closed. That is clearly synthetic equity. In 2021 the family give some of the warrants to a charitable trust they control but the assets in the trust have to be used for charitable purposes. Are those warrants still synthetic equity? Am am leaning towards no since no one in the family is a beneficiary of the trust but I am not finding a direct cite. Does anyone know of a direct cite or has a thought let me know.

Yup There used to be a time you could try asking for the penalty to be waived but with it being so large now the risk isn't worth doing that any more. You file DFVCP 100% of the time.

That might be the way it works but that would be rare unless the stock is publicly traded. More likely the cash is put into the KSOP and invested in mutual funds like a normal 4k as there are issues with using EE money to buy shares. So in most KSOPs it really is just ER money that is being invested in the company shares. In fact most of our KSOPs we help clients run are this way. The EE money uses a platform to allow are the normal daily valuation functions you find in a typical 4k plan and it is the ER money that is being used on the "ESOP side" of things. This is so much so you can almost treat them as two plans at the practical level even if they are legally a single plan. Our 4k group takes care of the 4k side of the KSOP and our ESOP group takes care of the ESOP side of the KSOP. It is only when you get to testing, 5500 and some other issues do we have to look real hard at what the one plan does. Or the cash is put into the KSOP and if company shares are being bought the EE money is used to fund the distributions of people leaving the KSOP. The buy/sale of company shares is happening inside the ESOP. However, the main point is still you have to follow the rules in terms of depositing the cash into the trust. The rest of this is just discussions of what you see happening in KSOPs for fun.

You can allocate contributions on pretty much any rational basis that can past testing. And to state the obvious the testing will be based on percentages of compensation. I had an ESOP years ago that allocated 25% of the contribution on Year of Service for Vesting over total Years of Service for Vesting. The other 75% was on comp/comp. It passed all the needed testing so the lawyers signed off on the idea.

Yes, a KSOP can have late deferrals. A simple example why it could matter. Let's say the late deferrals aren't in the KSOP trust when the company declares bankruptcy the creditors of the company could get those assets that belong to the participants. You could reply the stock will be worthless what does it matter? I suppose that is likely but many KSOPs do have investments besides the comp any stock. In fact most KSOPs I see don't put the deferrals into the company stock just the ER contributions but it doesn't always have to be that way. Besides when does the DOL care about logic? The rules say get the deferrals into the plan by these deadlines so you better follow the rules.