ESOP Guy

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.

Yup no on or before. It clearly says you ignore the age/service requirements if they are employed on Effective Date. So the general rule of you must look to all service when deciding if the age/service requirements have been met. So Bird is right. If we assume the plan has 1 year service requirement it doesn't look like this person enters. So now to answer the original question you need to apply any age/service requirement looking to all service, including service before the Effective Date, with the employer and ignore the exception waiving those requirement as he was not employed on the Effective Date. This is no different than any other rehire. Just decide if the prior service met the age/service requirements or not. Most documents, might have to look to the Base Document, should spell out when a rehire enters the plan.

I agree with this. Which is why I spent so much time asking if it really says "on or before". To be very clear. If it doesn't say on or before it is "no". If it does say on or before I don't see how it can't anything but a "yes" and the person who wrote that document ought to be ashamed of themselves.

Does the waiver of age and service really say on "or before"? Or does it say anyone working on the Effective Date enters on the Effective Date? You can't ever ignore service before the Effective Date so to me the answer here hangs on the exact wording of the waiver. If they really wrote people employed on or before the Effective Date they were sloppy in writing the document. If they meant to write "or before" and didn't think of rehires they were still sloppy. I would think about getting the attorney who wrote this document (if there was one or the person who wrote it) to opine on this. Once you set precedent I would document so the plan is consistent going forward. I would also get the client to sign off as Plan Administrator to agree. However, if it really has the "or before" language in place I would tend to agree with Riley- or before means or before.

I have never really thought about this before but can you just game this to hit those conditions? You put the person in their own group and then declare any group that has a a set of conditions will get an allocation as define for the group? Your group now didn't get an allocation because it failed to have hit the allocation condition. I really am asking here as it just came to mind.

ESOP shares do NOT count for HCE determination.

If you have a copy of the plan document read it very carefully and see if it authorizes the Plan Administrator to do interim valuations at their discretion. Most plans documents allow for it and it is just for that kind of situation. There is a good chance they are all good. But it is very dependent on how the plan document was written before they did the interim valuation. If you search this forum you will find a bunch of threads on this very topic from that time period. That might help you get more background on the topic and the issues people were talking about back as Covid started to hit the markets.

Once again you need to go back and read what people are telling you. You have two issues here and you need to work through both of them in order to get the correct answer. Issue 1: There shouldn't be a way a person who has been gone 6-10 years ago who didn't forfeit. So study the document and figure out what SHOULD HAVE HAPPENED with those accounts and when. You have a failure to follow the document it looks like. A decision needs to be made how you are going to correct that problem. Issue 2: Once you correct issue 1 you may or may not have to worry about is these people can be forfeited or need to be made 100% vested because of the plan termination. I can't imagine the plan will have to vest them. But it the answer will most likely fall out from the correction of the correction of failing to follow the plan document.

This is my question. I THINK there are ways to get a person treated as a trader and all this income is the profits from their trade and business but that often times means they pay the payroll taxes at the LLC or personal level and stuff like that so very few people do it. They need to talk to a good tax person in my opinion before they come to you.

I fully admit I am a DC guy not a DB guy. So what comes next could be worthless. However, in the DC world if a plan was changed to stop people from being able to accrue a benefit that were still employed by the plan sponsor the conversation would be if we have to make everyone 100% vested. The Partial Plan Termination rules, which as far as I can tell cover both DB and DC plans, are clear a plan amendment can trigger an event that would make the affected people 100% vested. So if this withdrawal is anything like a plan amendment I think one might need to ask, "are these people really 100% vested?" Like I said I am happy to be told this is nothing like what I am talking about and I should go back to my DC world and be a good boy!

Not directly related to your question but I have some experience with this kind of stuff with ESOPs so I will share. Be careful you keep track of the differences between the plans and the SH rules. For example in an ESOP you have to allow a person the ability to take a diversification at age 55 if they have been a participant for 10 years. SH benefits can't be taken out as an in-service until 59.5. Most MP plans don't allow in-service distributions. I forget if SH have to be allowed to be taken out at 59.5 via in-service or that is just an option. It has been a long time since I worked on MPPs. I guess I am saying I would make sure there aren't any contradictions in the rules like that which need to be thought through. Both MPPs and SH have very specific rules at times.

I actually missed the "wild west" days of being able to do bottom QNECs. We had a client in the ''90s that refused to say no to their HCEs and refused to do refunds for failed ADP tests. But they didn't really want to put money in the plan to pass. We would do these crazy bottom up QNECs that would give people who quit in the first week of the year 100% of their deferral as a QNEC that would quickly get us a passing test for a fraction of the cost of a flat or consistent percentage to everyone QNEC. I had a boss in the early days of Age Based PSP plans that wrote crazy formula like we would allocate 3% of pay on the first $100k of comp and 75% of pay on all comp over $100k. Throw in those very loose age based rules in the '90s and you had a passing plan. And my land some of the perpetually refinanced participant loans I used to see! As far as I can tell some of the early TPAs I worked for are the reason there are so many rules regarding how not to abuse the rules. 😁

If you read the rehire provisions of the plan document they don't make any reference to the effective date of the plan. They simply say if this person is rehired after working 12 mo and having a 1,000 hours they re-enter upon rehire. If so, they enter upon rehire. I believe that reflects the general rule of the law. You can't disregard service prior to the effective date of the plan for entry. Check the plan document very carefully. I am convinced it will answer your question.

While this first day/any day thing is interesting I don't think it is answering the person's question. I think they are asking if a person turned 70.5 in 2018 and was a 5% and now in 2021 is no longer an owner, can they stop taking RMDs if they are still employed for example?

It has always been my understanding that the better question is: Can you cite where they are allowed to stop? If you read the rules it is clear if they are a 5% owner they must start taking RMDs in their required date once they reach the age that triggers the RMD. They must take them every year after that unless you can show why they can stop. There is no rule that says they can stop so they must keep taking them.

Double check the document. Some (well drafted documents) include language that says or within so many days of knowing the balance. I have never seen an ESOP get in trouble for holding paying such a person until the correct balance is known in all the decades I have been doing ESOP work. I think the Reg quoted by Rocknrolls2 is the key.

I think the more important question is do you have to follow the service spanning rules for this allocation condition? If so, this will be a major pain. The service spanning rule is hard enough with vesting and eligibility. I would hate to have to review this every year for allocations unless this is a pretty small group. I have never looked into the question does the service spanning rule applies or not to this but I would figure it out before you do the first allocation.