ESOP Guy

I have both seen and done that. I doubt it is right. What I have found is the few times a plan didn't have a fidelity bond and a DOL or IRS auditor comes around they just make the plan get one. I have never seen them get in actual trouble. Having said that not following the rules and hoping for no problems is not a good plan obviously.

Legally speaking it is my understanding there is always an estate. They just happen once you die- your stuff enters your estate regardless if there was a plan or not. A plan just defines better what an estate looks like. That might not help much if you can't find anyone who can do something with the estate. You are most likely going to need the plan lawyer to tell you what to do. I would at least start by making sure the plan says document what has done to find an heir. Try outside of the box thinking. You would be shocked how many times we made a payment because we found an obituary that named the church the funeral service happened at. So we called the clergy to ask if they knew how to contract any family members of the deceased. Most people hold a funeral at church do so at the one they attended regularly so the clergy knows the family. Most obits name all the surviving family members also. Most are online. You MIGHT be able to defend a forfeiture and reallocation if you can document a very good search but I would want the plan lawyer to make the ruling.

Show how often I file DFVCPs!

If they can't get the audit done by the time the 2020 is due this is a valid strategy in my mind. The DFVCP fee has the same cap regardless of the number of forms filed late.

I can tell you for a fact if you file the 2020 it is just a matter of time before you get a "where is the 2019" letter. I would delay the 2020 filing to the actual due date and do your best to convince the client to get that 2019 filed by no later than that day also.

Maybe it is me but your question is confusing. Are they changing the company name or the company and plan name? There is no need to amend the plan document if the company name is changed. There is no requirement the plan's name changes if the company's name changes. If they are actually going to bother changing the plan name then I would assume that would take an amendment as that is defined in the document. That strikes me as a waste of time and money to do. I have seen companies that close down change their name from XYZ, Inc to XYZ liquidation (or close down) corp. and not change their plan name. So maybe a little help on what you are asking is in order. Are you just worried about the 5500?

I can't imagine a Plan Administrator would ever want to take on that burden of picking. As for the participant if the document doesn't give them the power to pick I would say "no". I have never seen a document that gives such power to a participant. I can't cite anything but that would be my answer every time.

To be clear are you saying this person will not be 72 and a 5% owner at the same time? Or you saying this person will simply not be a 5% owner by the 4/1 that is the first required payment date? I just like to be very clear on these questions as I think it is easy to get the facts confused. RMDs are very fact driven determinations.

If they are a 5% owner on any day in a year they are a Key Employee https://www.law.cornell.edu/definitions/uscode.php?width=840&height=800&iframe=true&def_id=26-USC-1004659535-204952971&term_occur=999&term_src=title:26:subtitle:A:chapter:1:subchapter:D:part:I:subpart:B:section:416 That link is found if you click on the key employee link here. https://www.law.cornell.edu/uscode/text/26/416

I have only once had to even start down the road of helping a client get an annuity for a payment. A person asked what an annuity would look like and the conversation was serious enough that the plan sponsor has to actually get quotes from insurance companies. What I remember most from that was all the fiduciary concerns. What if the insurance company goes bankrupt and the plan has to still provide the annuity amount? In the end the person choose a lump sum so it was all wasted time. We billed it anyway but it was wasted time. You would hope (I know dumb hope) that any such rules would give some clarity on the fiduciary liability in that situation. Yes, the balance size would reduce the cost. And maybe if it became a requirement people would start to automate the process as it would final be worth the investment. I just remember even one notice could take 20-40 min to get estimated annuity amounts. Get them loaded into a letter to the person. Everyone getting happy that there was enough cover your hind end language that the estimate as just an estimate and if they asked for annuity the monthly amount could change. Like I said you might create the form letter and plug the annuity factors in software or a spreadsheet to allow for a mail merge to cover that. But whatever time you spend would most likely be a waste since almost no one will choose the annuity based on history. I guess I am just not impressed with the idea but congress has to prove they are "doing something to solve problems"!

Back when I worked with MPPs or PSPs with an annuity option I had been in the industry for a good 15 years. I think I saw 1 person take an annuity that whole time. I will admit the universe of plans offering annuities was pretty small so the results couldn't have been large. But I have seen no actual interest for this option over the years. It would be interesting to hear from the DB folks: how many people who have a lump sum option or an annuity option take the lump sum vs annuity. I always got the impression from the DB I know that if a lump sum was offered it was taken way more often than the annuity. As in something like a 90% vs 10% type ratio. I could be wrong as I wasn't taking a formal survey. So such a law will increase the number of plans offering it but I doubt it starts a trend. On the other hand the annuity disclosures for MPPs and PSP with annuity options were a huge pain to prepare and send it. So my guess is it will increase costs without much benefit. But I might be a cynic.

You would need a plan EIN for account ownership. Also, if the plan writes distribution checks from those accounts and does withholding it has to have its own EIN for withholding deposits, 945s and 1099-Rs. You can create a real mess if you deposit the withholding from a plan using the sponsor's EIN. The issue is you can find threads on here if you get a plan EIN and don't use it for a time the IRS will in effect declare the EIN no good. So this is a bit fact driven how important it is to get one.

I think a participant can rollover any part of their distribution to a Roth which is what that seems to be saying. They just have to accept the tax consequences. The question is can the plan force out after-tax to a Roth? I have not seen that. I have seen a force out to a regular IRA and working with the IRA company to record the basis that is in the IRA. I think the best answer is to put all of the money in a single IRA and get the IRA company to understand there is after-tax money in the IRA that has a basis. For one thing most of the time two IRAs means two sets of fees to set up the IRA and annual fees. I would be worried if that is a fiduciary concern if you set something up that has more fees than needed. I know Millennium Trust Company is able to handle what I just described.

I am doing this from memory of the deduction/excise tax rules but as a general rule failing to take a deduction you could is NOT the same thing as something is not deductible. As such before I would go down this route someone would have to give me a clear cite that not taking a deduction and paying the excise tax allows you to time the allocation like this.

In fact this is what a person is supposed to do to avoid things like what is in the recent thread about how to pay someone with a fake SSN. My understanding is even a person illegal in this country can get an ITIN for these kinds of purposes.

If this gets challenged it is the retroactive changing of what the deposits were. I have always thought this is a bit aggressive. It happens in ESOPs somewhat frequently when they find out they are violating 415 so they suddenly claim the contribution was a dividend. I haven't seen a plan that does this get audited but my guess if the auditor detected the retroactive nature of the transaction that is where the objection is going to be.

Way back in the early 2000's I saw this also. The plan sponsor worked with the prosecuting attorney to make taking a cash distribution and turning it over to the plan sponsor as a condition of the plea agreement. Based on the way the question is written that might be too late but might be worth having the plan's attorney reach out to the prosecuting attorney.

This is an excellent question by the way. Obviously it is too late to do anything about it with this plan but the firm might want to look at procedures and controls if this was missed.

Once again if the PS provisions say the forfeitures can reduce the PS contribution all you do is have the client declare a PS cont equal to the forfeitures. The forfeitures will completely reduce the PS cont so the client doesn't put money into the plan. The forfeitures get allocated as the PS cont. So does the plan document say forfeitures reduce the PS cont?

What Lou said. If it is a reduce plan you simply have the sponsor declare a PS cont equal to the forf. Also, check to see if forf can pay fees.

Because of these issues you might want it to read something to the effect they get paid the year following the year they have a One (1) year Break in Service. I see that in ESOPs all the time. I will admit this means if a person terminates in 2020 and has over 500 hours their BIS is 2021. So they don't get paid until 2022. The client might not want to have the delay be that long. However, I don't see how anyone gets paid earlier than 2021 with that kind of language. I guess it might be worth having a good conversation with the client to make sure they and you understand the actual goal for putting any kind of delay into the plan's distribution section. There are plenty of good reasons just make sure the client understands what they are doing. After all they are going to get the calls from ex-employees demanding to know why they can't get their money.

I don't know about legal but that sure sounds like a great way to end up with a VCP filing as people get confused and don't follow the document. I have been working for TPAs since the early '90s and there are plenty of people in the typical TPA firm that struggle to read documents much less ones that make lots of references to other sections of the document. Now we are going to reference another document people have to keep track of and look at. There are just times when can we do this ought to give way to the KISS principle. KISS= Keep It Simple Stupid.

Maybe... we would need to know more. If they are really paying very low wages to even people doing professional work this could be part of trying to not pay a reasonable compensation. This comes up in family owned companies that are S Corps. You pay a very low pay which causes the company's profits to be higher. That income flows throw to the families 1040s. They take S Corp distributions to pay for the taxes and to keep some for themselves. You don't pay payroll taxes on S Corp distributions. There are rules against this- the reasonable compensation rules. So if they are upping their compensation, to make it look like they are paying closer to a reasonable compensation, but then in effect taking the pay back via the pre-tax elections that forfeit which allows them to pay via S Corp distributions they would be saving taxes. If that is what they are doing it sounds like a lot of work for saving hundreds of dollars at best to me. But I know people who will go through a lot to deny the government $1 in taxes.

I can't think of any special issues since this is a plan termination.

Are the ESOP balances now in cash or is it in company stock?