ESOP Guy

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?

I am an accountant who receives QDROs all the time to process not a lawyer. You will want to wait until the lawyers who know the legal parts of a QDRO to give answers before you come up with a plan of action. The one thing I will point out is you don't need an actual dollar amount written into a QDRO. Now if it has gone before a judge and approved some dollar amount that is different. But if you are trying to get a judge to sign off on a QDRO and you need to express how much you are to get it can be simply written as you are entitled to 60% (or some other percentage) as of such and such date plus earnings from that date. The 401(k) plan can determine how much money leave his account and goes into your account. We get QDROs to approve and process all the time using percentages like that. Also, a QDRO isn't a form it is a legal process that requires the plan and a judge to get fully through. Like I said the lawyers that come by this board can help you more on those kinds of details.

I am super busy today so I am just give a warning that may or may not apply being done from memory. A year ago an ESOP I work with excluded all HCEs and a very large number of their employees. This included employees who had been participants who had even gotten allocations in the past. No one had any problem with this amendment. It was pointed out that when people were checking into all of this that this amendment was a partial plan termination and all of the people had to be 100% vested. The term the ERISA Outlines Book used was a "horizontal partial plan termination". There might be too few people here to matter. But if you read the regs on PPT it says a plan amendment can cause one. I quote: Treas. Reg. 1.411(d)-2(b)(1) (b) Partial termination - (1) General rule. Whether or not a partial termination of a qualified plan occurs (and the time of such event) shall be determined by the Commissioner with regard to all the facts and circumstances in a particular case. Such facts and circumstances include: the exclusion, by reason of a plan amendment or severance by the employer, of a group of employees who have previously been covered by the plan; and plan amendments which adversely affect the rights of employees to vest in benefits under the plan. Once again it might mean nothing here as it is one person. But if I knew this before last year I had forgotten and this turned into an interesting conversation about the cost of the amendment and if the client still wanted to do it. They did but it did change the dynamic of the thought process.

I worked in the Loop (the Chicago downtown) in the '80s. I was taking graduate level classes at DePaul University at their downtown campus during that time. I would get out of class around 10pm. I would take the L which out to the suburb where I parted my car. When the Guardian Angels were on one of the cars 95%+ of all people rode in that car even if they had to stand and there were open seats in the other cars on the train. I remember them well from those days.

Is the system smart enough to know I am a boomer and not give me that section? I looked for it after I read the comment and couldn't find out what he was talking about. Still funny comment.

This is a very valid point. The last time I worked on 4k plans I had a partner at a CPA firm that had a benefits department get on my for billing one of his client $200 for an $8 earnings correction. That $8 went most to the dr as he had the largest late deposit. The partner's point was it would have been cheaper and easier to just assume each nurse should get $10 of lost earnings and give the dr nothing and not do the work. The dr only had 3 nurses. No one really like that idea but until we get some kind of de minimis rules for these fact patterns you keep running into times the cost of computing the fix vastly exceeds the fix. I agree I would not go looking for reason to irritate a client.

If you are saying my wording wouldn't allow a person hired on 9/1/2020 to enter 1/1/2021 because they don't have 12 months that is correct. If the employer wants everyone to enter on 1/1/2021 they could write such a provision. I just don't know a way to do that excludes part time people unless you can come up with an acceptable exclusion based on division, location.... But saying all people expected to work to be part time are excluded is a problem. At some point it might need to be conceded that the law doesn't allow the employer to do everything they want.

Just write the provisions to say anyone who has worked 12 month with 1000 hours into the plan enters the plan on the next entry date.... For eligibility you can't ignore service before the plan it set up. So if someone worked 1,000 hours in a 12 month period would enter on 1/1/2021. I am ignoring any discussion of breaks in service or Rule of Parity to keep it simple for a comment section. If you won't put anything in the document that resets the clock if a person worked 1,000 hours in 1999 they would enter on 1/1/2021 as that is the first entry date after they met the requirements. I agree if you say anyone working on 1/1/2021 enters all employees enter. If the client can break down their company by groups/divisions and one of them has most of the part-time employees you exclude that group/division and keep them out if you can pass coverage.

Page 3 of the instructions are very clear. https://www.irs.gov/pub/irs-pdf/i5500ez.pdf Final ReturnAll one-participant plans and all foreign plans should file a return for their final plan year indicating that all assets have been distributed.Check box A(3) if all assets under the plan(s) (including insurance/annuity contracts) have been distributed to the participants and beneficiaries or distributed or transferred to another plan. The final plan year is the year in which distribution of all plan assets is completed. The final year ends the last day of the month the assets leave the plan. You count the normal filing deadlines from that month. So 2020 can't be the final year as there were assets in the plan.

Unfortunate but the DFVCP is the best option. While no one wants to pay it the cost is reasonable compared to many other options that could leave someone at risk of the full fine. Bird's idea is playing the audit lottery which is most likely low risk but not sure I would do it.

Yup saw it in the WSJ and knew it would spark questions as this idea tends to get oversold in the media. If you are a subscriber here you go. https://www.wsj.com/articles/a-little-known-back-door-trick-for-boosting-your-roth-contributions-11625848733?mod=searchresults_pos3&page=1