ESOP Guy

An old discussion that might help or hurt I remember having. The question that I had raised was: what if a person meets eligibility in the middle of the year and the plan says everyone enters retro back to 1/1. The plan had 119 participants before that person as of 1/1. Did they need an audit? Several people took the position of "no". Not 100% the same but similar.

My advice to you is to get a conversation with the appraiser and trustee (especially if it is an outside trustee - bank or trust company). If there is an outside trustee they will have most likely have thought through this but mistakes happen. However, the idea they (both the trustee who is supposed to be reviewing the appraiser's work) have to defend their work is reasonable. Based on your description I agree the denominator sounds wrong. Those two should be able to defend their denominator. To be clear if I implied I thought someone did something wrong I did not intend to do so.

The first line in bold: Do you know that is true? The second line in bold: Are you sure that is true? To know those are true would require you to know the inner workings of the ESOP and see the appraisal. If you have access to that data fine but the average participant wouldn't know this for sure. I am not an appraiser but I don't know of any appraiser that would do what you are saying if I am understanding your correctly. If you have the kind of access to know what you know do you have access to ask the appraiser questions? They tend to care very deeply about the denominator for the reasons you spell out. I have seen them do so pretty good math to account for the changes in outstanding shares for 12/31 transactions over the years.

Man I wish I could have worked for some place with that rich of a benefit as a whole goat for 25 years back in the day! Most I found I had to share a goat.....

I am not sure what the question is also. Read the plan document. Does the plan allow anyone to enter the plan as of the first day the plan is effective? If so, you need something besides 0 there in most cases. You can make a case if the plan was signed on 12/30/2020 and effective back to 1/1/2020 that no one was a participant on 1/1/2020 (thinking of a PSP not 401(k) in this example where you make it effective back to 1/1 to use full year compensation). I have seen people make that case but it tends to only come up if it makes a difference if the plan needs an audit or not. It looks like your numbers are so low that doesn't matter. So go with the first part of this. What does the plan document say? Did someone enter the plan as of the first day of the plan?

In fact I prefer the documents to say if there is no beneficiary and no surviving spouse it list a few types of family members the benefit goes before it says it goes to the estate. Paying benefits to an estate is a major pain for the family involved. Unless there is a state law that helps out often times that means the family has to get an EIN for the estate. You can't send a benefit paid to an estate to an IRA so the estate has to pay taxes. You watch how much work it is to get an estate paid is for a family and you will never fail to complete a beneficiary form ever again.

By after tax I mean we reported the IRA had a basis so the person didn't pay taxes twice on the money. Once again I don't claim there is clear guidance. The problem is the government hasn't given us any guidance. So we did something that seems fair, they don't get taxed twice, but allows the plan to end which is also fair. To me until the IRS or DOL gives guidance to a situation that is rather common they can live with the industry's solutions. For them to demand we follow the law and then not give us a legal way to solve a common problem is not a rational expectation on their part.

I can't cite anything but we have done what you suggest in your first comment. We have set up an after-tax IRA at Millennium Trust Company for that kind of fact pattern. It is that or escheat it to the state which is grey at best also.

I am with Lou here. This comes from my days at the IRS back in the mid '80s. A person is an employee or they are an interdependent contractor (IC). You are NEVER both. Here is the part that is relevant to the original question and here..... The determination if a person is an IC or employee is based on a complex but objective test. You can debate how the test applies to a fact set but you can't debate the determination is an objective test and is NOT subject to negotiation or employer decision. You are either an employee or IC by law. So this Dr can't do this becasue you can't be both. in regards to the original question if the person really was an employee before (and they most likely were- as in 99.99% likely they were an employee) the Dr can't just wave some magic wand and declare the person an IC. If nothing changes in the relationship between that dr and the former employee the IRS will disallow the change if caught.

Isn't this fiduciary 101? The assets of the plan have to be title properly or the trustee isn't doing their job. I mean if titled wrong couldn't a company creditor try and make a claim on the plan's assets. By your logic would you be fine if all the stock was titled wrong? Or it just a question of immateriality in your mind? If the bank account doesn't have much money the risk is acceptable but not the shares???

Yes, she just got a zero check. She had gotten her tips every time she closed out her shift she worked. So she got the tip cash. As a practical matter for the typical waitress the tips is the game. My daughter pretty much paid cash for nursing school via her tips.

Sorry, late to this conversation. You might want to ask the future client or when you win the business the client how they handle and report tip income. They are required to measure it and report it on their W-2. So they might be able to measure the tips and take deferral from the wages on a check. The following is based on my memory (for what it is worth) of my daughter who put herself through nursing school as a waitress. She saved some money in the restaurant's 401(k) plan. She was required to report tips daily as part of her checkout process. This included cash paid to her and via credit card tips at the end of the night. She was actually allowed to defer on her tips at that restaurant. They took it from her check however not her tips. I remember this clearly because one time she got a zero check. Between the 401(k) deferral, and all the tax withholding it took up 100% of her wages. In fact as we looked at it my daughter and I became convinced they had to cut back the deferral becasue the taxes came first and then the deferral came out. That would be the other practical issue that would come up if you allow deferring on tips and they are cashed out daily. What do you do if the deferrals plus withholding exceed the cash wage paid for the week or two week period? Not sure if that helps or hurts but I am rather sure their is a restaurant company in the St. Louis area that allows deferrals on tips.

I have never heard anyone claim you can deduct them twice. They are considered employer contributions. In a sense they simply don't ever become Box 1 wages. So they can't be deducted as wages. They really don't come from a person paycheck by the way. We tend to show it that way to help people understand what is going on. But what you are doing when you make a deferral election is declare part of your total compensation is being put into a retirement plan. Once again as such they never became wages. I can't cite anything but I also find the idea anyone seriously claims you deduct them twice laughable. If that were true it would be announced on every 401(k) sales material and the best benefit for a company to set up a 401(k).

Sorry, a little late to this conversation. As a former IRS Revenue Agent let's be a little more careful with the "tax evasion" term. The law defines tax evasion as: “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.” A little legal commentary here: Proof of the crime requires first proving the attendant circumstance that an unpaid tax liability exists. Second, the prosecution must prove some affirmative act by the defendant to evade or attempt to evade a tax. Third, prosecutors most show that the defendant possessed the specific intent to evade a known legal duty to pay. To convict, the jury must find the defendant guilty of each of these elements beyond a reasonable doubt. https://www.law.cornell.edu/wex/tax_evasion Note there are intent elements to this crime that have to be proven to convict for that crime. the risk of prison is very, very close to 0%. Even the civil fraud case would be hard to make here. I can't imagine any Revenue Agent who found this would talk about a fraud referral. On the other hand there is a very real civil penalty for negligence that I could see a Revenue Agent who caught this would try and apply. IRS talks about negligence this way: "Negligence" includes (but is not limited to) any failure to: make a reasonable attempt to comply with the internal revenue laws exercise ordinary and reasonable care in preparation of a tax return or keep adequate books and records or to substantiate items properly This penalty may be asserted if you carelessly, recklessly or intentionally disregard IRS rules and regulations - by taking a position on your return with little or no effort to determine whether the position is correct or knowingly taking a position that is incorrect. You will not have to pay a negligence penalty if there was a reasonable cause for a position you took and you acted in good faith. https://www.irs.gov/pub/irs-news/fs-08-19.pdf https://www.nolo.com/legal-encyclopedia/negligence-versus-tax-fraud-irs-difference-29962.html Sorry for the long link choked comment but discussion of prison here seemed to be over done in my mind.

When you say you can't find anything in the document are you saying you have a copy of the full plan document and not just a Summary Plan Description (SPD)? I would expect the plan document to spell out how and when the restoration is made. It should spell ought how the restoration is computed. Does it include earnings or not? The most common provision is to not include earnings. That is to say if you account was worth $10k when it was forfeited they would put enough stock and cash into your account to be worth $10k at year end of the year of the restoration is easily 99% of how all ESOPs I have seen are written. In fact there is usually an explicit statement that someone who had a deemed distribution like it sounds you had if there is a presumption of the distribution being repaid. It might, but not always, tell you when the presumed repayment happens. If you have the actual document in pdf format I would search for the word "forfeit" and see if you can find the restoration provisions. I would also search for the word "deemed". That should help you find the deemed distribution section of the document. Between those two sections often times the restoration provisions can be found. Or go back to the company and see if they can explain the method used and maybe which part of the document they base that on. I wouldn't hold my breath on getting the document section question answered but it can't hurt to ask. In short the plan document ought to really have the answers to most if not all of your questions. So your quest for answers needs to start with finding out what the plan document actually says.

I just recently had a case in an ESOP where the plan found a person 5 years after the death. They kept trying to find the person as the mail same back. They finally got a hit on an internet name search that showed an obit. They couldn't figure out why the obit hadn't shown up before. They called the church the obit said the services were held at and the minster was still in contact with a family member.

I agree with Bill 100%. You MIGHT get a good cause waiver but if you don't the cost is so much higher than the DFVCP cost that the risk/reward makes no sense.

As far as I know your expectation is wrong. it has always been my understanding that a fiduciary can't ever fully delegate their duties. They always have to monitor and review what the experts do to make sure they do their job right. I don't think they can just assume a TPA has sent notices for example. They need to know they were sent in some way. If it is an internal trustee that is a participant did they get a copy of the notice for example? That is a big part of the Greatbanc settlement. It sets out guidelines, and I have always understood them as a guidelines not a safe harbor, to help trustee's understand if they have discharged their duty in regards to the stock appraisal. When you say are there guidelines that say you have discharged their duty and can't be assessed a penalty it sounds like you are looking for some kind of safe harbor rules regarding fiduciary duties. I think the reason you aren't finding anything is because they don't exist. I am happy to have an ERISA attorney, which I am not one, and tell me I am wrong. Every attorney I know on this topic says the way to defend yourself in this area is document your procedures and how you followed them. As long as the procedure was reasonable and they were followed you tend to have a strong defense in this area. As far as I know you can't just claim you hired professionals. They have to follow up to make sure the professional did their job.

Maybe it is part of being a "mods" which I assume is some kind of moderator but I can't ignore Mike. But If I hover over Bill's name like described I could choose to ignore him. The above is an observation.

Many years ago I worked with a bank that helped plans issue checks, 1099-R.... They sent the check and 1099-R in the same envelope. If you got a check today your got your 1099-R in the same envelope. The primary downside was people lost track of them between getting the 1099-R and tax filing season. So the requests for replacement 1099-Rs was kind of high.

Maybe you have done this already but to me you are focusing on the wrong thing. I am with Bird what is done is done move on. I would spend my time figuring out how to change someone's procedures so the withholding is done correctly going forward. Like I said maybe you did that but at our firm if we found this changing process to stop this from happening again would get 95% of our time and attention and worrying how we reported it on the 5500, fines and so forth would get the remaining 5%.

It is my understanding is what the DOL auditor will tell you if they come in and exam the plan. If the 401(k) money isn't deposited as fast as the withholding there is an issue. The only defense after that is the 7 day safe harbor.

As the plan is written you can't do it. You have to follow the terms of the plan. It seems like you could amend the plan to put everyone into their own allocation group and see if the tests pass. It would seem they would pass as it is one of the HCEs getting shorted. I agree with Mike 100% can't be done as described but someone should be able to get the document to a place that allows the plan to meet the client's goals.

I would say "yes". In fact if they wanted I think all the people who don't respond could be sent to an IRA. It wouldn't have to go to a related 401(k) if they don't want to mess with it.

What you are suggesting sounds like fraud and if so is a felony. The odd part it you could get the same result legally for minimal cost. A good divorce lawyer could get a QDRO in place that would get the results without committing a crime. Price out a QDRO and don't commit what sounds like a felony.