ESOP Guy

I did this many years ago for one of our ESOP clients. it might have been around 2012 or 2013. We sent a letter to the IRS as soon as we found the problem to the place you sent the extensions with a corrected extension and an explanation. We sent it certified so we could prove we mailed it. We filed the 5500 with the correct EIN. We told the client we expect them to get a letter saying they filed late. We asked the client to just to send us the letter and we would reply to the IRS. When the client got that letter we responded by sending the original 5558. We sent the second 5558 and letter with proof of mailing. In our letter we made a case that the penalties should be waived because it was extended and a simple one time error happened. We documented all of this with the above paper trail. The IRS waived the penalty. The only other choice you have is to basically act like the forms are late and file under DFVC and pay your client's penalty. That method would be a sure way to know what will happen and the exact cost will be lower than if the waiver doesn't' get accepted. The waiver route is a risk and they are less willing to give them now that DFVC exists unlike in the pre-DFVC days just about any reasonable argument of good faith efforts got you a waiver at least once. The firm I worked for was prepared to pay the penalty that happened when we went this route. We knew we were going to have to pay any penalty so we decided to go for a zero knowing the risks. As long as you and the client understand the risk I would think about the waiver request idea when the fine letter comes. Lastly, this was on an ESOP and not a welfare plan and I have no idea if that would make a difference. I don't know if the people who review wavier requests for retirement plans are the same group as welfare plans. I don't now how important that difference is but I thought I would point it out.

We use PBI all the time for 5 to 10 people searches for $10 to $15/person charge - not ever $1,000s. The thing I think about their search service is they give a letter that outlines what they did that really helps document the plan did a good search in case the DOL comes a knocking. If you are looking for an online where you can simply type in an SSN I don't know what their costs for that is.

It has been a while but it would be a distribution or other income. I would guess distribution is most likely. In this regard I am with Bird it is clear there is too much over thinking of it is going. Have you ever had an IRS agent who is auditing the 5500 get into the details of the Sch H this much? I haven't and I could easily explain what these amounts are. It could be because I deal with mostly larger plans- my smallest plan has 70 people but my largest has over 20k employees and most have over 500, these amounts are immaterial. So I just don't see a need to sweat it as hard as some seem to do.

Just to be clear I do not use "other contribution" but other income- line 2(c) on the Sch H. I don't think this is a type of contribution or rollover. I don't file that many SFs.

I have shown it in the past as a type of other income on the Sch H. I don't like netting with current distributions but not sure I could point to anything hard to cite. I don't see a reason to amend prior filings. You legit though the money was out of the plan. As a rule I don't see plans carry a liability on the books until the check clears the recordkeeper's system.

It is sad to hear that people didn't do the right thing here. ESOPs as a general rule are wonderful plans. I have over the decades seen many of them make the employees rich and secure great retirements.

There is typically a bigger difference between the US Postal address and the private delivery service address. Many of the IRS service centers get so much mail they have their own ZIP Code (one on the many types of trivia I learned when I worked for the IRS) and in effect the US Postal address acts like a PO BOX to the Post Office. Since companies like Fedex and UPS can't delver to a PO Box you have to have an actual street address. So if you send it by mail use the Post Office address. If you are going to use a private delivery service use the private delivery services address to make sure it gets to the right plan. There is no preference except use the address that matches how you send it.

Not the same set of facts but the one experience that comes close to your situation is the following. Many years ago a client of the firm I worked for back in those days was audited by the DOL. It was determined the counts were done wrong for years and they should have had been doing audits for years. The DOL's position was get the audits done for all years. They showed no interest in compromise or any flexibility. Based on that very small sample size I have to say if the government figures out the audits are missing they are going to take a hard line on getting them done.

There isn't a good solution. The correct answer is get the audits done. Any other answer is the wrong one. You might be able to get a prior TPA on something but my guess it will take expensive litigation. This is just bad.

I have seen it with the older SSAs as they were paper which means someone at the IRS had to input the data on the form into some system. Like anything that isn't going to be perfect. Since it has gone electronic I don't think I have seen it.

While Peter's answer is the right answer. It is my understanding the plan has a burden to keep the records to show this person was paid. Bird's answer is the most practical answer. I find if someone talks the person and points out the notice does say "may" be owed a benefit and the plan's records show they have been paid the person goes away 99.99% of the time. It is only if they don't go away after that you need to really start to go down the road Peter layouts out as a practical matter. Just to be clear have the client look for old records that might show if the person was paid or not. To make sure their benefit wasn't forfeited because they were lost of something like that. If the plan owes them the benefit the plan ought to pay the benefit. This by the way brings me back to a pet peeve of mine. Do those stupid "D" codes on the 8955-SSA. That would solve this. As I tell people all the time: When in doubt D. I have yet to see a D code to come back and bite me. I am asked all the time, "but what happens if we put a D code in and there wasn't an A code?". I have never seen that cause an issue. So when in doubt D. To the point if the client thinks they have old SSAs it might be worth to do a clean up filing this year to make sure anyone paid out and might have never had a D code filed gets one now.

They way the service spanning rules work such short leave and come back people almost always have the time gone credited to them. Both of these give an overview of the service spanning rule. The 2nd one is easier to read- starts around page 14. https://www.law.cornell.edu/cfr/text/26/1.410(a)-7 https://cdn.ymaws.com/www.nipa.org/resource/resmgr/2013nafe_presentations/richter_2s.pdf

Please let us know if this gets resolved and how.

I am not trying to be mean here but what you are describing doesn't make sense. I would go back to the advice in my first comment and get the SPD and distribution policy. These have to give you a summary of how people are going to be paid. Once again ESOPs have a lot of discretion on how people are paid out but it can't be arbitrary. And no I don't think I have seen an ESOP that allows them to determine year by year to simply turn a person's distributions on or off. Nor have I really ever seen a plan that doesn't respect a person's wishes on how much that goes to an IRA vs paid to them. Just curious how do you know the window to make a request is only open for another 15 days? It sounds like they haven't sent you are any forms to make a distribution request. If they have complete them and get them in on time. I would see if you can get someone at HR to either explain or help you. The company does have some obligation to help you get your benefits. Your next step if you want to escalate the situation would be to file a formal benefit claim. The SPD will have instructions on how to do that. They are required by law to make a formal determination and written reply to such a claim. They can still say "no" but they have to put into writing the why. Next is: If you really feel you are getting no where you might want to enlist the DOL for help. They have these people called Benefit Advisors. They will sometimes reach out the company and make an inquiry about the situation. The great thing about it is they aren't a DOL auditor so the company is less likely to lawyer up and really dig in. However, that is always a risk as some people will simply hear, "I am from the DOL". But if you really want to go that route here is the link to the DOL website to start the process. https://www.askebsa.dol.gov/WebIntake/ I am not 100% sure what more to say. Like I said the description given doesn't make sense. There is a break down in communication or understanding some place in my opinion.

Sorry, but your merge idea doesn't work. Only an ESOP can have the unallocated share and the related loan. At this point unless they simply want to get rid of one of the plans there isn't much value in a merge that I am seeing. I just thought merging to a KSOP would be simpler because you wouldn't have to deal with the unallocated shares. You could keep the loan and the suspense share in place. Since the goal doesn't focus mostly on getting rid of a plan as much as changing who owns the company a KSOP doesn't make difference. As for the goal of the minority owners slowly taking a majority of the stock by distributing the share from the ESOP and I assume making the shares treasury stock is an interesting one. It would slowly result in the ESOP owning a smaller percentage of the over all stock and the outside owners a larger percentage. You seem to understand this but currently the ESOP being the majority owner gets in effect a premium on the stock price for being the majority owner. When the ESOP's ownership fell to a minority the stock price would get hit with a discount for being a minority owner and all the remaining shares would lose value. I would research if the fiduciaries have to account for that and make some kind of adjustment. I mean this plan would result in loss of value to participants in a plan and it was because of the direct actions of the Plan Administrator and Trustee. They have a duty to not lose the participant's value. I see a possible big fiduciary problem here. Maybe one of the attorneys who come around here who knows ESOPs will opine on that issue. This is going to be complex enough you need a good ERISA attorney who knows ESOPs and doesn't merely dabble in ESOPs. If the current trustee is an inside trustee, and especially if the inside trustee is one of the 2nd generation people who could be seen as having a conflict of interest regarding this, I would look to getting an outside trustee. If they have the ability to simply buy all the shares from the ESOP that would make thing easier but that could take more cash than anyone has at this point.

Is there more than one employer even? Can I have two sole proprietorships? To me this is might be more of a business law question than a retirement law question. Not claiming to be an expert on the questions here as much they would be the first questions I ask before I even get to your questions.

What is the goal? I mean why not simply make the ESOP a KSOP and get rid of the 401(k)- merge it into the KSOP? That off the top of my head seems simpler unless they no longer want the ESOP. What is going to happen to the unallocated shares in the ESOP if you merge with the 401(k)? I guess I am still really stuck back at what is the goal before I opine too much. Lack of facts here seem to make giving a good answer hard.

Assuming your description is accurate I don't see how they are stopping the payment. Your payment last year was a distribution and not a DIVERSIFICATION payment correct? The way to tell is the payment was because you left the firm not because you turned age 55 and have 10 Years of Participation- and was most likely for 25% of your shares. Correct terms matter here. If it was a diversification payment we need to know that as the advice below would change. I ask because you said they paid you 1/4th and not 1/5th. A distribution installments tend to be over 5 years. So once again was it a diversification or termination payment? Not getting another payment in 2020 could be correct if a diversification payment. I would start by asking for the following documents if you don't have them already: 1) Summary Plan Description. (SPD) 2) Copy of their distribution policy. ESOPs have more discretion when it comes to distributions than just about any other type of retirement plan in terms of making people wait, take installments.... but no they can't just decide to pay or not pay a person on an ad hoc basis. Once you get those forms read how they describe distributions ought to work and see if they are following the terms as spelled out in those documents or not. If you think they aren't doing so I would go back to the company. They aren't allowed to simply dump all the decisions on the "company running the plan" as most likely the company running the plan is merely following the instructions of the company. If that doesn't work come back here and we can start to give you guidance now how to start the press the issue. I would not run off and lawyer up as your first choice. That will cause the plan and the company to lawyer up. It will simply slow things down and increase your costs. The are other steps like making a formal claim for benefits- the process is outlined in the SPD which is another good reason to get a copy. And ways to have the DOL make inquires on your behalf that are less inflammatory than a lawyer. Remember the point is to get paid not get revenge or hurt them with a lawyer.

I would add if this is a desired plan feature a simple amendment could allow people who are 65 or 70 to take an in-service distribution of say 20% (or x% of people's liking) and the issue is solved. So instead of tying to squeeze the desired result into the existing plan language simple amend the plan to do what people want. You can't even reply but if we amend the plan we have to allow everyone to do it. If you decide the RMD language allows for this that is true for everyone. If this isn't a desired feature I am not sure why anyone would work this hard to figure that out.

There are a lot of facts that could change my answer in my opinion. Are you saying for example they have the stock price early in the year (say April or May- pretty common for ESOPs) but they still want to not make the payments for people this law requires until Q4? That strikes me as aggressive to say the least. The amount of the payment is known. You know the account balance is that the payment will be based off by that early time. What exactly allows them to not pay at that point in 60 days? The fact they haven't decided if it is going to be an installment or lump sum because of the business' conditions? I am not sure I would allow what is happening at the company level delay what happens at the plan level. I am not sure that makes the amount something that can't be ascertained before December. Part of it is I haven't seen a distribution policy that allows them to bounce back and forth like you describe from lump sums in 2018, installments in 2019 to go back to installments in 2020 all because of the business' cash flow position in those years. ESOP distribution polices are way more flexible than other plans but that sounds like they are pushing it. For what it is worth I see two very aggressive positions what you describe. I can't cite anything that says it can't be done but I would be careful saying you don't have to pay until December if the stock price is known in Q1,2, or 3 just because the business hasn't decided if it has the cash flow to offer lump sums vs installments.

I am not trying to dodge your question but it is any method the Plan Administrator wants as long as they can show it doesn't favor a class of employees known as the Highly Compensated Employees (HCE). There is a precise legal definition of who is an HCE. It would have to be written in the termination amendment. In all the decades I have worked on ESOPs based on compensation and based on shares as earnings is easily 99.99% of the methods. You could give the compensation method some kind of years of service weighting I guess to reward people who worked at the company a long time and not just look at compensation for example since you asked for one. I don't think I have ever seen it done. You would have to test it to not discriminate as noted. To be very clear just because you can present the company with a method you like doesn't obligate them to use it at all. You can ask for the amendment but it isn't clear to me they are obligated to give it to you. I don't see a real good reason to say "no" as it isn't some deep, dark secret but don't be shocked if they don't give it to you. As I said before the odds of you getting shares is very low at this point. This part of the plan operation was almost certainly reviewed by the plan's attorney and the plan trustee.

I am with Mike here. Here is what one base document one of my clients uses says about restoring a lost participant's account after they have been forfeited. (There is a section of the document that tells when you can do the forfeiture) That is the most common way I read a lost participant forfeiture restore in the many plan documents I work with. With ESOPs I mostly work with individual drafted plans not prototypes. That is why I picked one of the few clients I have that uses a prototype and quoted the base document. If they went through the proper search to declare the person lost back in the day does the document say they get back earnings?

I am not 100% sure how informed my comment was verses close to 100% of what I know. My understanding is however it covers both the production and retail side of things. If anyone wants to know ore go to the CPA Academy https://www.cpaacademy.org/ And look at their list of free CPA CPE classes. It seems like there is pot related class every few months. They are pretty general as they are only 1 hour long but it might help point a person in the right direction. I would add it is my understanding that because of a court case cost of goods sold is still deductible which would help a retail operation.

You will want to Internal Revenue Code Section 280E. During the '80s at the height of the drug war the made deducting the expense related to the sale and distribution non-deductible. https://www.law.cornell.edu/uscode/text/26/280E They might be able to set up a 401(k) plan but not be able to deduct any of the costs and it raises the question if you can even have pre-tax deferrals. I have never looked into Roth. I am NOT an expert on the intersection of this part of the law and 401(k) plans. I learned about 280E back in my days as an IRS agent. There are also threads on here about how some banks and other financial institutions are reluctant to do business with a company that is technically violating federal law. If anyone curious keep reading otherwise you can stop. 280E is interesting as it only applies to drug crimes. So for example a chop shop can deduct "payroll costs" of the people stealing the cars and cutting them up for parts. But a pot shop will most likely have trouble deducting the payroll costs of the employees in the shop. It all stems from a famous court case where the Feds tried to get a drug dealer like they got Al Capone. The drug dealer's clever tax lawyer managed to dramatically reduce the tax liability and thus the criminal sanctions by showing that when you deducted the costs of the operation the drug dealer's net profit wasn't very large. Hard to believe I know but the lawyer did it. Congress got mad and even by disallowing the deduction of the costs of operation for illegal drug operations.

I would challenge them to prove this can't be forced out to an IRA like any other payment in a plan termination. I am not aware of any such rule/law. I would add the platform isn't supposed to have the power to overrule the plan sponsor and plan administrator (PA) unless they are one PA or trustee. There job it to take directions from the PA/sponsor and trustee.