ESOP Guy

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.

To answer you question directly... No, there is no law I can think of that requires them to give you an allocation of the suspense shares.

As I tell my clients all the time I am going to tell you the correct answer and not the answer you want to hear. There is a good chance you are out of luck. If the short term disability payments wasn't compensation for plan purposes, and there is a good chance it wasn't, you didn't have any compensation for ESOP purposes in 2020. If they allocated the suspense shares on compensation and you didn't have any compensation the result is you get none of those shares. It will be hard to give you a complete 100% answer without getting into the weeds of the plan document but I (anyone on this board) can only give general insights. If you feel strongly about this I would recommend the following. Find a copy of the plan's Summary Plan Description (SPD). You should have gotten a copy of it at some point. In it there are instructions on how to a make a formal written claim to the plan that will trigger a requirement they make a formal written reply to you. You can try and make a claim and see what they say. These formal claims tend to get their lawyers involved so don't be shocked if they lawyer up. But that will also result in someone who knows the document really making sure it is/was followed.

I will admit I was lucky enough to have a client willing to do the leg work a few years ago to find out how to pay the lady in prison to her prison account. Larry very well could be correct this person might want it to go to an IRA. I would see if you can get the form completed or at least some idea what this person wants. That would at least narrow the range of future questions. Good luck on this one! As one of my old bosses used to say all the time.... If this were easy everyone would be doing it.

Let's be clear while the beneficiary will be entitled to the benefit even if in prison there are very strict rules in many states (maybe all) on paying a prisoner. The last time I had one of these the money was put into an account at the prison for the benefit of the prisoner. You will want information form the prison or prisoner on how to write the check if you are helping do that. It was the lady's money but it was in some odd prison account. Everyone agreed it wasn't a violation of the anti-alienation rules because once she was out of prison she controlled the money. It is just her control while in prison that had limits.

I am not even sure I understand the first question. Are you talking about the stock compounding or the cash in the ESOP account? If you are asking about the stock the value of that part of the account is simply the number of shares times the price. If the company isn't publicly traded they get an appraiser to help determine the price each year. You should be able to see from your annual employee certificate if the number of shares you have is going up each year or not and why you are getting more of them. As for how many diversify it is a real mix. It depends on how much stock they have and what other kinds of retirement plans they have to keep them in a good mix of investments.

A well written document, not all of them are well written, will guide you through the process. If this is a prototype read the base document and see if it breaks down how rehires are supposed to be handled. A good when will go through the various possible fact patterns and you should find the one that guides you to the right conclusion. I would say Mike is right but the working through the document would be a good exercise. When I get stuck mentally on an issue like this reading the document again gets my mind back to where it needs to be on the issue.

Let's be clear here you don't have to hire an appraiser for this. The trustee and Plan Administrator have a fiduciary duty to come up with a good FMV. If you don't use an appraiser you have to mark that question on the 5500 saying it isn't traded and hasn't been appraised. They better do a good job of documenting their method of coming up with that value in case it gets questioned. Although it sounds like this might not be a material asset at this point. If this plan isn't audited you have to look into if this still allows you to not audit the plan. I do very few plans with <100 participants in it so I forget how that works but I am thinking that this could be an issue here but willing to be told I am wrong. But the audit safe harbor rules are based on all the assets and data is coming from sources that can be trusted and know you have an assets that isn't being held at one of those type of places. Like I said it is outside my wheelhouse but check the audit requirements. If the plan is audited I would make sure what method you use they can live with it. But the legal requirement is to show the FMV. If the trustee thinks they can do that and be prudent about it so be it. They should know the risks of being wrong but they can come up with a FMV.

This is interesting. As an aside the ESOP world is full of talk should ESOPs get an interim stock value in the summer of 2020. The same dynamic is going on. The 12/31/2019 value can't reflect any of the events in 2020. So is a new stock price which will be used to make the payments in 2020 a better price. I have ESOP clients who if they do this the savings could be in the millions of dollars. But the same kind of issue comes up in my mind. There never is a push to do this when times are good only when bad. It will be interesting to see if the court makes note they specifically refused to do a special allocation date in 2019 when the market was up but did it when it was down. Thanks for sharing.

Are you saying one of the plan sponsor's customers actually managed to deposit stock into the qualified plans of the plan sponsor? If so, how did that happen? I don't mean in terms of blame but it would seem like a stock broker/investment person had to help and made a mistake in the transfer paperwork If so, what responsibility do they have- if any? I am still just trying to figure out the basic facts on this one.

How it is split is up to you and your spouse to decide. it is just one asset out of many to look at and decide how you two want to divide them up. Once that decision is made you need to get a valid QDRO written. I would STRONGLY advise you get the help of an attorney who knows ESOPs. If they don't have a lot of experience with ESOPs I would strong advise people talk to the people who know the ESOP at the company. ESOPs are very different from 401(k)s. It is harder to be clear on how to compute the split since the stock tends to be only valued once a year, unless the stock is traded on a market. Also, there can be restrictions on how fast one can be paid from an ESOP. I have been in the position of having more then one Alternate Payee crying or yelling at me they need the money now to buy a house or some other huge need as I tell them it could take months to years to be fully paid from an ESOP. So I would recommend by starting by gathering information from the company about how they need the process to go to get the QDRO approved by them and idea of what the payment process will look like. Like I said however how you split the balance is subject to the negotiation between you and your spouse. QDROs are very technical and have to be written just right. The company that sponsors the plan has a lot of say in if it is valid or not. I can't say enough an attorney helping and talking to the company and their plan advisors helps a lot.

I once saw a plan document that did put it back on the employer if the plan was terminated. It was very clear about that point and I have only seen it once.

Let's be very clear here. A plan can reject a DRO as not being qualified (the Q in the QDRO) even if a judge has signed off on it People are used to the idea a judge signs an order it has to happen. In this law if the judge signs it and the plan rejects the QDRO as not being qualified, the response is get it fixed and have the judge sign it again. The judge can NOT order a plan to pay under a DRO that isn't in fact qualified. At the risk of saying it too much, a QDRO isn't in fact a QDRO until the plan agrees it is. So you need to find out if you really have a QDRO or a DRO the plan is saying isn't qualified. So as the others are saying you need to find the answers to those questions and it might help to find an attorney who knows QDROs well.

I can't cite anything but I listened to a couple of lawyers last week for my CPA CPE and this question came up. They are saying there is nothing stopping it. I agree maybe not in the spirit of the law but doesn't seem to be prohibited. Maybe a few lawyers that come around here will give their insights also.

My reaction was the same here. Does the plan require the diversification go to the 401(k) plan or is that one of several options including taking a payment. I don't know if I have ever seen an ESOP document require the 401(k) plan be an option and not allow for a distribution also. It could be written so that the 401(k) is the only option but it would strike me as odd. So agree check the document again.

How is the company treating this person on their books? This isn't a retirement law question. This is an employment law question. Have they done other things you would normally do when someone is terminated? Have they given this person a COBRA notice? Have they marked him as no longer employed on their payroll system? Have they notified other benefit providers this person is no longer an employee and not covered under those programs? To me the company has to decide when, if ever, did this person stop being their employee.