ESOP Guy

I would ask the appraiser. They are very open about the method they use to value a company. They have to be open about it. The trustee is required to understand what they did to get the value and determine if the inputs, assumptions... leading up to the value are appropriate and reflect FMV. I go to multiple ESOP conferences a year so I know most of the big names in the ESOP appraisal world and they are all open with their clients/trustees on how the value is determined and what could change the value.

Let's be clear here even if you can delay it to 2021 January might not be an option- it would most likely be much later in 2021. If this is a calendar year plan that means any payment in 2021 has to be made based on the 12/31/2020 stock price. I am assuming this is NOT a publicly traded stock. They are saying a payment this year will be September suggest it isn't a public company. So it sound like they are working on getting the stock appraised and account balances determined. That is why they pay in the fall and not sooner after year end. If my assumption is true I would assume any payment in 2021 would happen in September of 2021. Most of the ESOPs I help do their work pay around the same time each year because that is how long their process take to get to that step. ESOPs aren't like 401(k) plans were you get to just say give me my benefits when you want. They work at their own pace and you have to understand what the pace is. I would get a copy of the SPD. It might tell you if you can delay the payment. If not, the comptroller might be able to get you the answer. I would also clarify with that person when they would estimate a 2021 payment would actually happen. I am willing to bet it would be around September of 2021. Also understand you would have to take the change of the stock price good/or bad that happens as of 12/31/2020 if you delay the payment to 2021. I am not saying you can't delay or it is a bad thing to delay. I am saying you need to make sure you understand what you can and can't do. And you need to make sure you understand all the ramifications of such a decision. I get the impression that isn't true at this point.

I would agree the ESOP Association seems to have be more geared towards the industry professional vs the NCEO which clearly has an employee owned company as more of its goal. I will say that ESOPs are a real specialty to themselves. I am not trying to be mean but I cringe whenever we get a client whose former TPA was a 401(k) shop that was doing the ESOP work as a courtesy to their 401(k) client. They have a very high VCP filing record after we start to dig into them. If you want to learn I would suggest you find out which ESOP Association chapter you live in. If you live in the US you live in a chapter's territory. You can find out when they are having local conferences. They all have at least 2/year. I would think about attending those. The chapter conferences are less expensive and since it is broken down into territories you might not incur as large travel costs. They all have good breakout sessions. If you just can't make a conference if you join the NCEO they have a 1 hour webinar most weeks of the year that is free to members. They happen around lunch time if you are in the Eastern or Central time zones. If you are west of that it is still morning when they happen. At one hour they aren't going to be super detail but you can get a good idea of the issues.

Talk to your HR department. Fidelity works for your company. The company my lean hard on Fidelity to get it right but in the end the company not Fidelity is most likely the final decision maker. Fidelity is way more likely to listen to the people paying them.

I am having a hard time believing the document is silent on the topic. I would talk to your document provider. Check the base document if it is a two part type of document. In all the decades I have been working in this field I can't remember a time the document didn't discuss this issue. The most common provision is some kind of forfeiture of the benefits if the person is lost and you did a diligent search. The DOL is now making a lot of noise about doing that but it is the most common provision. If you can get a pdf of the document I would search for words like "lost" "missing" and other words like that.

Your plan document will tell you how to handle lost participants. The big thing any more is making sure you can document they are lost. The DOL has taken this topic up. You need to be able to document you did a search that meets their requirements before declare a person lost.

Help me understand something here. I admit I haven't gotten too far into this as most ESOPs are pretty far still from making payments in 2020. But it is my understanding the plan has to make an amendment to elect to not have to pay RMDs. If there are no RMDs why do they have to do an amendment? Logic (in know pension law and logic don't have to go together) would say if they don't elect to waive RMDs via amendment they have to pay RMDs still. So what are those payments if not RMDs?

The one and only time I worked for a CPA firm that did TPA work through a subsidiary they never did both. The closest I saw was we would prepare the Form 5500, 8955-SSA and SAR for a plan they did the plan audit. It was my understanding it was the CPA rules for independence that was the issue not any kind of TPA ethics rules. But I can't quote anything even though I am a CPA. I just wasn't involved with those independence questions by management at the CPA firm.

Just added this comment because I forgot to set the "notify me of replies" option.

I am going to start with one of your last questions/issues. I work for an ESOP TPA firm and our installment forms are very clear if you do not return a form in the future years you will get sent an installment sent to the same address and in paid the same way as the prior year. On the last part it means if you asked for your installment to be sent to xyz IRA and never return a form after the first one all the installments after that will be sent to xyz IRA. You, or someone at the company, is the Plan Administrator not the recordkeeper/TPA. I recommend you speak to your ERISA attorney. if they agree the plan can have the forms say all future installments will be paid as the previously returned form demand it changes. You drive how the plan works not the TPA/recordkeeper. If the person's balance is over $5,000 you can't force them out of the plan. it is just how the law works. You can force them out of the company stock while their balance stays in the plan. This is called segregation in this business. If your plan allows for it, and if it doesn't talk to your ERISA attorney to get it amended, you can set up a method that allows you to sell the people out of their stock and into cash based investments. They key here is to give the plan flexibility. See if your attorney will allow the plan to be written such the company decides who much cash it wants to put into the ESOP to segregate the accounts and describe the method to do so. Pro rate is the most common method. For example, if there is $100,000 of shares in terminated employees accounts that can be segregated and the company is only prepared to put $50,000 in cash to fund segregation using a pro rata method all the terminated employees would be forced to sell 50% of the shares in their account. You can use other methods than pro rata. We have clients that sell 100% of the stock from the person with the oldest termination date for example. You go from oldest to newest until the cash runs out. You just have to make sure the method isn't discriminatory. A good ESOP TPA can guide you through this. You will find many of the people start taking their payments if they know they are going into a cash based investment vs the company stock. After all they can invest in mutual funds and so forth in an IRA with more control if they do so. There are a number of issues you need to investigate before you do this that is too long to write here. For example. by making them sell the shares and putting them into some kind of cash investment your company has made an investment election for these people. That means there is a fiduciary liability regarding the investment choice. Not saying that is a deal breaker as segregation is common in ESOPs. I am just saying you need to be aware of the risk when making the choice of investment and pick one that helps mitigate the risk. Search the NCEO and ESOP Association's websites for the word "segregation". You will get a large number of hits for information . This is the closest I will do to a "sales job" on this board as that is frowned upon here. Is your TPA/recordkeeper one that is known to specialize in ESOPs? I am a little surprised that they haven't brought up segregation. If not, I recommend you get one that is an ESOP shop. They can do other types of plans- the company I work for does. But ESOPs have enough unique situations I think you need an ESOP specialist to help guide you through these kinds of situation/planning opportunities. Lastly, I would recommend you attend your local ESOP Association chapter meetings- when we are allowed to have conferences and meetings again! Also, NCEO has weekly webinars. The NCEO also has a large conference in April. There will be breakout sessions on segregation at most conferences. You can learn a lot and speak to other ESOP companies that have done segregation. If you aren't a member of the NCEO and ESOP Association you should think about joining to access these benefits and learning opportunities. There will be a wealth of other sessions on ownership culture, repurchase obligations. what to do if you find a mistake...... Sorry if this was a little long.

Many years ago I had a client that had a landscape company with a rather generous PSP. Part of the plan that did landscape architecture had a number of well paid people. As you can guess the people who did the lawn mowing and tended the plants at the nursery weren't the best paid people. One day he comes in and asks how many years can he make his people wait before they get paid from the PSP. When we talked to him about it he said we was tired of some of his lawn mowing crew quitting in the Nov/Dec time frame. Getting a distribution in Feb and by the time spring came around they had used the PSP money to buy and truck, mowers.... and was calling up his clients and pricing those services under his price. The ESOP world it is full of stories of firms that make people wait because they start of having a problem because they make so many employee/owners in their 50s and early 60's millionaires. They have a brain drain of their most experienced employees realizing if they can get a lump sum shortly after they leave the company they can afford to retire early. So they make them wait a few years to start getting paid and make the payments in the form of 5 installments. So it does happen. I know not adding much value to this thread but.....

In all my years of working on ESOPs I am not sure I have seen a 1042 and rebalancing. But my initial reaction is your on very dangerous ground. 409(n) reads: In generalA plan to which section 1042 applies and an eligible worker-owned cooperative (within the meaning of section 1042(c)) shall provide that no portion of the assets of the plan or cooperative attributable to (or allocable in lieu of) employer securities acquired by the plan or cooperative in a sale to which section 1042 applies may accrue (or be allocated directly or indirectly under any plan of the employer meeting the requirements of section 401(a))— Getting any of the 1042 shares is a problem. I think even non-1042 shares strike me a possible problem. You will note this talks about "allocable in lieu of" and "directly" or "indirectly". I have always understood this to mean any kind of backdoor attempt to get this person made whole isn't allowed. My initial reaction would be to rebalance the non-1042 shares and 1042 share in a separate calculation that gets this guy equal to the rest of the people for those shares. It could mean his ratio is different that others or some other kind of provision. But I would be very wary of anything that makes the plan act like he is basically getting 1042 share directly or indirectly with the rebalancing. if there is no difference in the total number of shares he gets if there was or wasn't a 1042 allocation would seem to point to the idea this person has been given shares in lieu of or indirectly for the 1042 shares. And rebalancing seems like that is happening. Cautious thinking might make the two provisions not workable which might be why I haven't seen it. Although with so many of the ESOPs being S Corp ESOPs and cap gain rates having been so low for so long there are simply less 1042 transactions. I am not going to pound the table and say I know for sure you can't do it but those are the issues I see.

Take just this part of the example. What if their spouse was laid off due to the virus? Hasn't this person had an adverse financial consequence due to the virus?

It looks like you have it. Like I said the firm I work for sends out forms that allow a person to ask for a percentage or a number of shares desired. As a practical matter what you will find is the most common election (of the people who make an election) , by a wide margin, is simply take as much as they can.

It isn't uncommon. There are a lot of reasons for that kind of premium.

If (and I realize this if might not be true) you have enough cash in other sources you can fix this. You wanted $45,000 in the IRA. If you have that much money between this distribution and other savings get $45,000 into the IRA. You would need to find $31,000. You have to do that before the 60 days are up. If you do that the $45,000 isn't taxable income. You would still have only $14,000 taxable you wanted. Yes, when you file your taxes next year you will get credit for the $9,000 so it will even out in the end. The weak link in that process is you might not have enough outside savings to get the desired $31,000 into the IRA. You are most likely going to need some saving outside this payment to get the $31,000. If not, get as much as you can afford into the IRA before the 60 days are up you will have at least sheltered as much of the income as you could from current taxation. As always this is free advice so you get what you pay for. You need to find a tax adviser other than this finance guy to help you. They can look over your whole situation and give you complete advice. It shouldn't cost you much but the tax saving will be worth it. The biggest problem there is you might not be able to see them until the lock down is down which could be after the 60 days are up. This is mostly to completely fixable if you move quickly and do the right things.

I don't think so. I have to admit I can't remember anyone ever seeing someone try what you are doing in all the decades I have worked on ESOPs. You have to remember diversification is cumulative. By asking for a lower percentage you are now asking for the cumulative percentage to be lower than it was the 1st year which can't happen. So if you ask for 15% each year all you would ever get is 15% of the new shares. People tend to want their money or let it ride by keeping it all in stock. I guess if you really want to hit a very specific share number each year see if the plan will allow to request a specific share amount each year. The forms we give our clients allows a person to ask for a percentage or number of shares up to the maximum allowed. Here is my math: Year 1: 1700*.15 = 255 So if you remove those shares from your account the new ending balance is 1475. Year 2: 1445+ 100 (new shares) = 1545 Diversification formula is: 1545 + 255 (prior diversification) = 1800 (gross shares for diversification) *.06= 108 (gross diversification) - 255 (less prior) = -147 shares You have to pick at least 15% and that will get you 15% of the new shares: 1445 + 255= 1800 *.15= 270-255= 15 On the other hand if you went up to 25% you should get the remaining 10% from year 1 plus 25% of the new shares received in year 2. Like I said I don't think I have seen someone go for a lower percentage. I have seen people using our forms pick a very specific number of shares each year since we tell them the maximum number of shares they can take in any given year.

Not only don't we do things like that we are told to not do anything that can be construed to turn us into some kind of fiduciary by accident. When a client asks me to review a QDRO I don't write back the DRO is approved or qualified. I write back that I recommend to the Plan Administrator they approve the DRO as qualified. This is so I or my company isn't seen as the one who decides if a DRO is in fact qualified and approved by us. There are all kinds of little things I have learned over the decades like that to help make the case we as a TPA aren't the PA.

That is interesting. I wonder if that is how they came up with the DQP method. They basically used the method for warrants. It seems logical that the SARs don't count. They really don't turn into ownership as warrants can. Although I have seen warrants that can only be turned into cash.

You might want to read the loan note. Back when I was doing 401(k) plans almost all our notes said the loan was payable upon termination. That note is a contract subject to contract law not pension law. I think you have to ask yourself can the plan allow that contract be ignored if the note has such a provision?

Wow that is a blast from the past. Oddly, we decided I was wrong as stated above. We decided the code you are quoting is says they own the shares. That is to say we decided these people were HCEs. In this case the denominator didn't matter. The family collectively has enough warrants to be worth 30% of the ownership. So 30k/130k or 30k/100k are both so far over 5% we didn't get into that much. I would think you have to use the larger denominator - of use fully diluted basis as the denominator. However, I couldn't cite anything to you to say I had to be right. I guess if I had a case where it make a difference I would make the plan attorney make the call. The attorney gets paid more than me to make those calls. ? As an aside it turns out saying that family are HCEs helped the that plan a ton. The plan document excludes the family by name from entering the plan and becasue of a 1042 election. But they have so much turnover that they would never benefit 70% of the NHCEs and now they don't have to do so as over 50% of the HCEs don't benefit either.

I missed she gave the age in a later reply. That makes the in-service amendment harder.

As pointed out the determination if a person is an independent contractor is determined by the law not decision. So if a person simply keeps going the same job but less hours but is now sent a 1099 is most likely a violation of labor law not pension law. Your two choices are: 1) This person go through a bona fide termination. 2) Change the plan to allow a person who is over say 65 to be allowed to take an in-service distribution. I have a number of plans that allow #2 for what looks like your real issue is. You want to keep this older person around working some but they can't afford to work part-time. They need to be able to access their retirement funds to afford to work part- time. I would look at changing the plan to allow people who are retirement age take an in-service distribution. It is a pretty simple plan amendment.

Yes, a person is retired if they are terminated and that termination happened on or after the person's Normal Retirement Age as defined in the plan document. The term 'terminated" isn't defined in the law but a person who is still employed part-time clearly isn't terminated per the dictionary definition. A person simply can't be terminated and working some hours.

By definition if the person is still working regularly they aren't retired or terminated. This person is still working. So the answer is "no".