ESOP Guy

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".

Sorry, for the slow response. I didn't get any kind of notice that allowed me to pick up on the fact there was a reply. To be clear I work for a Third Party Administrator (TPA) and I am not an appraiser. I think you are going to simply have a hard time making a case. An appraiser's risks are too high for them to simply do what the client wants for fear of losing a paying client. They are not going to issue a report they don't think they can't defend in front the DOL. I would suggest trying to find out if there is an outside trustee or not. The Summary Plan Description should help you on this point. If there is an outside trustee It would be very rare for the the annual valuation to be off a lot. In that case it would take both the appraiser and the trustee to risk liability for fear of losing a client. If it is an inside trustee there is a conflict to a degree but once again the trustee has to be willing to be open to legal liability to try and play games. I have to stress again an appraisal of a private company is based on a fair amount of assumptions. You can't just show you don't like those assumptions. You have to show the assumption used weren't reasonable and prudent decisions. That is a tough thing to overcome. I am sorry you don't think the stock price is what you think it should be but everything I have seen unless a subsequent event happens that can cast doubt on the price you have a hard burden to over come to force the issue.

Don't forget the audit costs can be paid from the plan. That might not be popular but there is a way to get the auditor paid to do it. It is just a matter of the fiduciary doing their job. I am about to send out the final distribution forms for a company sold back in 2015. For a number of reasons the ESOP is only being shut down now. The former CEO has had to handle all of this and not get paid since 2015. He is the only one left. He got the big bucks while CEO and got a healthy balance from the ESOP this is the other side of that coin.

If you send it certified you have proof you mailed timely and that counts regardless of when the form is processed.

There is a lot going on here and there is most likely a lot being left out. The stock in an ESOP by law has to be appraised once a year by an outside appraiser. While legally speaking the appraiser only brings a value to the trustee who has the final authority to approve that value or not the fact is ignoring the appraiser is something a trustee can't do as a practical matter. The trustee has a legal duty to make sure the appraiser is right but can't just ignore. You will find the legal liability on an appraiser is too high for them to not come up with a value that can't withstand a lot of scrutiny. So I would tend to trust the appraised value unless you can come up with some very solid reasons to think otherwise. Appraising ESOP stock is not simple or easy. (I am not an appraiser by the way.) Just knowing revenue and profits isn't enough. Factors such as does the company have one or just a few main clients that generate a substantial portion of the gross revenue. There is a famous court case where an appraiser was accused to over valuing a company where Wal-Mart was over 60% (I think that is the number) of the company's gross revenue. The stock was sold to an ESOP and Wal-Mart dropped the company a few year later. The stock value crashed. The claim was they should have discounted the value one normally would give a company like the one in question for the fact they had an additional risk of having too much of their revenue dependent on one source. My point is there could be factors going into the appraisal you might not even thinking of. All ESOP stock that is 100% owned by an ESOP gets some kind of discount to the price for the lack of marketability for example. I have seen that discount be as high as 15% and as low as about 5%. Your not going to be able to debate these kinds of elements of the appraisal. You say the President/CFO runs the ESOP. What do you mean by that? Is this person also the trustee of the plan? The Summary Plan Description (SPD) should tell you who is the trustee of the plan. An internal trustee isn't illegal it is becoming less common for reasons of conflict. But a professional trustee isn't cheap so some companies do save the money. But if the plan has an internal trustee isn't in itself illegal. I will let the lawyers that come to these forum speak to the legal questions. I will say as a practical matter very few of the legal challenges I have seen by a lone participant was worth the cost. Once again the appraisers are more fearful of the legal liability of their appraisals being challenged than they are of losing a client if they are unhappy the stock price they are giving isn't what the company wants to make stock prices to be off by large amount very often. The times you see court cases on it the claim isn't they were told to come in with a price of X and they did it. Someone is challenging what seemed like a reasonable assumption that after the fact now seems less reasonable- see my Wal-Mart example above.

I know most of the banks I work with give us a chance to amend or correct 1099-R codes in December along with updating address. If the number gets large that could be a pain. But if the people issuing the 1099-R allow for that it might help to start a list now per client of people to revisit this in December and hopefully we have guidance. I wouldn't want to have to go back and find these people in December without a list guiding me.

There is more going on in that question than you might realize. You would best to go and ask someone at the company to help you through the facts and get the best answer. Without knowing how vesting is computed: Is it elapsed time or do you have to work 1,000/year to get a Year of Service for Vesting? If it is a 1,000/year plan which is the most common what years (assuming the plan is a calendar year plan) did you work 1,000 hours or more? As a very general rule, and there are a lot of assumptions going on here, I would expect such a person to be 40% vested the day they come back regarding any new money/shares allocated to them. Depending on the facts they might have moved up to 60% or 80% vested because of the additional years worked. It would fairly rare to see the person reset to 0% upon their return. But ONCE AGAIN WITHOUT SEEING THE PLAN DOCUMENT AND KNOWING ALL THE FACTS no one can say for sure. If you paid back any of the prior distribution to you that can make the situation more complex but such paybacks are rare. So talk to your former employer and have them explain it to you is your best bet.

Do they want to terminate the plan? I agree with David unless something in the sales agreement requires it they can keep the plan. It was a stock sale so the company never went out of existence.

The one and only time I had this happen we filed a form under the correct EIN. When we got the letter about the form being late.... We showed them we filed an exactly identical 5500 timely except for the EIN. We explained why the new EIN was correct. We never heard back from the IRS. That was early last fall. I can't cite anything to say that is the right method. It is simply what we did.

I know now isn't the best time to invent how to get your systems to work while people work from home. But maybe this should be the event that moves your firm to doing that. Most of the TPA firm I work for works from home 100% of the time. I have worked from home since I took my current job back in May of 2012. You couldn't get me to work for a TPA that doesn't allow me to work from home and/or pays me enough I can live in the same town I work in. And even if I live in the same town I worked in I would still want to work from home some. I will never go back to a 30 min commute again unless I am desperate for a job. That was my longest commute and it lasted for 16 years and once I stopped doing it I came to realize how much I disliked it. Most TPA work can be done remotely in my mind. I would add since I started this job and I was the only person in this region we have gained over 8 new clients. I am not in business development and I didn't do most of the work to get the clients. But my presents and speaking at local conferences has gotten the firm I work for a lot more exposure and looks from local ESOP companies. So it has been good for my bottom line and the firm I work for bottom line.

If you can't point to some place in the recently passed laws it covers 2019 RMDs I would not risk it. So far we have gotten all the needed 2019 RMDs out by this week.