ESOP Guy

Maybe I am overthinking it also..... But to me the next question is why does the person have $800 in their account as of 12/31/2019? This is the real issue. Once you solve this I think you have solved your vesting problem. If the plan says a 0% vested person gets a deemed distribution upon termination and forfeits why didn't this person forfeit as of 12/31/2019? I will admit at this point since ESOPs can't do New Comp structure there might be a good reason related to that I don't know about. I haven't worked on New Comp plan for over 9 years. It could be this was how you solved the infinite loop problem where they get a cont, forfeit it but share in the forf that are reallocated. That gives them a balance they should forfeit..... That should have been solved by amending the plan to stop the infinite loop from happening in my opinion. But based on what I am seeing so far to me it looks like this person shouldn't have an ending balance as of 12/31/2019 and that would solve the issue. They have no balance to become 100% vested in. However, if there just has to be a balance in this account as of that date the next question is do they forfeit on 1/1/2020? After all you are supposed to deem distribute and forfeit them as soon as administratively possible. If not, they are 100% vested seems to be the answer as they had a balance when the plan was terminated. Once again to me your real problem is you have someone who is 0% vested as of 12/31/2019 with a balance in a plan that says that can't happen. I think you need to go back and decide if that can really happen under the terms of the plan. It would be interesting to see if one of the people who do more work on New Comp plans thinks of this. And that is the one limit to my answer in this reply.

What happens to the forfeitures? Do they get reallocated or do they reduce the ER contribution? When you allocated the contribution did they immediately forfeit the contribution? If so, what happened to those dollars? If not, why not? What did their participant certificate show as their total (not vested) account balance as of 12/31/2019? I guess I am not sure we have enough facts to know. Although this goes back to one of my things. This is where a good termination amendment could have solved a lot of issues. It would have spelled out clearly how to handle when a person becomes 100% vested. My initial reaction is when the money is deposited isn't the driving factor here. The contribution was allocated as of 12/31/2019 and they shared in that allocation. What happened after that allocation happened seems to be important.

Your 401(k) plan should have fund notices and other information that can answer your question. If there are restrictions on selling a fund after buying (a pretty rare thing to see but it does happen) the notices and fund information provided by the plan will tell you. No one can tell you for sure what your funds are like in the 401(k) plan you are participating in. I will say as a general rule most 401(k) plans are in bond mutual funds that allow you to buy/sell once a day. If the plan has some kind of guarantee income fund they can SOMETIMES but not always have some buy/sell restrictions. But I don't think I have seen one that was over 3 month. Based on how basic your questions are and how little you seem to understand the investments you might want to see if your employer offers any kind of investment education. Ask about cost some is free and some comes with a cost so you can get a better understanding of your retirement plans. You might want to see if your local community college has an affordable basic investment/financial literacy class that is part of their adult education classes that aren't for credit. My local community college offers an investment/401(k) basics type class that helps you understand how all of this better.

As I stated in my comment I don't think there is a 100% agreement on what 1 YOS means in this context. I think most people would say the YOS is hit on 1/1. But no one says they have been married 1 year on the say before their anniversary. Likewise, people don't say their child is 1 the day before their birthday. So the common English usage of the term 1 Year of Service would seem to say it was up on 1/2 not 1/1. In fact I have worked for a number of TPA firms their software would say the YOS was hit on 1/2 and this person would enter 7/1. When I try to explain why the firm works for says it is 1/1 and not 1/2 I get a call from most of my clients who don't understand our thinking. Once I spell it out they go with our recommendation but it is clear they could have lived with 1/2 and the person entering 7/1. As far as I can tell the IRS and DOL haven't opined on the topic and I haven't ever seen a plan that uses the 1/2 and have the person enter on 7/1 get hit by the IRS or DOL. In fact the first time someone brought this up to me my reaction is this is yet another example of people over thinking things in this industry. (That happens a lot in this industry just read a random selection of questions on this board where people get all bent out of shape over immaterial amounts) I am still of this opinion I just don't care to debate it with the people I work with. So if the firm has a policy of saying in this case it is 1/1 and the document says on or next following in the DOE definition I go with it. But deep down I don't see how anyone can pound the table and say they have to be right by doing that and any other take just has to be wrong.

I have seen both also. The current firm I work for their policy would be they would enter 1/1/2019 is our recommendation to all our clients as long as the document says they enter on or the next date of entry. Double check the document. . This all hangs on what 1 year means in this context. Is it 365 days including the first day they work which would end 1/1/2019. Or does this mean how we treat things like birthdays at which time it is 1/2/2019.

I don't know about that. I am in my 50s and now know a number of people who both their parents and them are basically middle to upper middle class who inherited an IRA or 401(k) benefit worth a few hundred thousand that it would be nice to not be forced to have to take it out while they are still working and pushed into a high tax bracket. Before you could just take an RMD until you stopped working and then make it part of an overall retirement plan that could include trying to pass about the same amount down to their children. Is the impact as large for these people? No, but there is an impact and they aren't 1%s.

There could be some very fact specific ideas in my mind. I was talking to someone I know a little while ago. His father will most likely leave him some retirement money. This person is still in their 50s and the father is in the mid 80s. So there is a good chance this will happen while the person is working. I pointed out money is fungible. In this case if he has to take money from the inherited IRA he could increase his 401(k) pre-tax to the max or it fully offset the money from the IRA whichever limit he hits first. In that case the taxable income from the IRA is partially or fully offset by the pre-tax 401(k). Like I said that would be very fact specific and wouldn't do much good with the inherited amount is in the millions. But I could see a fair number of middle class families having these facts fall into place.

This is a classic example of a bad plan amendment if it doesn't answer this question in my mind. Whoever wrote this amendment should have seen this coming and written the answer into the amendment. To me the take away for you is this: If they had asked you or told you about this amendment as they were drafting it you need to speak up and get things like this answered. The next question that is going to come up is this: If a person was first hired and terminated during the old vesting sch and is rehired under the new one which sch do you use? Once again the amendment can be written to answer this. I recently had a staffing firm amend their vesting from a 3 year cliff to a 2-20 sch. They asked me about it. I asked the amendment say that the new one applies to anyone whose first hire date is on or after 1/1/2020. That amendment now answers both of those questions. The client liked my request once we got the HR person on the phone who had to help me run the plan. Once I pointed out if we say make rehires on the new sch we have to make sure we track them and they could have money with the old and new sch they didn't like that idea. I would point out they have over 20k employees. I have seen these kinds of amendments written that say they apply to anyone who works there first hour on or after xx/xx/xxxx. So to me the answer is: 1) Did you read the amendment so make sure it doesn't answer you question? 2) You might want to go back and see if the client and/or lawyer who wrote the amendment have any thoughts on the question. 3) See Zeller's answer.

Read your plan's definition of a Break in Service very carefully. Most plans simply say a BIS is any year a person works <501 hours. Some plans I have seen say any year terminated and works <501 (rare but I have seen it). If it simply says a BIS is any year a person works <501 hours I think this person had a BIS all the years they worked. So this person has 5 BIS in 2019. That has been my understanding of these rules. I have a number of staffing firm clients that can have many people do what you describe and we have consistently said you can work in a year and still have a BIS. It seems odd but I think it is true. It will be interesting to see other people's take on this.

Just an FYI but there is at least one practical issue that has been brought up by various people. This rule would seem to allow you to start a plan as late as 9/15 as that is the due date of the corporate tax return for a 12/31 PYE. But if you didn't know that until around that point you will not have filed an extension on the 5500. So you would be setting up a situation where you have a late 5500 for the year of inception. That struct me as something that isn't obvious at first but true.

I can't cite anything for question 1 but we rarely file a 5500 for amounts that small. My guess is if someone wanted to comply to the letter of the law you are supposed to file a 5500 for 2020. You need an auditor's report for your question 2. It is based on beginning employee count and there is no getting around it.

If you are asking do they have to treat the employees from different acquisitions the same in the ESOP the answer is "no".

By the way TPA stands for Third Party Administrator. They are firms that offer services to help you set up and run your plan efficiently and in compliance with the law. Both Belgarath and I used an acronym you might not know what it means.

I second the idea of getting a good TPA to help. As many people here will scream there is no such thing as a Solo 401(k). That is a marketing term not a legal term. The big thing is you didn't need to set up the Simple IRA. You could have easily brought your employees into the 401(k) plan if you had someone advising you who really understood 401(k) plans back then. So there is a 3rd option you aren't even realizing. You could work with a TPA to get this plan up to date. The missing amendments and plan document updates is a bigger problem than the late 5500s. You might need a lawyer in the end to help with that problem. But once the 401(k) plan is brought up to date you might want to work with a TPA to see if in the long if run your goals in terms of saving for yourself and as a benefit plan for your employees if the Simple IRA or the 401(k) plan is the better route to go. But one of the big take aways here is there is no such thing legally speaking as a solo 401(k) plan. You have a 401(k) plan that you and your employees aren't using at this point.

Maybe it is just me but I find people who feel the need to come up with stupid names to market a put off. I remember years ago seeing something about opening an 802(k) plan. I got curious. It turned out the reason it was an 802k plan was it was twice as good as a 401(k) plan. Get the stupid math? It turned out to be nothing but a dividend reinvestment plan. They lost me on the whole twice at good as a 401(k) thing. Even if I liked their idea the cutesy marketing terms had me closing the webpage pretty much after they explained it.

Can they redo the 2018 valuation? It is my understanding that they can't deduct it but that doesn't mean it isn't a plan asset and the participants don't have a right to the money to be in their balance. This is one of those times you have to ask when did this receivable become a legal plan asset? It has been a while I have had this but I recall they had to deposit the money in the year we were in. There are rules about how this will be a current Annual Addition in the 415 regulations. But it isn't clear to me just becasue they can't deduct the contribution they don't still owe the contribution to those participants. The place this could make a big difference is if someone worked in 2018 and is no longer working aren't they entitled to their allocation? And I am thinking this is where you run into some crazy 415 issues. That person has a current Annual Addition but no compensation. I forget how we handled all of that.

Every time we have something like this it was an audit per year. I doubt a CPA would issue a 12/31/13- 12/31/2019 report anyway.

Yes, it is required.

To give you an idea of how many of these forms I have prepared I had to Google what the form did!

I will let one of the lawyers answer about the voting rules. When a client of mine asks about it I tell them to talk to an ERISA attorney that knows ESOPs. What I can tell you is I have worked in the ESOP field for decades and I find when votes do and don't happen to be a bit odd. But based on all the conversations I have had and discussions at conferences you have the correct logic when you say: a trustee is required to ignore the layoff aspect because they are only acting in the best interest of plan participants, not employees. I can see the logic, but this seems like a very peculiar definition of "best interest" and "plan participant" that stretches credulity. The one thing I will say is that price doesn't have to be the only criteria in this decision by the trustee. A 10x price might make it hard to say "no" regardless of the facts. My understanding is just because the price exceeds the current appraised value doesn't mean the trustee has to vote to sell. I am not sure I can give a good example but I have clear memory of attorneys telling me that more than once. it really is a complete facts determination and price is just one of the facts. A very important fact but not the only one that has to be looked at. The other oddity is I have had some people tell me even if the employees vote to not sell there can be cases where the trustee ought to ignore the vote and vote to sell the company. Once again not my area of expertise but I get the impression that the participant vote doesn't have to always be binding. it isn't clear to me what happens if the employees vote one way and the trustee doesn't think that is the prudent decision. This stuff gets murky fast and maybe I am not helping you much. The NCEO and ESOP Association will have publications for sale that might help point you in the right direction. They tend to not be dense legal manuals but overviews. They are priced pretty low so there isn't much risk but the footnotes sometimes are helpful to guide a next step. Here is an example. https://www.nceo.org/Responding-Acquisition-Offers-ESOP-Companies/pub.php/id/324 Hope I helped more than I hurt....

The real problem of not paying the balance until Oct 2020 is to the rest of the people. Bird gets at that but I want to emphasis it. If this person has a large balance relative to the whole plan this becomes an issue. I was doing balance forward PS plans back in 2008. Imagine if you had to pay someone with a large balance on their 12/31/2017 balance as of October 2008? The plan has been suffering large losses all year but this person doesn't share in them. So the losses on those fund get passed on to the other people in the plan who stay behind. In fact we had a hospital client that allowed some in-service payments based on the prior 12/31 balance. They had to modify the plan in 2008 because word was getting out with the doctors they could avoid the 2008 loss by taking an in-service distribution. There was going to be a "run on the bank". Sure the reverse happens in a 2019 which surges from 2018 to October 2019 which is unfair to the person who is being paid. I would talk to your accountant about revising the plan's procedures. As Bird says there is no reason the earnings can't be known in the first quarter of a year in this type of plan. All the bank and brokerage statements would have been in by end of January. The other solution is the partial payment idea. I would just run this by a lawyer to make sure the plan document supports such a procedure. I think this puts the plan and its participants in a better plan.

Scrivener's errors sound great in theory. I don't think I have ever seen that argument win if challenged. I think this fact set helps not hurts the VCP route. I have also seen VCPs allow for a retroactive amendment. VCPs are costly but that is the only way to know the plan is safe. A Scrivener's error is a high risk route. If the plan gets audited I don't think that is where you want to be defending the plan.

Your question is a bit vague or odd in my opinion. I don't think the auditor's report can be on a cash basis as GAAP won't allow it. The plan can use cash basis accounting and prepare the Sch H that way. If that is done something has to be done about the differences between the Sch H and the auditor's report. If the auditor is up for it they can prepare a reconciling schedule in their footnotes reconciling the differences. If they are willing to do that life is grand I guess. For some reason many auditors don't like those reconciling schedules. Maybe an auditor who comes around here can give us insights. So short answer as far as I can tell is "yes" an audited plan can use cash basis. If someone wants to tell me I am wrong fine with me. You just have to work out the issues with the auditor and their audit report vs the Sch H.

If you are saying you get paid now and then to prepare this form but don't disclose you were the paid preparer I think you will find the IRS takes a dim view of that if they figure it out.

Except for the interest rate are all the other terms the same? If other terms start to change like the term of the loan thought needs to be given if those other changes make sense for the plan and the participants. As a rule the DOL is skeptical of refinancing ESOP loans for longer terms without something of value given to the participants.