ESOP Guy

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.

Just to be clear here you also aren't an owner or a family member of an owner are you? My guess is the answer is "no" because if you were an owner or a family member of an owner your problem would get solved quicker. But let's make sure something isn't being overlooked here however.

Yeah it sounds like you won't benefit much from the sale through the ESOP. So unless they agreed to give you SARs or phantom stock as part of your pay when hired I it sounds like you need to keep your expectations pretty low in terms of sales proceeds.

There could be a lot going on there so it is hard to give a good answer based on what you have written. It will depend a lot on if there are just allocated shares (all the shares are in someone's account) or if there are still suspense shares (a loan was used to buy the shares in the ESOP and the loan isn't fully paid.) The sales proceeds will follow the shares like any other company sale. So if all the shares are allocated that is how the money will flow. If there are suspense shares it gets more complex very quickly. How the sales proceeds after the loan is paid off on the suspense shares there can be some discretion on that allocation. If you are part of the executive team that is making the decisions regarding the ESOP you need to talk to the TPA, lawyers and trustee to make sure everyone understands how the suspense share proceeds are going to be handled. If you are an executive but not part of ESOP decision team you might just have to ask or wait and find out what is going to happen. You best chance to get an allocation given your service is if they allocate the proceeds from the suspense shares on compensation. They however are not required to do that. They could allocate most of those proceeds as a gain which would favor the people with the allocated shares. That is about as good of an answer I can give without a lot more details and this not becoming too long.

If you are saying you think the 1099-Rs were done wrong in the past so you should keep doing the 1099-Rs wrong I would disagree. if that isn't what you are saying I am not sure what the question is. A side point have they been updating the basis every year for the S Corp flow through earnings? That can change the basis and NUA a lot.

You might have done this... I have had more success than one would think searching for an obit online. It not only often times names the family but the church the service will be held at. We have called the church and the pastor knows how to contact someone in the family and does it for us.

Congrats

Those CPAs and their sticklers for numbers! (This is coming from a CPA by the way.)

I have an ESOP client and here are the facts: Person A owned >5% of the stock in Company XYZ until 100% of the shares were sold to the ESOP in March of 2018. The ESOP was effective on the date of the sale of the stock to the ESOP. This person was 70.5 in 2018. He was 70.5 in 2013. It just dawned on my he got a balance allocated to him as of 12/31/2018. We didn't get the work done until August of 2019. So is the 5% rule you are a 5% owner any time during the year regardless if the plan exists or not or do you have to be a 5% owner on or after the effective date of the plan? Does this person need an RMD for 2019 because he was a 5% owner in 2018 when he was over 70.5 or does the fact he stopped being a 5% owner on the day the plan was effective change this? The RMD will be <$30 so the amount is the issue it is a simple compliance question. I guess the balance could grow to the point the RMDs become more meaningful.

Stopping the IRS from auditing all forms. Maybe it is the CPA in me but from my first job at the IRS the idea there are forms you can't audit because of the statute of limitations happens was talked about as important. You can say that is pretty small in this case. Maybe it is a small benefit. But the cost is very small. It has been a very long time since I worked on this small of plans but we had all the information to complete the form to do the work we did for the client. All you had to do was have some input done and a quick review. Low cost maybe low benefit but I will take for the cost.

Yes, that is a problem. But no one here is defending that fact pattern. No. and I mean NO ONE is saying ignore the rule. They are saying there is a presumption that if it takes over a year it is a problem unless you can rebut the presumption with good reason(s). That fact pattern is not even trying to have a good reason. To use example from another place you have a presumption that can be rebutted. I have a bunch of ESOP clients that are staffing firms and convenience stores. Every year, and I mean EVERY year, their turnover is greater than 20%. A number of them have been audited by the IRS over the decades. In each case we have a conversation if the Partial Termination has happened. We have won that there wasn't a Partial Termination every time. The 20% rule is a presumption there was a Partial Termination unless you can rebut it. We can show their turnover is an industry norm. We win once we show that is true. In both of these cases the rule is there and no one is saying ignore it. We are saying make sure you have the documents to rebut the presumption. In the case of plan terminations experience tells us if you can show just about any fact set that comes across as reasonable you will rebut the presumption. Another story but I have an ESOP that is going on its 4th year in the termination process. The plan terminated in 2016 and we will most likely get the assets fully paid in 2020. We have had multiple partial payments as the funds were available. It turned out one of the money market funds they had invested in was subject to embezzlement. It has taken until last month for the final court rulings on what can and can't be paid from that money market fund. We paid all most all the assets the plan had access to within the 1st year. Now we will pay the last of the assets when released by the court. Taking 4 years is a very long time but it was reasonable and I am confident we could rebut the presumption of the 1 year rule.

Can I suggest you file a Form 5500 always? The only way a statute of limitation clock starts is if you file a Form 5500. Back when I worked on very small plans (a very long time ago!) we still did the trust accounting. So we had all the data for an EZ or SF always. It is very easy to complete and file a form. It would take less than a man hour to protect your client more it seems like. It just isn't that much work to give a client added protection vs no statute of limitation.

For years we joked about this provision in the law. The joke got old before we got the regs.

You should be able to show her how her earnings was allocated and what the basis for the allocation. She doesn't get to pick and choose which assets she is invested in if this is a pooled account. She is invested in the pool. As for her portion of the underlying investments doesn't really make sense. She is invested in the whole pool. While it could be a pain I see no reason to not send her copies of the CDs and brokerage statements and say, "here is what the trust is invested in" You account balance is x% of the total so in a sense you are invested in x% of all of these investments. Since it is a pooled account you don't get to pick and choose which assets only apply to your account balance. But in the end I would stress the idea her account isn't invested in particular assets of the trust but all the assets in the trust. And until the plan is changed to individual accounting that is how it is.

I think you have to know more before you can say there is a problem. What if it is a way for small plans to gain access to the cheapest class of funds within that fund family and the total fees are still lower than what a small plan can get on its own for example? Almost all mutual funds have shares that have much lower fees if you can invest say $5M. Any given small employer's plan can't do it but could this structure allow it to happen? I don't think you can say there is no value in the structure. It very well could be a problem. I have seen plenty of layers of fees that existed to enrich people but you not seeing the value doesn't prove there is not value in the structure of the fund.

I learned something new today and that is really a neat little site/function. Thanks