ESOP Guy

Your question doesn't make sense to me. The term "merge plans" mean they are moving the balances from the old plan to the new plan without giving the employees any choice. The decision was made by the trustee and plan administrator to move the assets from old plan to new plan and the employees get no say in it. On the other hand if they are terminating the old plan and setting up a new plan the answer could be they need to give them an option to take a distribution. So please clarify what is really happening here. Are they merging the plans and the employees have no say about it or is the old plan being terminated?

Not a lawyer here just a CPA who does ESOP TPA work. Depending on what they are asking for that is from back in the day it can still be relevant. I mean the purchase of the stock and loan agreement might have been signed 10 years ago. But if it was a 20 year loan those documents will still be driving how shares will be released today. In those kinds of situations I don't see how you will win a fight to withhold the documents.

I don't know about studies that showed they wanted to set up ESOPs to get out the market "casino" (a loaded term). There are studies that showed ESOP companies laid off fewer employees during 2008 than similar companies who didn't have an ESOP. https://www.businesswire.com/news/home/20170425006676/en/Employee-Ownership-Companies-Laid-Workers-Firms-Recession https://www.nceo.org/assets/pdf/articles/EO_Costs_of_Unemployment.pdf https://www.esopassociation.org/articles/employee-owned-companies-have-fewer-layoffs The NCEO, ESOP Association, the Beyster Institute and the place at Rutgers in the first link are the best places to find research on employee ownership. The NCEO and ESOP Association tend to require membership to get their best research or you have to pay to get the research on a per paper/book basis. The lower cost of unemployment insurance by employee owned companies has even caught the eye of several congressmen. You could lower government costs and spread the benefits of employee ownership by encouraging employee ownership seems like good public policy to them. Hope that helps.

I realize this doesn't really help or answer your question but I can't even figure out why a company wouldn't supply SPDs. Given you can do it almost exclusively electronically now a days. I work currently for a company with about 60 employees. We use I think the term is a PEO that handles our benefits and payroll stuff (that is the technical term by the way ?) I could go on a website right now and get every SPD for every benefit I have. I get why people didn't want to do it back when it cost $5/package to send a paper SPD to 2,000 employees. But now it is so cheap it makes no sense.

Maybe it is me but Lucy's question and follow up comment is vague on an important point. In both comments it isn't clear who is paying. In comment one she says "offers" and she talks about who gets to elect but never discusses who pays. Who is paying for the coverage over $50k? I have worked for employers that paid for life insurance coverage that was 2x my salary and I paid nothing for that coverage. I had taxable income on the part of the coverage that exceeded $50k and that is my understanding how it ought to go. On the other hand if the employee pays it isn't taxable. Full disclosure this is a benefit area that I am NOT an expert in. I am a simple CPA and what I learned about this was because of my own taxes and that is what I am basing my comment on.

I guess it depends if the $1,000 is the total vested account balance and this is a full payment. I think the gross taxable payment is $900 and you withhold on that. If this is an in-service and there is $1,100 in the account I can see how you pay $1,000 and take the $100 from the account. That is how loans are done.

I have seen both but my understanding the correct way is $900 as long as the $100 is coming from their account.

Just an observation I would always be slow to do an interim valuation. As today shows you can recoup a lot of the loss quickly. It is just the nature of balance forward plans to have a lag between the valuation and the payment. I used to do a lot of balance forward PSP and once you explained to people over the years they benefited and got hurt by the lags most of them accepted them. By that I mean most people who have been in the plan a long time got a benefit because the plan paid people out based on the last valuation and the market went up and they got extra gain and sometimes the market went down and they got extra loss. It is likely that in the long run it was mostly a wash.

Just curious do you have a policy with both up and down market thresholds for when you would do the interim valuations? I can't cite anything (haven't really looked either) but it would seem odd to say you are protection participants if interim valuations happen only with sharp down turns I mean up until the moment the person is paid the terminated person filling out the forms is a participant also. If you don't have both up side and down side thresholds it seems like heads I win and tails you lose policy. To say the payments will shrink because of interim valuations on a sharp down turn but never go up on sharp up turns seems to hurt participants who are about to be paid at the expense of the ones staying behind. I am not sure you can justify treating those two groups of participants that differently.

I would be interested in updates as the DOL part unfolds. If you don't mind send them out way. Thanks

I forget the exact wording in the rule but isn't it the deposit is late if not done as soon as administratively possible? Can a case be made the blackout makes it not possible until over? I am asking not arguing this position. It has been a long time since I did any daily 4k work but it seemed like all the plateforms would take deposits and put them in a money market fund until they could be split back in the day to solve this.

Isn't the "original sin" on Congress? Instead of reasonable penalties they do things like: Miss an RMD the correction and maybe pay a small penalty, if you want interest on the missed payment to the government. Nope it is a 50% excise tax no one at the IRS wants to impose because it is draconian. No one wants to tell a retiree on a fixed income becasue someone didn't compute the RMD right they have to pay $1,000 of the $2,000 that should have come out of their 401(k) account to the IRS. So they came up with VCP to fix it for a reasonable cost and penalty waiver. Or because one of what seems like an endless list of things that can go wrong on the client's or the TPA's side of things the plan doesn't simply make a correction to get people back to where they would be and maybe pay a small fine because of an error.... Nope it is the plan is technically disqualified. I have ESOPs that have 100s of millions in assets in them and if you read the rules literally when the disqualifying defect happens all those assets are now taxable and oh those 500 distributions you paid last year and the year before that figure out which ones went to an IRA that money shouldn't be in the IRA even though those people had nothing to do with the error. So once again the IRS has simply come up with a more reasonable way to deal with this. Yes, add to it my understanding is the IRS has less employees working for it than it has in decades because of budget cuts by congress and the POTUS and sure you have a mess. But Congress could have come up with a realistic set of penalties and corrections most of which could be handled as self corrections with maybe a form paying a penalty. The IRS could choose a sample of them to make sure people are doing it right.

If it hasn't been combined I would think about not doing so. Often times the two sets of money have slightly different rights and benefit attached to them. For example, she can mostly take their late husband's money at any time as a beneficiary and her money she might not have any in-service withdrawal rights. There is a good chance both are over 59.5 but if she isn't she could take those funds and get a death code on a 1099-R and not her money. I see this situation about once every couple of years and we always leave the two accounts separate. We might rename the one into her name as beneficiary to make it clear whose money it is but I think mixing the money is a bad practice. The exception would be if she actually signed a distribution form that gave her the option to take the money, put it in an IRA and she specifically said she wants it rolled to her account in the plan. But I wouldn't just tell her the plan is going to merge the two accounts.

When you deduct and when you allocate are not linked. I know of no way to not allocate these funds.

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.