ESOP Guy

I am working with an ESOP to get their problems cleaned up. We need to file an amended Form 5500 for the a 10/1/2014 to 9/30/2015 plan year. We can't access the 2014 form on FT Williams. I don't do really old forms like this very often but something in the back of my mind says after so many years EFAST2 requires you to submit very old 5500 on the current year's form. So I am thinking this is right. Seems very unlikely FT Williams would get this wrong also But can someone confirm this for me? Thanks

There are lengthy debate threads on the question is the RMD amount a minimum and you can take more vs it is simply the amount authorized to be taken on this board. I am with Lou on this one. Unless the plan has an in-service provision you take the RMD and not more. I have a few plans were the plan attorney has said the RMD is just a floor and you can pay more than the RMD. For a long debate read this.

My only issue would be to ask why didn't forfeiture happen when the 5 BIS happen? That has got to be the latest date the document would have said it ought to have happened. So you had a failure to follow the document in my mind back in the 2009-2020 time frame if this person termed in 2004. Had the document been followed this question wouldn't have even come up. I would recommend at least make sure your firm's procedures look for people who ought to forfeit when the document says even if they aren't paid for all clients.

I agree you are reading the regs correctly. Let's say a plan says a 0% vested person forfeits on date of termination. So Joe is a 0% vested person terminates employment on 10/15/2019. The plan termination date is 12/5/2019 does Joe have any rights in the plan that become non-forfeitable on 12/5/2019? I think the answer is "no".

A well draft termination amendment answers your question. I find most of the termination amendments are not well drafted. If someone calls me before they draft that amendment this is one of the first questions I ask them to answer in the amendment. If the amendment doesn't say, you need to go to the document and read the forfeiture provisions in your plan document very carefully. I have some plan documents that clearly say the forfeiture happens on the last day of the plan year of the triggering event and other say the forfeiture happens on the date of termination if they are 0% vested. Some even say they forfeit as of the day they are fully paid if being paid their vested balance is the triggering event. My point is some plan documents tell you exactly when a forfeiture happens so is that date before or after the plan termination date? If before you can make a reasonable case they forfeited and are not 100% vested. If the forfeiture date is after the termination date they are 100% vested and they got a "windfall". If you get through all that and still don't know I think the best answer is "yes" they are 100% vested. So in order: 1) Read the termination amendment- if no answer 2) Read the document- if no answer 3) Make them 100% vested Is my take on this. There is no hard cite in the regs that I know of.

If you do the documents, including SPDs and distributions forms, correctly I am pretty sure you can single out the terminated participants to pay some of the fees the actives don't pay. So if the plan sponsor pays most of the fees and you help the client to get the documentation lined up the fees might encourage the terms to take their money.

Yes, if the fiduciaries are making an investment decision they have to show the investment is prudent. With interest rates so low many would argue a pure money market fund isn't prudent. There might be some discrimination issues but I would be more worried about the fiduciary duty issues.

I am confused what exactly is the question. Are you asking can they still make a deductible contribution for PYE `12/31/2018 ESOP in Dec of 2019? I don't see how that can be done. Intent has nothing to do with when a contribution is deducible. or Are you asking if they actually set up a plan back in 2018? If all the paperwork was in place I think there was a plan. It just sounds like there are no assets in the plan as of 12/31/2018. I am assuming you are working with a 12/31 PYE since you never stated what the PYE is.

There are practical issues here also. What happens if the person defaults on the mortgage? Now the plan has to come up with the cash to foreclose on the loan. The plan forecloses it now has real estate in the plan. That is a host of problems. If they go all in and put most of their account in these types of assets what happens if they need an RMD. Will the monthly payments be high enough to supply the cash to pay each year's RMD? It isn't like the plan can borrow money to fund an RMD to be paid later. If I thought about it for a while I might think of other possible problems.

I know Millennium Trust is willing to set up an IRA in this case with a basis for that fact pattern. I have concerns a record keeper is declaring policy instead of the Plan Administrator but I think there are solutions to many, if not all, of the practical issues to the move.

He said 401(k) plan so I would assume it will be a C Corp. An ESOP can have S Corp stock and not have issues except as pointed out the ROBs structure will almost never fly with 409(p) testing. But S Corp stock in a 401(k) plan has UBIT tax issues. An ESOP doesn't have to pay taxes on the flow through income from the ESOP but a PSP/401(k) plan would have to pay income taxes on the flow through income. That often times blows the PSP S Corp model. I guess you could make the portion with the stock an ESOP and the rest a 401(k) plan thus creating what is called a KSOP. But I have not ever seen that structure with a ROBs. I will admit I have only seen a few ROBs however.

ESOPs tend to be busy in the Oct/Nov doing the payments because they have finally gotten to the point where they can know what to pay people. I mean some ESOPs are better than others and get their certificates out in March-May and pay in the summer months. But plenty of them get the stock price in Sept/Oct range. They finish the annual work. They file the tax forms by the drop dead date of 10/15 and start sending forms. The rule is they can hold off paying you until the year after the loan is paid. So if it was paid in 2018 you should expect to get at least your first installment in 2019. They have to give you 30 days to return the forms so they are almost out of time to send forms. Since it takes time to cut the checks around the 3rd week in Nov is the absolute latest for most plans to send forms. If you don't have forms contact your former employer and make sure they have an updated address and ask when they are sending forms. It could be as simple as a miscommunication. It happens more than you expect with wait times to make payments going into the years after one is employed by the company. They can pay you in installments still and don't have to pay you in lump sum. Most (I emphasis most) plans the way the installment works is the first installment takes your vested balance and divides it by 5. If your vested balance is $60k the installment is 60/5=12k. For installment 2 they take the new balance, you should share in any stock price change for good or bad as long as your account is still in stock- they can put it into cash that is another topic- and divide by 4. Next divide by 3..... There are some that use more complex methods for the installments but that is most common method. If they aren't giving you answers when the forms will be out still let us know. You can escalate the situation by going to the DOL or lawyering up but I caution you the most common response by a company to you doing that is they get their own lawyers. Getting your own lawyer is very expensive. Escalation can be counter productive if all that is going on is miscommunications. So once again try and get a firms answer they are sending you forms now and have your correct address. Let us know if that doesn't seem to work.

I am not a fine of ROBs but leaving the editorializing about that aside for a moment yes there is a way to buy the stock from the 401(k) plan. You would be best to have a good ERISA lawyer and maybe even an outside trustee help you do such a transaction. The government is going to look very carefully at the transaction to see if you really paid FMV for the stock. I have never seen it done but it would seem like if you are willing to stop being the primary owner of the company (say you are retiring and want to cash out) you could convert the plan to an ESOP and sell the company to the employees. An ESOP is a type of retirement plan. You can find banks that finance ESOP transactions. What I will tell you is that either idea has some pretty steep costs. Lawyers and an independent trustee to help you prove you paid FMV could cost you in the $10ks. An ESOP has those costs also. If you study a ROBs make sure you run the plan correctly. It is easy to have the IRS come in a blow the whole thing up.

So many words and yet you never explained why the person's taxable income is $20,100 when they had $20,000 in wages except they generated $100 in taxable income by paying the $100 interest on the 401(k) loan. Likewise, you keep saying they are no worse off if they take a bank loan but as the math shows their bank account is $100 smaller if they take out a bank loan. The math is simple.

I know this isn't the answer you will want to hear but they can pay in an installments. It is rather common for ESOPs to do installments at this point for large balances.

Simple example 1: I get paid $10,000 day 1 and put all of it in my 401(k). My taxable income is $0. I have $10,000 in my 401(k) plan and $0 in the bank. On day 2, I get paid $10,000 and I put it in my bank account. My taxable income is $10,000. Note I have been paid $20,000 in wages. I now have $10,000 in my 401(k) plan and $10,000 in the bank. On day 3, I take a 401(k) loan of $10,000 (ignore the rules on how much I can take it doesn't matter for this problem). My taxable income is $10,000. I now have $10,000 (note) in my 401(k) plan and $20,000 in my bank account. On day 4, I pay back $10,100 to the 401(k) plan to repay my loan. My taxable income is $10,000. I now have $10,100 in my 401(k) plan and $9,900 in my bank account. On day 5, I take a full distribution from my 401(k) plan which is $10,100. My taxable income is now $20,100. I now have $0 in my 401(k) plan and $20,000 in my bank account. Those people who say I am not taxed on the interest how can my wages be $20,000 and my taxable income be $20,100 if the interest isn't double taxed at some place along the line? How did I get $20,100 in taxable income and only $20,000 in my bank account? Simple example 2: I make $10,000 on day one and put it in my bank account. My taxable income is $10,000 and I have $10,000 in my bank account. On day 2, I get paid $10,000 and I put that in my bank account. My taxable income is $20,000 and I have $20,000 in my bank account. On day 3, I take out a $10,000 loan from my bank and put it in my bank account. I now have taxable income of $20,000 and I have $30,000 in my bank account. On day 4, I pay back the bank loan for $10,100. My taxable income is $20,000 and my bank account has $19,900 in it. You will note my taxable income is lower here but my bank account is $100 higher than in example 1. So unless the taxes on the double taxed interest is 100% or higher you are better off paying the interest to yourself ignoring opportunity costs. Until someone can explain where they think I got the math or law wrong I stand by my claim that interest is double taxed and you are better off paying the interest to yourself than the bank. Once again on that last part I am ignoring (as admitted the first time) the opportunity cost of taking the funds out of the 401(k) plan and them not being invested in the market. But I took Larry's challenge and ran the numbers and they support my claims.

Strictly speaking they aren't exactly the same position as a bank loan. In a bank loan the bank got the interest and paid taxes on those earnings. With a 401(k) loan your retirement plan got the interest the person paid and will pay taxes on those earnings when paid from the plan. But unless the tax rate is over 100% they actually are better off paying the interest to themselves over the bank. The above leaves aside the opportunity cost of what the money could have earned if left in the 401(k) plan. But if a person maps out the flow of money a bank loan means the bank gets 100% of the interest and pays taxes. In a 401(k) loan the person gets 100% of the interest and will some day pay taxes on the interest. In the end I basically agree with Larry and the difference here can be small.

I think you are leaving too much out of the question to give a good answer. If they are simply talking about setting up an ESOP by an S Corp and neither the company nor the trust will pay income taxes on the company's net profits that is basically true. There is a lot that can go wrong, very BADLY wrong, with that structure and if they are planning on this they need to get people who are experts on S Corp ESOPs to help them or they could bankrupt the company with IRS fines. But your question is so vague and open ended we need more data to give a more specific answer. For example you don't normally allocate profits. You allocate a contribution or dividends/S Corp earnings payments. You might want to search the NCEO and/or ESOP Association websites to find educational material to help get some of the basics.

I would wait but I will admit I don't work on any 1 person plans anymore so maybe someone with more experience will give their opinion. As an aside (the real reason I replied) back when I did do a few we always filed the 5500 regardless of asset size. That small of a 5500 isn't that hard or time consuming to prepare. If you filed an extension you most likely have them set up on your form software. We always did trust accounting even on the 1 person plans back in the day regardless. Most importantly by filing you start a number of statute of limitation clocks. To me so little in terms of cost/man hour(s) is saved by not filing and so much is gained by filing. Off my soap box for this morning.

I don't think the issue is the rollover. I see no reason the rollover would be an issue. I think the issue is the plan wasn't really terminated back in 2017. So the question is does the plan need to go back and amend the 2017 5500 and file a 2018 5500 and will need a 2019 5500 for the short plan year until the assets leave the plan in 2019? If it were a small amount I would say no harm no foul and say just get the assets to the IRA. But you say it is a large amount. I think I would look into what happens if you say the plan wasn't really terminated. You might have to file the 2018 5500 under the late filing program to keep the late filing penalties to a minimum. Like I said the assets were in a plan and are being rolled to an IRA so I don't see why the rollover can't happen. As always I am happy to be told I am thinking of this wrong but to me this plan wasn't actually fully terminated in 2017 that is the "primary sin" of this issue.

I guess I don't understand the question.

Strictly speaking the vested balance is the total balance, including the loans, and you then take the vested percentage. Simple example: Assume the person is 100% vested. They have $6,000 in mutual fund balances and $4,000 in loan balance for a total account balance $10,000. The vested balance is $10,000. What I can tell you is some recordkeepers will only show the $6,000 as the vested balance. I THINK they do that to let people know how much you would get paid if you were to terminate and asked for a distribution. The platform the company I work for does that and I am not a fan. The loan is an asset of your account. If they want to show how much you are going to get paid if you terminate and don't pay the loan back they can start with the actual vested balance and start subtracting the loan from that point. Sorry, if this is more answer than you wanted.

I know this doesn't help but.... It has been a while since I heard or seen something this brazen by someone regarding a retirement plan.

If you search for 20% in this publication https://www.irs.gov/publications/p575 You will find the following: If an eligible rollover distribution is paid to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to another qualified retirement plan or to an IRA. However, you can avoid withholding by choosing the direct rollover option, discussed later. Also, see Choosing the right option at the end of this discussion. A hardship isn't eligible for a rollover distribution.

Question 7 is the cite fo what Lou S and I are talking about. https://www.law.cornell.edu/cfr/text/26/1.402(c)-2