ESOP Guy

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

Yes, because the first dollars from the plan is the RMD per the regulations.

The default is 10%. They can use a W4-P to elect out of withholding or ask for more. Our firm just puts the ability to do a withholding change on an RMD (or hardship) form we send that explains the RMD (hardship). We make it clear that the "r" stands for required so they will get a check even if they do nothing. My point is I have seen a number of firms just use the form as a substitute for the W4-P and never seen it be an issue. If pressed for time we have told plans to send the RMD and withhold 10%. Since people are used to the 20% rule it is rare the get an objection even if it is for the wrong reason. Sorry, I got a little confused and started to write RMD a lot when the person asked about hardships which is the same basic answer. I didn't intend to cause confusion. I guess I am still recovering from 5500 due date.

Doesn't the allocation of fees have to be described in the document? I mean I have seen some that give the Plan Administrator discretion but read the plan document first. As for the method I have seen just about all the ways described so far used. I have seen per capita, pro rata and the mix per capita and pro rata method described above. I even had one plan that was a balance forward that put most of the money in low yielding cash investment and charged the audit to the plan so every year the plan had a negative rate of return. The company couldn't understand why so few people wanted to put 401(k) deferrals in the plan! Who doesn't want to see money come out of your pay check knowing it will shrink every year????

I know this isn't an answer to your question. Nor is it a criticism or objection to the idea. I am simply curious. Is this stock publicly traded? if not, these people are going to have a hard time finding IRAs to hold the stock, It isn't impossible but harder. And if they don't put it in an IRA they have to pay taxes on a distribution when they are <59.5. Obviously, if they are publicly traded those kinds of issue will pretty much go away. Like, I said I am curious because as the alias implies I work with a lot of plans that have employer stock so I have seen my fair share of stock distributions and what happens after the stock leaves the plan.

Although if someone was made 100% vested with the termination resolution I see no way to undo that part.

We figured out the EIN is the issue shortly after I posted this. The odd part is the change was in 2012 and this appears to be the first time we are being asked. So it took them 5 years to notice it and wonder why.

I know there is a large thread about getting rejected or bad 5500 extensions. I just got a letter saying a client's 2017 5500 wasn't filed when I can prove it was. Not a problem just wondering if anyone else has gotten and if there is an emerging pattern here also?

As an aside would USERRA allow you to deem this person as severed if they been on active duty the whole time?

I have never heard of this being a problem before. There are a lot of exceptions to the stock distribution rule. All S Corps don't have to allow it for example. I have seen plenty of amendments that terminate an ESOP turn them into profit sharing plans as part of the amendment. Although that seems to be in plans where the share were bought from the ESOP as part of the transaction. ESOP are required to be primarily invested in stock and once they go 100% cash that isn't true. I know trustees and Plan Administrators have a lot of discretion on how the assets are invested. You can force terminated employees out of the stock as a matter of regular practice in an ESOP. I can't think of a cite but I don't see it as a barrier. There are some lawyers that hangout here with deep ESOP knowledge also They might comment for you with a cite.

Oddly, I just has a version of this conversation here. We use Sharefile. To prove to myself there was a gap I did the following. 1) I took an e-mail a co-worker had sent to a client with a distribution form and had cc my work e-mail address and forwarded it to one of my personal e-mail addresses. 2) To be very clear I am now working from an e-mail address that was not listed on the original e-mail. I was using a computer that is not a work computer. Sharefile asked me for my name. I gave as a first name: identity as last name: thief 3) Sharefile allowed me to see and download the distribution form. At this point I would try and ask for the distribution claiming I moved and put a new address on the form. Yes, I have brought this to the attention of my IT people and management. I think this is what you are saying is your problem. While the whole thing might be encrypted while being transmitted once someone gets the e-mail it doesn't seem to do anything to determine if you OUGHT to be allowed to open the attached file. It is my understanding there is a setting on sharefile that makes a person set up an account and only the account holder can access the e -mail and attachments But it is a setting you have to set.