ESOP Guy

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.

This question appears to have been asked twice and answered in the other version.

No

I think the bigger issue would be is it worth to challenge? There would have to be a lot of unvested money at stake to make a court case worth the time. Even in my large clients the difference between between vesting those directly effected by the Partial Termination and everyone termed just isn't that large amount of money. It rarely breaks the $10k mark in my experience. I mean the people with the largest balances tend to be 100% vested already.

If management is leaving cash off the balance sheet there are deeper problems than the stock price. But most companies leaving cash off the balance sheet is hard to do. The CPA firm might detect it. They often times have loan covenants to meet and missing cash make that harder. You better have some good evidence before you go around claiming the balance sheet is materially misstated to a lawyer or DOL.

I get the impression there is some debate in the appraisal community as to how and when to factor in the fact they company does have a claim on its future cash flow. We are outside my expertise so I am hesitant to speak in a way that comes across as authoritative. So yes it needs to be left up to the appraiser.

I am not an appraiser. I help companies run their ESOPs from an accounting, regulatory and participant accounting functions. I work for a Third Party Administrator. My point is I can't speak completely authoritatively regarding how an appraisal is supposed to work. In the end it is the appraiser's job to get the fair market value of the stock determined. I have always understood the cash is in that fair market value like any other asset regardless of why it is on the balance sheet. Legally speaking nothing stops the company from using the sinking fund's cash to run the company so it is simply an asset.

Do you know who is the trustee of the plan? Is it a member of management/board or an outside trustee? If it is an outside trustee than I find the idea of what you are saying next to impossible to believe. Even if there is an inside trustee I find what you are saying is hard to believe. The appraiser will require a set of financial statements from the company. They will want some kind of assurance from the company's CPA the financial statements are accurate. It might not be a full blown audit of the books but the CPA isn't going to give some kind of assurance on people's word either. The simple fact is for your charge to be true it would take a combination of management, an appraiser, trustee and the company's CPA to be not doing their job. I am not saying it can't happen. I have worked with ESOPs since the '90s and there are some crazy stories out there but what you are suggesting isn't easy to do. You don't have a legal right challenge the appraisal directly. You have some rights to challenge how your benefits are paid and how much. You can go to the DOL and file a complaint. But the most common reaction from a company is going to be to lawyer up. Those legal fees coming out of the company is going to reduce the cash on the balance sheet and reduce the company's value also. I would add the appraisal is a pretty complex process and idea. There can be discounts for things that most people don't think about- lack of marketability, if the company has risks because one or just a few customers are a very large percentage of total gross revenue for example. So a price being too low or too high isn't obvious. You can find legal cases where dueling appraisers come up with some pretty different numbers. In all seriousness what makes you think the share price is too low? What is your baseline to compare that price to? Why don't you think the cash on the balance sheet isn't included in the valuation? If the appraiser can see it on the balance sheet they are going to factor it in to the stock price. I would add having a lot of retirees and a lot of cash on the balance sheet sounds like good management on the face of it. The plan sponsor needs to have cash to fund the distributions the retirees are going to be paid. Is that cash simply a sinking fund for the ESOP repurchase liabilities? If you go to an ESOP conference they talk about setting up sinking funds to fund distributions all the time. Based on the very limited few sentences you have written and nothing else I see prudent planning by having a lot of cash on the balance sheet. Do you really have solid evidence?

Is this dumb? Most likely. Is it illegal? I doubt it. I am not a lawyer however. Now they might have to pay Unrelated Business Income Tax (UBIT) on the profits since it sounds like they are trying to run a tax free business. I would look into that topic as if they have to pay taxes on their profits my guess is they will be less interested. You might want to search this forum using the words "real estate" for the many horror stories of how RE in a 4k plan can go bad.

Any other thoughts? I was heading towards where David went in terms of thought process.

You are mixing and matching a lot of ideas here in my mind: 1) It is my understanding the most conservative approach is to say the trust isn't gone until all the checks are cashed. I know people who file the final 5500 showing an asset and a payable that net to zero. 2) To me the audit question is more interesting. If it was just one check outstanding and you say that person is a participant still than isn't the plan's opening body count well below 100 on 1/1/2020? So there is no need for an audit for 2020 in my mind. Now if there were a hundred uncashed checks..... I will let the lawyers talk about the 1 year thing more authoritatively. I have never seen a plan get in trouble for going beyond 1 year if it is actually working on getting everyone paid as a matter of observation.

Someone has to pay the vendor!

I agree that merely being terminated is not enough to say no worries. Someone has to guide the plan and trust to paying out everyone. I don't think Company A is responsible for the ESOP merely because company B doesn't exist. Even a terminated plan is supposed to have a sponsor until fully shut down. Someone is still the plan's trustee also. If A owns the stock of B and B is the sponsor doesn't A have control of the sponsor? I think you are basically correct but for slightly different reasons. I am assuming the cash paid for B's stock is in the ESOP's trust and needs to be paid out. I am shocked people aren't being hit up with requests of when do I get my money. Curious who does A's management think ought to be responsible for finishing the process of closing the trust and paying people out?

I have an ESOP that defines Normal Retirement Age (NRA) as age 65 and 5th Anniversary of Participation. When the plan started it was a 9/30 PYE. The first PYE was 9/30/2015. In 2016 they switched to a 12/31 PYE. So they have a short plan year of 10/1/2016 to 12/31/2016. I have a person who entered on 10/1/2014 the Effective Date of the Plan. As of 12/31/2018 he is over age 65. Does he have his 5th Anniversary year? Do you count it as PYE 9/30/2015, 9/30/2016, 12/31/2016, 12/31/2017 and 12/31/2018 which comes to 5. Or Do you count actual anniversaries 9/30/2015, 9/30/2016, 9/30/2017 and 9/30/2018 which comes to a count of 4 by the time the person terminates. It makes a difference as his YOS for vesting are at 5 as he got a YOS in the short plan year. However, this is a 2/20 vesting scheduled so by YOS he is 80% vested. If he has hit his NRA he is 100% vested.

Not my area of expertise at all but I was thinking under the Affiliated Service groups you needed common ownership for A and B types but NOT for the Management type. I am close to 100% of my knowledge here. See starting page 67 in this pdf by the IRS. https://www.irs.gov/pub/irs-tege/2013cpe_related_employers.pdf

I agree with C. B. Zeller those articles are written for the average person and they use language that makes sense to them. In many ways it looks like you are paying interest to yourself but legally speaking it is paid to the plan and allocated to your account. In my world the common way of explaining an ESOP is legally incorrect. It is often times said you own stock in the company in your account. For most purposes that is a good description but legally speaking all the stock in an ESOP is owned by the trust and the participants are a beneficiary of the trust. There just isn't much practical value in all the extra verbiage when doing an enrollment meeting so it is skipped and we talk about how the participants own the stock of the company. Even in a 401(k) plan we talk about how you are invested in this or that mutual fund like you own the mutual fund. Legally speaking the trust owns all the assets and the participant is the beneficiary of the trust. The poor person who asked the original question getting hit with these technical side conversation! To that person I agree with the other people go talk to HR and see if there is some kind of misunderstanding as I have never in my decades seen a rule like you describing.