ESOP Guy

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.

Question 1: We have a mix that have and don't have a procedure that puts a hold if the plan thinks there is a QDRO coming or not. (My sample is all ESOPs now) Question 2: I don't recall there ever being a major fight over the procedure to put a hold on an account as long as we can explain this has been the procedure for years and it has set time limits. If you can convince people they are being treated the same as everyone else and you let them know this procedure is about making sure the plan has all the information so it can do things correctly most people seem fine with trying to be right. Question 3: I don't think I have ever heard of a plan going to court on this issue. Question 4: I don't ever recall it. Question 5: It doesn't seem to be high . In fact the thing that gets me yelled at more than anything else is more unique to ESOPs. Being as the stock price is set once a year we have a hard time explaining why they should write that the account balance be split as of an allocation date (most of the time a 12/31) and why ESOPs are so slow to pay in general. People are used to 401(k) plans being able to split and pay a QDRO within days of the judge signing the thing. An ESOP can still take months to know what the balance that needs to be split is and to split it.

Glad to hear it is working out.

Look I am a simple CPA working for a TPA and all your words are nice and most likely are all legally corerct. I have been working in the DC field since the early 1990s. I have never seen what you keep describing. What I get is a phone call from a client and they say: Joe is saying he is getting divorced what should we do? I have never in my life gotten a letter that quotes 20 U.S.C..... If we got a letter like you describe we would most likely tell the client to go talk to an attorney. Or we get a call that says we got this QDRO thing what do we do? We some times get a copy of a divorce decree but that is rare. So to answer your question of what what would I do if I got such things you describe? My answer is simple: I will let you know when it happens but in a better part of 30 years it hasn't happened. yet. Call me cynical on this one.

I guess my question would be: So what if it is? Based on all the descriptions it clearly isn't a QDRO. If they have a procedure that says if they get a DRO they can put a hold on the account I guess I can see this being enough to put the hold on the account until the time is up or they get a QDRO. But strictly speaking I am not sure I have seen a legal definition of a DRO.

You have hit upon what I consider to be one of the hardest topics in this field. I can't stress too much you need to do a lot of research on the leased employee rules. https://benefitslink.com/cgi-bin/qa.cgi?db=qa_who_is_employer&n=20

This I 100% agree with. I am a firm believer in, "if in doubt D". If you aren't sure the person was reported with an A before send the D through. That is so much less effort than proving the person was paid out years after the fact. Likewise, I have not ever seen an example where someone got blow back from the IRS saying you reported a D and there never was an A.

While it is my understanding a martial settle agreement can in theory be a DRO and a QDRO. What the people I know that know this subject well tell me is as a practical matter they almost never have all the needed characteristics. Based on the original description I don't see a QDRO. It has always been my understanding that DROs should be rejected for what seem like even minor technical issues. For example in the ESOP world we see DROs come in that call the plan, "XYZ Corp Employee Stock Option Plan". We will always recommend the client reject the DRO and make them get the right name "Ownership". So unless what was sent to you have all the the needed requirements I stand by the advice given by most of the people in this thread.

Huh? Here is the instructions for the Code D Code D Use this code for a participant previously reported under the plan number shown on this form who is no longer entitled to those deferred vested benefits. This includes a participant who has begun receiving benefits, has received a lump-sum payout, or has been transferred to another plan (for example, in the case of a plan termination). Also complete columns (b) and (c). Participants should not be reported under Code D merely because they return to the service of the plan sponsor. These people haven't been reported previously so why use a D now?

My only question for the lawyers that so far I have not see addressed is this: Is making a deferral election in any way a contract to have money taken from a check or some other way ? As a general rule minors can't sign contracts. So if a deferral election in any way forms a contractual relationship I would think a parent needs to be involved.

We have always understood this part of the instructions to mean you don't report the person with your fact set: When Not To Report a Participant A participant who has not been previously reported is not required to be reported on Form 8955-SSA if, before the date the Form 8955-SSA is required to be filed (including any extension of time for filing), the participant: 1. Is paid some or all of the deferred vested retirement benefit (see the Caution), 2. Returns to service covered by the plan and/or accrues additional retirement benefits under the plan, or 3. Forfeits all the deferred vested retirement benefit. If they have been paid before the form is due they aren't reported.