ESOP Guy

I do appreciate the problem. I hope I am making it clear I don't think my view has to be correct. This is one of those areas where you better be humble as there isn't a clear answer.

P gets a pro rata share of $101,000 based on $100,000 account balance rather than his share of the assets that are actually invested. I am not sure I agree with that statement. Isn't this person invested in the $50k (ie loan) that earned the $1,000 interest? His account is clearly still $100k. The $50k loan this person took is an investment the plan holds Your statement seems to imply the $50k in his account is missing from the plan but it isn't. It is the loan and making a return based on the interest the loan is adding to the plan. This might be a good reason to change the plan going forward to make new plan loans a segregated involvement. Not sure you can change it for existing loans. I know that doesn't help you in the here and now.

It has been over 10 years since I did balance forward 4k/PSP plans so factor that into this answer I guess. The few times where the loan was part of the pooled investments and not a segregated investment we treated it as if the plan has invested in a bond from say IBM. So I think the 2nd take is correct. The person's account is $100,000. You total up all the pooled accounts earnings including the loan interest and allocate it like you normally would. In fact in one case I remember there was a down market (might have been the early 2000s) and the loans in the pooled account were what helped the total return stay positive. There were a lot of loans. To me thinking of the loan as just another fixed income investment by the plan helps keep it clear. That was how we did it. I don't have a cite. We didn't get into your legal question. But if you are correct than it would seem like you are saying all participant loans are required by law to be a segregated investment would be the practical ramification of what you are saying. Out of curiosity does method #1 get him close to his $1,000 interest on his $49k plus his pro rata share of the non-loan interest earnings on his $59k? If not, is the plan's method or earnings allocation harming him in a way that isn't legal? I am asking not advocating a position I really am asking. I would recommend running that math.

I am with duckthing and/or your description is unclear. What exactly does the plan say? Does it say that someone who has to take an RMD can take a distribution in excess of the RMD also? If so, than doesn't the person have to be required to take an RMD before they can take a withdrawal? You seem to be saying a withdrawal can trigger an RMD. I am not sure how that works as that isn't a requirement under the law for an RMD.

Yes, the regulations are very clear on this point. The first dollars out of the plan are the RMD dollars.

I guess I am confused. If this was in 2018 and the person has filed their taxes haven't they gotten credit for the withheld amount already? Why fix it if that is true? It seems too late to roll the Roth money to a Roth IRA it seems. That would seem like why a person would be upset they had taxes withheld and couldn't roll it to a Roth IRA. If this payment happened in 2019 are you saying the 1099-R was issued already and needs to be fixed? if not, just show the actual withholding. I am unclear what the problem is.

Have you had any conversations on what this plan's attorney is willing to call de minimis for 414(s) purposes? the IRS has never defined it. I have had exactly one attorney sign off on a 7 percentage point spread in my time. That was aggressive in my mind.

Interesting question as you are taught from day one you have to follow the terms of the document. This IRS website says that but doesn't document the legal reason why. https://www.irs.gov/retirement-plans/a-guide-to-common-qualified-plan-requirements#2 Basically all the other requirements they do document a reason why it is a requirement.

Important correction. The normal due date of a corporate tax return is 3/15. So 3/15/2019 this year. The extension is for 6 months of 9/15. Although I think 9/15/2019 is a weekend but that is the normal date.

My understanding is that is a failure to operate the plan in accordance of the plan document that needs to fixed if there wasn't a timely amendment.

I don't think we would count a person paid on the last day as being a participant on the last day. I see how you can make the case for it but I don't think we would do it. So "no" I don't think I have ever seen a case where the beginning count is lower than the prior ending count outside of an error. The harder situations are the plans that say everyone enters on 1/1 if they meet the entry requirement any time during the year. I have a plan that if you meet the requirement on 12/31/2018 your date of entry into the plan is 1/1/2018. Once again you don't get too worked up about this if you are well above or below the line for a plan audit. You spend way more time on it if the person who met the entry requirement on 12/31/2018 is the person who puts you over the line and you now need to get an audit. Does that person get counted as being a participant as of 1/1 or not for audit requirements? What I have seen is that person doesn't count for this purposes but if you have a count over the limit on the 5500 and don't attach an auditor's report you will risk the letter asking why.

We add the 1/1 entry people. On the other hand once you get past the audit requirement I have not seen anyone care. As you say if it goes from 30 to 32 I have not seen an issue during an audit. I am more likely to see 500 to 502 but same thing. The number I see IRS auditors zero in on is the number of terms not 100% vested and vested with balances. They are looking for a partial termination and want to see the 8955-SSA match the other number. I don't think you can make the link they do on that 2nd set of numbers but I have seen them make a huge issue of it.

Our firm also sends them in batches. The few times we have had a client get called on the extension we send the cover letter with that client's name listed and proof of mailing and the IRS backs down every time. Although since you do have time to re-send I don't see any harm in a re-send.

It has been about 10 years since I last worked this kind of very small 401(k) plan with these assets but I think we always knew. We didn't just take the client's word about the assets and values. We asked for bank statements. We had a client once that had a diamond ring as an "investment" in the plan. We were able to detect its purchase by seeing cash leave the bank statement. We asked the client to get appraisals for the ring every year. To not know a TPA would have to just be getting some kind of vague already prepared financial statements from the client. I have never worked for a TPA that would use just that.

To me you had it in your original comment. It says comp paid while not a participant. Your description of the facts says it was paid while a participant. It doesn't say earned but paid.

Doesn't help with the current problem but sounds like they aren't equipped to have 401(k) loans so amend it out of the plan going forward sounds like a good idea also. That might not be a realistic thing for you to recommend but sounds like the right thing to do.

You might want to ask your ESOP TPA if they can do electronic beneficiary forms. We have the ability to allow your ESOP clients to get internet access to ESOP data to our clients and that includes electronic beneficiary forms.

Technically, a KSOP is one plan so one form is all that is needed. It is common for the way they are run they look like two plans but they are just one happy little plan.

It is important here to have distribute the shares to the participants first then do the buy back. While it is legal to have the share to be bought back directly from the plan to fund the payments it is way more difficult to do it legally. You have to make sure the purchase has to be at FMV. You can't use the prior year end price if it is months old or you risk a Prohibited Transaction problem. If you are going to have the shares bought directly from the plan to the sponsor please get a lawyer to help you. As I said in my previous comment a good TPA can guide you though this.

The short term solutions are: 1) Pay a dividend/S Corp distribution which can be added to the ESOP and isn't an annual addition to the plan so you can put as much cash into the plan as you need. The down side to this is dividends are allocated to the people who have the stock. So the people with the most stock will get the most dividends. This to create in the long run a have/have not issue where those who have stock keep having most of the stock and new people having not as much. If this is an S Corp make sure this doesn't create a 409(p) testing issue. 2) Distribute the shares from the plan as part of the payments and have the company buy the shares. It can be set up the sale of the stock to the company is mandatory. Talk to your lawyers to make sure your plan document and other documents are set up to do this before you start distributing shares. This will tend to make the problem of your stock price going up worse as there are less shares outstanding while your enterprise value is mostly unchanged. Long run you need to work with your TPA, trustees and lawyers to releverage your plan. ' You start by doing #2 above. You then have the company sell the shares to the ESOP on a long term note taken back by the company. The goal is to move a good amount of your shares into suspense. If the shares are in suspense they don't have to be repurchased. This slows down the churn. Currently, your problem is you are giving such rich benefits everyone has huge balances when they terminate This helps slow down the growth of those balances. I think you will be stunned what doing this for 2 or 3 years in a row will do to reduce what your repurchase obligation will be over the next 15-20 years will be. A good repurchase obligations study ought to help you determine the right amount to releverage. If you stock price is really high there might not be much you can do but do some of all of the above and you will still have a rich benefit. That happens in some ESOPs whose stock price has done very well. A good ESOP TPA ought to be able to guide you through all of this. I also recommend you start attending conferences put on by your local ESOP Association conference or listening to NCEO webinars and going to their conferences. There breakout sessions on a regular basis on how to handle this issue. Not trying to be mean but it sounds like you could use more information/education and you can find it on the cheap at these sources.

Yes, it is common for an ESOP to do what you are describing.

My daughter owns a property that has an HOA to mostly take care of the common grounds. It isn't in her mortgage payment but she did set up auto payment from her checking account. That is the closest thing I have ever seen to what you are talking about but my sample size is 1 person.

It will be interesting to see if any of the lawyers have an opinion on this. I have not studied the law on this so I am not sure I can cite anything. I guess how do you handle something that would most likely be rare but as to be thought about? I am thinking what if they want to make the spouse the beneficiary for one plan and someone besides the beneficiary for the other plan? Would the spouse being signing it to cover things? I guess I haven't found getting two forms that hard once you have moved to electronic formats for both of them. We have clients were we handle the 401(k) and ESOP. We just don't seem to struggle to get one but not the other. It is more often the struggle is to get even one. However, once we get one the person is willing to do both.

I once lived in a townhouse that was part of an HOA. If I remember the documents correctly they could foreclose to recover a fee. Having said that it is far from clear their claim is senior the secured lien holder's claim. I think that would be one of the risks of going full nuke on the owner. They property could be sold the bank gets paid and there isn't enough left to pay the HOA.

I would make a separate account for the Alt Payee funds. There is most likely different rules regarding how the money will be treated. The most notable would be when the funds can be paid out. Most likely the Alt Payee can take the funds at any time but if restricted it is linked to the former spouse's age/date of termination. There could be different tax treatment when paid depending on the age of the Alt Payee. The times I have had this situation we always put them in a separate account and keep them separate.