ESOP Guy

I agree with ldr here. I don't mind a certain bluntness in answers, I am also very thick skinned so my blunt could be another person's rude. However, I try do make sure initial answers are not rude. It is for the reason I think people should be encouraged to answer. Even if you give a wrong answer you ought to be encourage to give an answer. You should learn from the other answers if you are wrong but that is really the only way to learn here. I know for a fact you can search my answers over the years where I have gone back and edited my answer to say something to the effect: I have edited my answer to nothing as I have been shown to be wrong in my first answer. Sorry for the confusion I may have caused. That should be good enough and encouraged. That is how everyone learns. And in the case of this forum the number of truly dumb questions is very small. So all questions ought to be encourage to be asked.

I don't work on any plans so small that filing a 5500 is optional. However, back when I did I was always in the same school of thought as Larry. The Form 5500 with modern software just isn't that hard to complete and the simple ones for small plans is low in terms of labor. In return your client gets the statute of limitations started. It was an easy recommendation in my mind to make.

We use Millennium Trust for most of our ESOP clients if they need to do a force out to an IRA. It seems to work well. I know they do a yearly search for the person as part of the package of holding the assets in an IRA. The one downside in my mind is the fees. I am thinking it is around $50/year. Pretty common price I find. But on a $1,000 balance that take the first 5% or the ROR. I don't think there is anyone a lot cheaper but just giving you my full opinion. On smaller balances the IRA will be gone after a few years. They are in Oakbrook, IL as suburb of Chicago if that matters.

Personal insight from me for what it is worth. I would see if the powers to be at your firm are wiling to start to work on a basic QDRO policy you can offer to your clients. You can use this to see an area where it would have been nice to have had a written procedure for the client in place before the fact. I will be the first to admit not all the ESOP clients I work with have a good QDRO policy. As you say at times it takes all you have to keep up with the normal day to day flow of things.

The ERISA attorneys I know personally tell me all the time it is often cheaper to call before then after and a fix is needed. Over the decades experience has taught me they aren't being self-serving here.

My guess is the lawyers who know more about QDROs will leave comments at some point but here is my take. What do we know at this point? You have a participant who is terminated. You don't have a DRO or a QDRO. There might be one coming but you don't know that for sure. What does the law and plan document say? You clearly have a distributable event for this guy that would entitle him to 100% of the funds in the account. Is there something in the plan document, QDRO procedure or law that says something different? I have seen plans with QDRO procedures that say if the plan get notified there might be a future DRO to put a hold on the account for 90 or 180 days. After that wait the hold is up and the plan goes on using normal procedures. Does the plan or procedure have any such rule? If so, follow that rule and part of the document/procedure. If not, on what basis are you not paying this person 100% of the money in his account? A well written document or QDRO procedure ought to guide you through this so let us know what if anything they say. There is a good chance it answers your question. But at some point the document says this guy is entitled to be paid 100% of the benefit in the plan for him unless someone can point to something that says otherwise. That is how I would look into this. As for your final question: No I don't think this guy can arbitrarily say just pay me 50% and wait for the ex-spouse to show up with a QDRO to pay the other 50%. He is entitled to 100% of the money since he is termed or something in the plan documents is saying you can put a hold until a QDRO is produced or some time limit is hit.

Point out if the plan terminates before they are fully vested by law everyone becomes 100% vested. Unless they sponsor on employees soon why don't just make the plan 100% vested from day 1?

It quotes the Book of Psalms from the Old Testament. Almost all of them were ancient Hebrew songs.

You really had me confused for a short while. In all my comparative religions class I don't recall reading that line in the Book of Mormon and the language was too modern. I had to Google it. It is from the play not the actual book. Never seen the play so that explains why I didn't recognize it. Now my mind is a little less twisted.

I am not sure how much I can help as audits aren't my area of specialty. But are you saying the IRS is taking the position the name change of the plan from ESOP and Profit Sharing Plan to just ESOP makes these two different plans?

A person doesn't get to decide if they are an IC or not. There are objective tests you follow and if the tests say they are an employee they are an employee. If you treat an employee as an IC there are serious legal issues. You need competent legal help on this question. What I just wrote is a very short summary of what they trained us to know back when I worked for the IRS. We were taught to look for employees who were treated as IC and if we found them problems for the employer followed.

You might want to ask why someone is turning down "free money". I have seen cases where the person doesn't want it because they will lose some kind of low income based government benefit that is worth more to them than the payments from the plan. Knowing that might make it easier to get them to sign a waiver or take some other action that meets their goal and yours.

Can this be legal? Sure Search the term real estate on this board for possible practical problems. Things like what if he needs part of this assets value to pay an RMD becasue there isn't enough cash in the plan to pay an RMD. How do you pay a part of a mortgage? You can find plenty of people who work with plans that came to regret these kinds of odd and illiquid investments.

And anyone with just plain old fashion tax training will tell you that the IRS is being consistent here. This is known as the constructive receipt rule. The person has receipt of the income so it is reportable income. On the payroll side of things you can't refuse to cash a paycheck (I know who gets actual checks anymore?) from late December until the following January and move the income to the next year. You had receipt of the paycheck so you had the income in December. The only grey area would be if the check was sent to the wrong address or something like that but this seems to be saying it is still income.

I am not a PT expert so I am not going to speak to that. But I used to do a lot of balance forward 4k and PSP plans back in the day that were pooled and some of them them used method #2 above for the loans. The collateral issue is no different than with a separate investment or daily recordkeeping. If the person defaults you reduce the account balance of the person who took the loan' and the rest of the participants are still whole. I saw the math all the time back then. You might be able to quibble about some lost interest to the rest of the people depending on how much time passed from last payment to default. In fact it was this experience that convinced me that the idea you should only be able to take 50% of your balance because the other 50% had to "secure" you loan was a rule written by someone who didn't think very deep on this topic. There is no form of recordkeeping I have found that the loan isn't self collateralizing. A default happens you reduce the person's balance and no one is out of any amount of money. It always balances out so if security is the only issue you should be able to take 100% of your balance. If they just want to make a limit for the sake of a limit fine make it 50% but need idea you need the other 50% as collateral is not a valid reason for the 50% limit as far as I am concerned. Off my soapbox now.

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.