ESOP Guy

I have worked mostly with larger plans in my decades in this field. Most of my clients are in the 500+ and have had plenty of 2,000+ clients. Many of them actually set up the plan to be a benefit. They cared a lot about their employees and their retirement. To the point were some (not sure if it is most or not) were rather paternalistic about the whole thing. They didn't allow their people to take loans or put other restrictions on the things that allowed leakage from the plans. As you move to the ESOP world that is even more true as many ESOPs are set up by small business owners who have decided they wanted the employees to own the company vs selling to Private Equity fund or large corporation. Having said that I have had my share of companies that simply offer a 401(k) plan because that is what it takes to compete for employees. My guess is if they could unload the the job of helping their employees to prepare for retirement onto the state they would. In fact one can't help but wonder if this wouldn't be an unexpected consequence of this if it became viable. Would the taxpayers just be subsidizing the least caring and responsible employers? As an aside I also seriously question if the government is really more competent that the market to do this job well and efficiently. After all Sanders see the fact you have 23 choices of deodorant as an impediment to helping the poor. I guess I see it as the market trying to innovate to get me what I want at the price I want. I am not sure I want people who think wanting choices in my retirement is an impediment to helping the poor running things so I need to take their one size fits all answer. I would say history isn't on their side when it comes to providing benefits to the masses.

Wow there is a lot in there! I can only talk as general rules as so many facts are left out and with all retirement law there are exceptions to just about any statement. And in ESOP rules those exceptions seem to be more than many other areas. As a general rule the TPA sounds correct. If they paid the loan off early all the shares will have been allocated. They are released as the loan is paid. You now have the classic have/have not problem in this ESOP. I know it doesn't help now but someone should have been talking to the company before now. This was very predictable and could have been avoided. Yes, the most common way to get shares to the new people is to wait until someone terminates and recycle those shares. There are OTHER ways to get shares to the new employees besides new shares. You can do what is known as reshuffling IF YOUR PLAN DOCUMENT ALLOWS FOR IT. In reshuflling you adjust everyone's balances so everyone has the same ratio of cash and share every year. For example if the ESOP assets are 90% company stock and 10% cash everyone's balance would be 90% stock and 10% cash. This isn't popular with the people who currently own all the stock if the price is going up. You are forcing them to sell stock for cash in their account. However, it will mean everyone has some stock in their account if that is important to management. Adding new shares to the plan is possible but there can be issues. If the ESOP owns 100% of the stock adding shares outstanding is going to put downward pressure on the share price for example. Is the TPA that does the work one that specializes in ESOPs or is it mostly a 4k shop that does a few ESOPs? At the risk of sounding like a snob but ESOPs need the focus of a specialized firm. It sounds like the current TPA is getting the allocations right but it doesn't sound like they are in a place that can help the client plan and look forward. Also, there is so much more to ESOPs than allocations and firms that don't specialize in ESOPs often times miss those rules. If you want to private message me I can put you into contact with people in our business development group as our firm specializes in ESOPs. I am not putting a hard press here as this board is one that frowns on selling your services on it. I would also recommend people in this situation look to organizations like the NCEO. https://www.nceo.org/ I would recommend they join and look to their publications and articles on the topic of "mature ESOPs" which will talk about how to solve the have/have not problem. Also, if the timing isn't such you have to have solutions by 12/31/2018 I would strongly recommend some of the people involved go to the NCEO spring conference in Pittsburgh. It is one of the best conferences for ESOPs in the country. There will be multiple breakout sessions where they can learn more about these issues. If people don't have time to go to conferences for most of the year the NCEO has one hour webinars that are very good also. They are around lunch time in most time zones. It is a still morning on the west coast. They are free to members. (Maybe I should ask for a commission from the NCEO if people becoming members after this. ?) You can also look to the ESOP Association for resources. https://www.esopassociation.org/about-the-association The great thing about the ESOP Assoc is they have chapters around the country that put on smaller conferences all though the year. Since the chapter conferences are across the country they don't require as much travel. The chapter conferences tend to be very high quality. The one I am on the Executive Committee for gets great reviews for our breakout sessions. So find the chapter in your area and start to reach out to them and go to their conferences. Hope that helps.

I have always understood the answer to be the RMD has to be paid this year if the beneficiary is being paid this year. I believe if you read very carefully the plan document it will get you to that point as the document simply repeats the law on this subject.

A bit of an odd question as I don't see anything in this conversation that is really unique to ESOPs. I have experienced what you are talking about however. We have had ESOPs that terminated and were under audit. The audit put the D Letter process on hold. In fact in one case that happened just a few years ago it took around 2 years to get the ESOP closed. It took that long to get the audit resolved and than get the D Letter. Kind of a pain as the company was sold was the reason the ESOP ended. People were not happy it took so long but there really was nothing that could be done. The audit did find issues and correction has to be made. So it was good the trust was still around. Although if you are looking for ESOP TPAs I believe this webpage has a professional list and so do organizations like the NCEO.

Here is a link to a discussion of if a person worked the last day or not. I offer this because to me the question is really is this person terminated in 2018 or not or put another way are they an employee on the last day or did they term before that date. This discussion gets into the idea when does a person terminate. I hope it helps but it might not. Since I am a DC person and this is a DB plan I am willing to be told there is something about DB plans that changes this. But I think the answer is the employer needs to decide is this person an employee currently or not

I am with Kevin. I have always been a firm believer in "when in doubt D". I have never had an issue with them coming back saying there were never an A or had been D before. So I guess you problem might be scope of problem if you do everyone going back what could be decades. But just doing a D for anyone in doubt shouldn't be a problem in terms of the system.

Been there done that and know your pain.

To get back to the primary point of the question you are entitled to a clear explanation of what distribution options are allowed so you can plan what is best of you within those parameters. I would keep asking questions until you get good answers. If need be start going up the org chart. Like I said before the SPD has to describe a claims procedure if you want to get real formal about it. They will either have to grant you your claim or give specific reason for a denial. You can make a claim for a partial withdrawal and see what happens. You just have to follow the procedures on how to make the written request. Outside of time this doesn't cost you much to do.

Depends If in fact they did make a mistake in the past they are not required to keep making that mistake. It is also possible the plan was changed to no longer allow these kinds of payments but that should have generated a notice so that seems unlikely. The fact the Summary Plan Description (SPD) is silent doesn't bode well for you. In plans the basic rule is the right to take money out has to be described. So most of the time silence means you can't do it. If you took it all out and put it in an IRA you would have this kind of control If you really wish to push the idea you should go to the part of the SPD that spells out how you make a claim. That should spell out how to make a written claim. The plan would be obligated to either make the payment or make a written explanation why they are denying the payment. These procedures are most often found towards the end of the SP.D.

I don't see a coverage test issue either. Way back when I was taught that as long as a person received any benefit they benefit for coverage. So you could give $1in match to everyone but the owner who gets $1 for $1 match and pass coverage. You would fail nondiscrimination but not coverage. I am trying to think if this has to pass anything besides ACP? As a general rule ACP is the discrimination test for match.

The plan doesn't HAVE to be revalued but it might be smart to do so. Here is one of many discussion on this board about the pro/con of this idea. The RMD must be paid. It is always the first dollars out of the account per regulations. As an aside this is NOT my area of expertise by a lot but I thought the rules for paying to a charity from a qualified plan are very different than an IRA and most of the benefits given to an IRA don't apply to a qualified plan. I could be wrong on this so if anyone wants to say I am wrong I fully accept your word on it.

Not my area of expertise either but some thoughts: 1) Like jpod I think you need to look beyond ERISA to the IRC. 2) You might want to look to state law or contract law. For example this holding the cash until they vests means the benefits could be subject to creditor claims if the organization declares bankruptcy. But such a thing could cause the plan to be terminated and everyone becomes 100% vested. How does this conflict get resolved?

This has come up a few times at the firm I work at. Typically it depends on the amount involved. Once it was around $80. The employer was more than happy to take that risk to get the benefit paid. Once it gets into the thousands they are talking to an attorney. I have seen a few do this in the $1k-$2k range. I don't recall anything larger even being asked about. So I guess the answer is the conversation starts with how much risk are you willing to take without much research or guidance from a lawyer. After that a lawyer gets involved and they assess the risks more and a decision has been made.

I think an "A" is the correct answer. I can't cite anything. My opinion is the people who wrote the instructions to that form didn't bother to ask anyone who actually works in this field to see if their instructions even come close to covering all the possible situations that could come up. But to me the point is to let the government know, so they can let the person know, they are due a benefit and an "A" does that.

When I read about things like that it makes me really wonder if there was ever really a golden age of pension coverage like people talk about. They go on about how people used to have pension and now they only have 401(k)s. As far as I can tell in heavily unionized industries and the government there were pensions (although we are starting to find out they were not being funded well) but not sure the rest really had a pension coverage as a practical matter. I mean you heard stories in the '80s of pension with 15 year cliff and a lot of terminations at year 14 for example. Did retail employees really have pensions? I have heard Sears and other large retails had them but my guess is most in the industry didn't or they never vested as a practical matter. Off soap box for now.

Like I said find out if the Trustee's reason is legit or not. As others have pointed out the trustee's reason are not legit. The plan has to pay.

You need to find out if the reason is a legit reason or not. But if the person needs to be paid per the plan document and the trustee simply refuses that is a plan disqualifying defect. They have failed to operate the plan according to the terms of the document. There might be other ramifications but that one ought to be enough of a reason to make the payment unless there is a valid reason to not do so.

If management has on the ball advisors the amendments that terminate the plan cover this. If they don't these discussion will start as soon as their TPA catches wind of the sale. It depends on if the shares are worth more than the loan that has them in suspense most of the time. Some of the shares will be used to payoff the loan by exchanging the shares for the note. If the shares are worth more than the loan most likely the excess will be allocated. The next question is how. Will it be treated like earnings and allocated on current value or like a contribution and allocated on current compensation? All these decisions will have to be made and announced sooner or later. If the loan is worth more than the shares in suspense most likely the shares will not be allocated. This is because 100% of the shares in suspense will be used to pay the loan.

There are a lot of areas in field where that is true and the answer really is because the law says otherwise. The risk simply isn't worth the upside to try and argue the results are the same. The fix seems so easy as others have pointed out.

A death of trustee could slow things but I agree with Luke knowing how long that was could make a difference in terms of how reasonable it is.

If you are talking about actives what happens if you wipe out their account and they start to defer later on? Their balance could go over $75 and you just took a benefit from them they would have had.

And the clear answer is "yes" the distribution used for a housing allowance can do double duty. The fact it is not taxable is irrelevant.

Actually, this is a complex set of rules but once the person becomes a "leased employee" the service can count. I stand by the link I gave as it starts with this: Once a temporary employee meets the criteria for becoming a leased employee (one year of service on a substantially full-time basis), must s/he be included in coverage testing for a subsequent year in which s/he works less than 1,000 hours (our Plan's definition of a Year of Service)? Section 414(n)(4) seems vague. I guess I could have been a little more clear that the person asking the original question needs to decide if this is a temp employee or leased employee. But what I was going for was the idea you include service for leased employees.

The only reference I see to a 30% rate in the instructions are here: In the absence of a tax treaty exemption, nonresident aliens, nonresident alien beneficiaries, and foreign estates generally are subject to a 30% federal withholding tax under section 1441 on the taxable portion of a periodic or nonperiodic pension or annuity payment that is from U.S. sources. However, most tax treaties provide that private pensions and annuities are exempt from withholding and tax. Since he is talking about a US citizen this person isn't any of those types of people. Did I miss something in your mind?

The 20% federal is correct. I almost never feel qualified to speak to state tax withholding issues.