ESOP Guy

To be clear I am assuming these are individual directed investments. https://www.law.cornell.edu/cfr/text/29/2520.101-3 https://www.irs.gov/retirement-plans/retirement-plan-participant-notices-when-a-plan-may-impose-a-blackout-period

Are you sure Metlife is the trustee of the plan? It has been a while since I worked daily 4k plan using there various platforms but I don't ever recall a company like Metlife being the legal trustee of the 401(k) plan. It was the reocrdkeeper but not trustee. Who made the decision to change from Metlife? The person making that decision is often times both the Plan Administrator and Trustee of the plan. Unless there is a very large plan at which time those roles might be split. If it is just a change in recordkeepers I agree with Karoline there are a bunch of notices regarding blackout periods that have very strict rules around them. There all kinds of notices about fund mapping and so forth you need to make sure get done. Those blackout notices have timelines that need to be kept. However, the new recordkeeper often times have a conversion group to help guide you through those kinds of processes. There are people who do daily 4k work still on this board who can give you better details regarding all of that. If somehow Metlife is the legal trustee a change to a new trustee takes a resolutions. I am just doubtful they the plan's trustee. None of this requires the consent of the participants.

Some of the stories about payroll systems or providers that hit this board make me chuckle. You feel like you are in a time warp. I know this doesn't help the question. By the way I also agree this is a problem.

This is a very complex topic. Here is another resource. https://benefitslink.com/cgi-bin/qa.cgi?db=qa_who_is_employer&n=20 it isn't just comp. You at times have to look at their hours for vesting. (See the 2nd person in his example) If you can find any other material by Darrin Watson on whose is the employer he does a great job of explaining all the nuances and pitfalls. If this is going to be a regular issue in your firm they should sprint for one of Darrin's webinars on this topic. The firm I work for has people listen to his webinars on this topic on a regular basis and we keep his PowerPoint slides handy. Full disclosure after that commercial for Darrin I am not paid any commission by him. I just find this topic rather hard.

How sure are you the checks are getting to the people? I guess put another way is the problem the checks not getting cashed or do you have lost participants? Have they done some kind of address search to see if they have a good address or are they in contact with the people? I would make sure you don't have a lost participant problem first. If you do and you haven't done a search forfeiting the money is problematic in my mind. If they are sure the people are getting the checks but not cashing them have they contacted the people to find out why? I guess what I am saying if the plan is making just assumptions about them not cashing the checks vs knowing they aren't cashing them makes a big difference in my mind. the DOL is looking hard at lost participants the past year and they are taking a very dim view of lazy plan administrators.

Maybe it is me but I find this question confusing. The 404 limit is 25% of eligible gross compensation. You can have a different definition of compensation for testing and allocations that are well below gross compensation and still deduct 25% of gross compensation of the eligible participants. It isn't clear to me why a change in compensation for testing lowered the 404 limit. But to answer you questions directly if it is true you have a non-deductible contribution there is no getting out of the excise tax that I have ever heard of. If they are filing late there is no getting out of the interest on the late tax. If the IRS assess a late penalty you can sometimes get the IRS to waive that part if you can show cause and there isn't a pattern of being late. You write a letter to the IRS after they send the penalty letter to your client asking for a waiver. It has been a while since I wrote one of those letters but I think the IRS notice even tells you how to ask for the waiver.

I would disagree. I know of no authority that would allow you to have anything done but 6 separate audits. I doubt an auditor would do an audit that spans 6 years vs 6- 1 year audits. The client might be able to get the CPA firm to factor into the costs the fact they would only need to send their people into the field once and look at all 6 years at that time. Although I doubt it would be a huge savings as there will be close to as much work as having done 6 audits over a 6 year span. But the way I understand the rules you need 6- 1 year audits. They can be done at the same time but you need 6.

This conversation has come up before. This might help.

In that case the TPA needs to be very sure the Engagement Letter fees cover the cost of all the work of a refinancing a loan. A $100 per refinance fee, for example, would make a lot of people pause before doing it 19 times in less than 5 years. And if it doesn't slow them down at least the TPA is very sure they are being paid for the work.

New loan policy needed?????

Assuming she puts the money into an IRA that had no other assets in it until this rollover it is 2019. Any 2018 RMD from the IRA is based on the balance at 12/31/2017 which would be zero-so the RMD is zero. The other catch is she can not terminate employment during 2018. The moment she does that there would need to be an RMD from the 401(k) plan even if there is no cash in it at the time.

You also need to look into form W8-BEN this person most likely needs to complete that form. If this person isn't a citizen and the payment is going outside the US as far as I can tell they need to complete this form. So Google W8-BEN form and instructions. I work with a bank that makes me get a bunch of information for a 1042S which they issue in these cases instead of a 1099-R. I am NOT an expert on this form. I am doing what management and the bank tell me to do for the 2-4 payments clients I help make outside the US a year. So Google 1042S form and instructions also.

To me this is like the debate can you add last day language to a plan after people have worked a 1,000 hours. Have these people accrued a benefit in a plan that only requires you to work 1,000 hours or is the benefit accrued after the sponsor declares there will be a discretionary contribution and working 1,000 hours. I have always been taught the safest thing to do is to never amend a plan so a person who otherwise would get an allocation will not if it were not for the amendment at the time of the amendment. In this case if a person has met eligibility and crossed a date of entry under the current rules they should not have that entry amended away if there is going to be a contribution in the current year. You might want to search this board and see if you can find (I couldn't but I know they exist) the threads about amending a last day requirement into a plan after people have worked 1,000 hours in a year. That would seem relevant to this discussion.

I have to admit my initial reaction to #3 above was are you required to attache a note? The answer is "yes". https://www.irs.gov/pub/irs-pdf/i1040gi.pdf Page 25 I quote: If you rolled over the distribution into a qualified plan other than an IRA or you made the rollover in 2018, include a statement explaining what you did I am willing to bet the note was missing and when the computer pulls the return when a human doesn't find the note they send the letter.

If you follow the link I gave I tell a similar story to Brid's one of my clients had happen to them in the early 2000s. The key seems to be getting the prosecutor to be willing to work with your firm. I would have your attorney reach out to the prosecutor early in the process.

Read this thread there are others. .

There are possible side issues with the loans. Many 401(k) loan notes say the note becomes due upon terminations of employment. If those notes say that than the notes may have gone into default not because of pension law but because that is how the note which is a contract says happens. If the note says loan payments will be done via payroll deductions and they were making payments by personal check what implications does that have for the note? There might be other issues but those two come to mind quickly.

And you have to worry about timing of the same with an annual appraisal. This comes up with ESOPs all the time. You get the 12/31/2017 appraisal in mid May. That mean 4.5 months of business has happened so is the copmany's value still the same as if was on 12/31/2017? That is why in ESOPs most people tell you to distribute the shares and have the sponsor buy them off of the person at that point. It solves a large number of problems. I have only worked with a very small number of PSPs with employer stock so I am not 100% sure the rules on in kind payments and sales to the sponsor work the same way but that is the easiest way to get the shares from the plan to the sponsor.

Many years ago (early 2000s or late '90s) I was assigned a plan takeover of a balance forward PSP. When I got the data from the prior TPA there was this 5 year old PS contribution receivable. I asked the prior TPA about it and they said the sponsor never paid it but it was allocated. I asked the sponsor about it and they said they had initially told the TPA they were going to make the cont but changed their minds and told the TPA to not allocate it. This receivable was part of everyone's balances. The sponsor decided they were not going to tell employees 5 years after the fact their certs had been wrong all this time. So they were going to deposit the money. We talked to our in house attorney about this and we were told it could be allocated all those years ago but not deducted until year of deposit. The 415 rules was the big problem as people had left and had their balance including that "phantom" money paid to them as you can borrow from Peter to pay Paul in a balance forward plan. So I think you can deposit the money even years after the allocation. I have always been curious if we needed to do some kind of discrimination testing in the year of deposit. If not, I can imagine some interesting abuse of the law if the facts fall into place just the right way.

I am not an expert here but I have worked on the ESOPs that got set up using people's 401(k) money being rolled into the newly created ESOP and based on conversations there are security law issues. Not sure why there couldn't be such issues in a ROBs. And based on those conversations I have always gotten the idea it is easier for example to use match vs 4k deferrals when taking money from a 4k plan to start an ESOP- ie using this as part of the down payment to buy the stock and borrow the rest.

Maybe I am being a bit pedantic with my language but if that is true than they aren't responsible for the compliance testing. I have seen that business model and understand it. Than yes you are on your own and you get what you pay for in those situations.

To me being responsible for the compliance testing would include making sure the comp limit was used. You literally can't do the testing correctly without this. I get they might not figure out there is a problem until the end of the year but they should have known there was a problem right there. So after the first year everyone should have been on record there is a problem. I don't see this can go on for years (plural) and someone is claiming to be doing the compliance testing. Like I said above I am more bothered by a RK who claims to be doing compliance testing but doesn't seem to know how to check if the comp limit was used or not. This isn't vetting the data. This is knowing enough about the plan and data to see the match formula wasn't working if you apply the comp limit. Once the problem was found people could have worked with the payroll company who should be able to handle this basic function.

It is true you have very few rights directly. Do you know who is the trustee is? I am willing to be told I am wrong by the various lawyers but from all the ESOP conferences I have been to I get the impression the trustee has a fiduciary obligation to make sure the executive compensation is at market prices. They ought to be demanding the board document the process they are doing to make sure that is true. If one of the executives is the trustee that is obviously more difficult. Also, the board gets to pick the trustee and the trustee gets to vote for the board members. I have heard of stories over the years where there is a race between the trustee to replace the board members before they replace the trustee type of conflicts. I also get the impression if they hired an outside compensation consultant and they documented this was all market rate you have a difficult time winning. As for the buildings and leases their might be what is known as a Prohibited Transaction (PT). A PT can causes excise taxes and disgorgement of profits. However if they are working with lawyers and consultants to cut that fine of an edge on the 409(p) test my guess is they are running the PT questions by the lawyers also. You need more information before you known about a PT. It really matters if the board members are employees also. Some of the lawyers here might be able to give you a better idea what you would need to look for to see if there are any indications of PTs.

Sorry for putting words in your mouth.

My guess is Jpod meant "corporation" not "construct" as I can't think of how that word applies either. The primary benefit of a 100% S Corp ESOP is no one pays income taxes on the company's income. The Corp doesn't as it passes its income through to the stockholders. The stockholder in this case is a tax exempt trust. So you will find most S Corp with an ESOP are 100% owned by the ESOP. The cash flow freed up by this not paying taxes is simply too good to pass up. The next issue with a partial owned S Corp ESOP is the people who own the shares besides the ESOP typically need a distribution from the company to meet their tax obligations. The ESOP as a shareholder must gets its share of this "dividend". Yes, I understand legally they aren't dividends but for this purposes they function like them. Each shareholder has to get their share based on ownership. What companies find in this situation is too much cash ends up in the ESOP and it undoes many of the benefits the fact the ESOP doesn't pay taxes on the pass through income. So unless the outside owners just don't want to sell most partial S Corp ESOPs become 100% S Corp ESOPs over time. You are correct often times you do have to compensate the officers based on stock price/equity. It is just S Corp ESOPs use things like SARs that pay in cash, phantom stock, warrants that once again pay cash when cashed in. This is because the company values the tax free status too much to ever give actual shares to these people. So to answer your question nothing is wrong with giving shares. I just find it very rare to allow outside equity with an S Corp ESOP. With a C Corp ESOP you see giving shares to officers more often but not S Corps ESOPs. Most S Corp ESOPs simply don't want to have to pay dividends most of which goes to the ESOP for taxes it doesn't have to pay. There are better uses for the funds in their mind.