ESOP Guy

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.

Interesting I don't think I have ever seen a SARs plan that paid in stock. My guess is a 100% S Corp ESOP wouldn't do it as they won't want to stop being a 100% S Corp ESOP. But I guess I learned something new today.

Just spitballing here.... The reason the RMD rules exist is to create a finite number of years the money can stay in a tax deferred account. I think the end point of these funds going tax free has just happened.

I agree the synthetic equity is 4.5 shares. It is your 2nd calc on the DQP calc that is correct. 13.5/104.5=12.9%. You put ONLY that person's synthetic equity into the numerator and denominator to determine DQP.

No more stock will be issued. It merely is a right to be paid cash based on the appreciation of the stock. For purposes of the appraisal I believe the appraiser counts them as shares to determine their fully diluted number of shares as the SARs are a future claim on the company's value. Although most SARs are based on the value at the time of issue. So if the stock is worth $10/shr at time of issue the person who gets the SARs share in any value increase above the $10/shr mark. I have never seen SARs count as compensation for allocation purposes. They tend to be a non-qualified deferred compensation program is how I see them work.

As far as I know there is no limit or issue. I can't cite anything to that effect but can't think of any reason there would be a limit.

The big one is SARs are synthetic equity for 409(p) testing so you have to make sure the SARs don't cause a failure. Typically when the SARs are cashed in they are not part of compensation for plan purposes. My guess it would really be wise to have an attorney that understands both SARs and ESOPs. I know they exist as we work with plenty.

We do not file false 5500s. The closest we would come to that is if we don't have all the data and we don't think it is material we will file knowing there is an amendment. By the way something like not having the stock appraisal for an ESOP would never be seen as immaterial. That can be a problem with ESOPs. I see no reason to be associated with a false 5500. Although I will add I am a CPA so I have the added risk of losing my license over something like this but even if I wasn't I wouldn't do it. The firm I work for management would never agree to a false 5500 filing. They will deal with late forms and those costs over false filing or lost client.

It looks good on my screen now.

That is what I am seeing and the newsletter box that seems to be pushing things to the left. Hope that helps.

Sorry, I did miss this was a DB plan question. Sorry, for that.

I am in Chrome currently and see the same thing. I was in Firefox.

I get the same thing and what I don't recall being to the right is the box asking to sign up for the newsletter. It is like that is pushing everything to the left. I did do the cntrl-F5. I will try a different browse next.

Huh? This person should have taken two RMDs in the first year he took an RMD on 4/1. Ok, you could have made 1 payment on 4/1 but it would still have to be for two years. The person would then take an RMD once a year after that. I sounds like this person missed an RMD in the first year. Unless the one payment that year was for two year''s worth of RMDs. By the way after that first year 4/1 RMD all the other RMDs were due by 12/31 which is why the 2nd one was due in the same year as the first one. The 4/1 RMD was for the RMD for the prior 12/31. So I guess most likely no this person doesn't need another RMD for 2018. But given it sounds like you are a bit confused on how RMDs work one wonders if you compute the 4/1/2018 RMD on the correct 12/31 balance, which would have been the 12/31/2017 balance.

When I said no one seems to think that is the correct answers I was referring to the idea you could just issue 2 1099-Rs and move on. I agree you had the correct answer. I think I gave it also. I think Larry has cleared up the reg in question. It makes sense to me to say if a plan makes a distribution to a person the RMD is made. It isn't the plan's problem if the person in the next 60 days puts that RMD into an IRA. Also, the person is going to be subject to the penalty for failing to receive an RMD. The person got the RMD and will have to include it in their income which is the point of the rules.

Sorry for being dumb here but then why this long thread? Why wasn't the correct answer to the original answer issue 2 1099-R s and the plan is done? No one seems to act like that is the correct answer. Everyone seems to think the plan has some duty to make sure the RMD amount gets out of the IRA. More importantly the whole time I have worked in the DC world if I was setting up a payment to a person who needed an RMD and had 100% of the balance going to an IRA I would be told to redo the work. The answer wasn't ever well that is what the participant wants as long as we issue two 1099-Rs the RMD has been paid we are done here. What am I missing in what are you saying because I suspect you aren't saying just cut a check and issue two 1099-Rs but that seems to be the obvious conclusion of what is being said here.

The regulations state that the plan is treated as having satisfied its duty to make the RMD even if the RMD amount is rolled over. I don't agree with that statement. The regulations are very clear the first dollars out of the 4k plan are the RMD and RMDs aren't eligible for rollover. So the plan should not have cut one check. It should cut two checks not just two 1099-Rs. Two 1099-Rs doesn't mean the plan did it right. If the plan cut one check to the IRA and that was 100% of the person's balance the plan made a mistake period end of story. The only conversation after that point is what does it take to fix the mistake.

As an aside we do this also. This is even more important in plans like ESOPs where I might not get the prior year's census until well after 4/1 the following year.

Search this board for the words "real estate" to get an idea of all the things that can go wrong with this idea. Those problems alone should convince people to not do this. Now you are adding the son is involved with the land which could be a Prohibited Transaction- wow. This sounds like a real stinker of an idea.

I am hoping you aren't understanding the question. All qualified plans must have a written document that describes the plan provisions. it must also have a written document that sets up the trust. These two documents often times are combined into one large "plan document". This is not something you get from the DOL or IRS. Do you have a mutual fund house or broker helping you set up this plan? Or maybe a Third Party Administrator? If so, they should have helped you adopt a plan document that spells out the plan provisions and spell out a number of provisions regarding the trust.

The regulations are very clear the first dollars leaving the plan in 2018 were the RMD and they could not be rolled to an IRA. The money needs to come out of the IRA. Does the money have to go back to the plan? To me the answer is no. The plan should issue two 1099-R reflecting the RMD and the rest as a rollover. The IRA should get the money out of the IRA and not issue a 1099. That is typically the hang up. The IRA will want to issue a 1099 because that is how their computers work. Money leaves the IRA a 1099 is created. One way to stop that would be a trustee to trustee transfer to the plan. But I don't think any of the correction methods require it. It might be the practical issues make it required.

And maybe I wasn't clear in my question. That was what was causing me to doubt or wonder if it might not be subject to UBIT. I just thought it was worth asking.