ESOP Guy

I am pretty sure this isn't the answer you want to hear but this is the answer that comes to mind around this time every year when a question like this comes up. Will including this person put them to the point they need an audit? If so, think about it real hard. I would think not but happy to be told I am wrong. If not, stop overthinking it and flip a freaking coin, do what you want.... it is immaterial. (Or if it is being audited already- which is most of the clients I work on do the coin flip or whatever you want) I can't tell you how much time in the decades I have been working in this industry I have seen wasted on questions like this when it doesn't make any difference. I have never seen something like this ever come up in an audit (unless it was an audit plan or not). If this doesn't put them over the audit count threshold I have spent more time writing this reply than I would have thought about this answer if I was faced with this fact set.

We would never send out a $0.00 1099-R. Our position is the taxable amount is after the fee. So there wasn't a taxable distribution in this case. I see what is in effect the fees resulting in the person having no balance after the distribution and got no payment on a regular basis where I work. Peter, normally I find your insights valuable. In this case I am going to go on record saying you're over thinking this one. Back to the original question. In the case of the smallest balance you listed every place I know that sets up an IRA would change you more to do so than the balance listed. The choices become keep the money in the plan or pay the person and watch fees eat the whole payment.

A well drafted document will answer this question. Does the plan say a person becomes 100% vested if they terminate because of death or disability? If so, I don't think they become 100% vested as they did not terminate becasue of those causes. It is pretty rare but I have seen plans that are pretty clear that if a person dies after they terminate they become 100% vested. I don't think I have seen that for disability. But this to me it is very important to read the document very carefully and note all the words and what triggers full vesting upon death or disability. One last note: As a matter of facts it can be hard to detect a terminated becasue of disability. Since some plans define disability as determined by the Social Security Administration and they can take over a year to make a determination you should look at the date of the determination. They will retro the determination back to when the process started. So you could have a person leave the company and over a year later be determined as disabled around the date of termination. To be very clear that is a question of facts not document. Your first question can ONLY be answered by reading your document. But it would be a rare document that says you are correct in my experience.

I agree the 2nd paragraph is very confusing. It helps if you allocate loan payment dollars on each loan and release shares based on the ratio of the dollars. You need to know the value of the dollars and FMV of the shares for 415 depending on how the document is written. Do the rest of the allocations like forfeitures if any. It almost sounds like you are allocating shares in dollar value and not shares. ESOPs should always be done in share accounting as far as I am concerned. Although that isn't a legal requirement. It just is the best practice as far as I am concerned. You then compute your total Annual Additions for 415. You correct per the document which might be in the 401(k) plan. I don't see how a 415 failure can ever result in a negative allocation. The worst you can get is no shares allocated to you. You don't ever take shares from a person. if they are still failing 415 and get no Annual Additions in the ESOP the problem is obviously in the other plan and it needs to be fixed there. Since the S Corp amount is fixed by the formula of the amount paid to the suspense shares you compute how much of the loan(s) payment(s) are paid by them. The rest is contribution. If there is more contribution made to the plan it is simply a cash contribution. There might be exceptions to this but without seeing the actual facts I can't say. Remember you can only use Loan 1 S Corp distributions to pay that loan and same for loan 2. You can NOT put all of them in one happy bucket and pay the loans. You must track by loan vs their shares when doing the release. Bias alert: I work for an ESOP specializing TPA firm. Lastly, I am a bit concerned your TPA can't seem to help you more. If your TPA firm that is helping your with your ESOP is just a 401(k) primary firm that is doing this work as a courtesy please think about getting a new ESOP TPA. I know that can come across as self serving which trying to market around here is mostly considered bad form. So that isn't my purpose. ESOPs are a very specialized type of plan. I cringe every time I am assigned to bring on a new client that came from a non-ESOP specialized firm or self administrated. I would estimate 95-99% of the time they have a serious legal issue. What you are trying to do is something an good ESOP firm should be able to help you do. Plenty of my firm's competitors and my firm could help you do this correctly and guide you through it all. You need someone like that.

I stand by the idea 1 or 2 is what I see the most with 1 being very common. I see the virtue of 2. One of the big issues here really is can they even tell the employees. I can't tell you how many times in the decades I have worked in the ESOP world I have been looped in by management they are in talks and told to keep the number of people in my own firm who are told to a minimum. They want their ESOP TPA's input but the non-disclosure agreements make it very hard to tell the employees. The fact the sale isn't final means you don't in fact have any actual hard numbers to give the employees. I have seen deals at the letter of intent stage fall through. In the end almost no one in the company knew anything about how close the company came to be sold. I get the whole retirement plan issues but you can not lose track of the regular business issues and balance them with retirement plan issues. Once again there are court cases out there where people got paid and shortly later the company was sold for a lot more. A court required fiduciaries to disgorge gains to pay people who took a distribution at the lower price to get them up to the sales price. Paying a good attorney who can look at all the facts whole can guild the fiduciaries is cheap insurance in my mind here.

I think the issue is the due date for C corp tax returns changed back in 2016 or so. It used to be they were due 3/15 so 6 months afterwards was 9/15. See this link https://www.cpa-wfy.com/get-ready-businesses-some-filing-due-dates-are-changing/ I quote (bold mine): For many years, C corporation federal income tax returns on Form 1120 were due two and a half months after the end of the corporation’s taxable year (March 15, adjusted for weekends and holidays, for a calendar-year corporation). Form 1120 could be automatically extended for six months (through September 15, adjusted for weekends and holidays, for a calendar-year corporation). However, a law passed last year established new due dates for Form 1120. For tax years beginning after December 31, 2015, the due date is generally moved back one month to three and a half months after the close of the corporation’s tax year (to April 15, adjusted for weekends and holidays, for a calendar-year corporation). So someone taught you a short hand version of the rule and never taught you why is was 3/15 and 9/15. So when the due date of the 1120 changed you didn't pick up on it changing the deduction deadline. Zeller's way of saying it is the better way to teach it and that hasn't ever changed.

Can they legally do that? In many cases until the sale is final both sides are bound by confidentiality agreements that don't let them speak about the negotiations and possible sale. Also, letter of intent doesn't sound final. So if the deal can be broken disclosing it could cause people to not sell their shares and could be harmed if the sale falls through. You are rightfully concerned to worry about fiduciary responsibility. There are court cases where such people have been forced to pay people who sold at the lower price to make them whole to the sale price. However, given things like above disclosing it might not be allowed or even right. This client needs to go to an ERISA attorney who is very familiar with this topic. You can find times where the answer will be to delay payments until more is known. I have seen cases where the recommendation is to not pay anyone, diversification nor terminated participants even if it goes past the next year end. Obviously that raises questions of what about the law that says they have to be paid. This is very tricky becasue there are some large possible liabilities for people. You need something better than free advice on this forum for this one unless it is the free advice to find good paid advice.

If you don't want to spend too much on travel look up the ESOP Association. They have conferences that are large. But they also have local chapters that hold local conferences. For example in about a month there will be the Midwest Conference in KC. You can typically find a regional conference that won't cost too much in terms of travel unlike the national conferences which typically are in the DC or Las Vegas area. If you don't live near those cities that can be a pretty big cost to travel. Also, look up NCEO online. They publish a ton books. If you are willing to become a member they have a monthly webinar free to member. Depending on the time zone you are in you can eat lunch and watch the ones that interest you. As a side bonus they do the work to make these count for CE. I know it counts for CPA which I am. I THINK they count for legal CE. You can get a few hours of CE and learn for a cost of membership. Membership comes with book discounts and access to more of their online articles. The NCEO annual spring conference is always good to go to.

Does the document have a section that deals with rehires? Most of them do. It is typically near the primary eligibility section. If you are dealing with a document with a base document, like a prototype plan, check it. The vest majority will tell you in pretty good detail how to handle someone who met eligibility but didn't enter except for the fact they weren't employed on an entry date. The guy who taught me this business back in the early '90s told me that 99% of your questions will be answered by reading the document carefully. I would recommend you look for a section that spells out what to do with rehires. Here is an example of a Volume Submitter plan our firm uses as an example of what I am talking about: Rehired Employees. Subject to the Break in Service rules under Section 2.07, if a terminated Employee is subsequently rehired, such Employee will be eligible to participate in the Plan on his/her reemployment date if the Employee is an Eligible Employee, and the Employee had satisfied the Plan’s minimum age and service conditions and reached his/her Entry Date prior to termination of employment. If the Employee had satisfied the Plan’s minimum age and service conditions, but terminated prior to reaching his/her Entry Date, the Employee will be eligible to participate on his/her reemployment date or the original Entry Date, if later. If a rehired Employee had not satisfied the Plan’s minimum age and service conditions prior to termination of employment, such Employee is eligible to participate in the Plan on the appropriate Entry Date following satisfaction of the eligibility requirements under this Section 2. For purposes of Salary Deferrals, the requirement to participate on the reemployment date is deemed satisfied if a rehired Employee is permitted to commence making Salary Deferrals within a reasonable period following reemployment. See how clear this is spelled out? That was found in the base document not the Adoption Agreement part. My guess the person enters based on seeing so many documents over the decades but I really think looking for a rehire section of the document will confirm that or not.

You don't want free advice. Someone needs an ERISA attorney that is good with ESOPs. I am serious here. I have been working on ESOPs since the mid 90s and I wouldn't dare advice the client how to clean this up.

For what it is worth I am with the others. I don't understand the desire to fight the bank. They are treating their customer awfully. Why does your client want to reward such bad behavior by still doing business with such a bank?

It is pretty low in the "normal" DC plan world (under 10%). In the ESOP world it is the norm. Outside ESOPs the only plans I typically see that balance forward is because the client wants something daily value won't do/allow for. Examples would be: The client wants a very specific investment manager to run the investments. I had a client like this. Along with quarterly certificates for their employees they wanted me to complete a detail spreadsheet to help them track the return their investment managers had gotten the plan. If a manager didn't hit their benchmark too many quarters the client got a new investment manager. They were brutal to the investment managers. It wasn't the many quarters. But if you saw the participant's balances you would be amazed. The client put in almost 25% of pay and they got really good returns. They want the certificates to show and record things that they can''t find from a daily platform. I had a client that wanted all kinds of historical data on the certificates that no daily platform would agree to do. The preferred distribution method wasn't common. It is that kind of stuff. Most of the examples I am thinking of are Profit Sharing Plans with a few Money Purchase Plans. I can't remember the last time I saw a 401(k) done balance forward. The expectation of the employees is they get daily values and control of the money coming from their paycheck. But pure employer money will now and then be different. The thing is this is all part of a package of desires by the client that costs more typically and they are willing to pay for what they want. All of the examples I have worked on over the decades were very high demanding in what they wanted from their TPA but they were also willing to pay for top of the line service. So you didn't mind giving them that service. Hope that helps.

I have worked with PBI for over 10 years. https://www.pbinfo.com/locate-missing-participants/ The thing I like about them is if you get the correct service the client will get a letter at the end describing the search and that people weren't found. It gives you something hard to point to if the DOL asks did the plan do its due diligence to find these people before forfeiting or forcing a lost participant out of the plan.

What is the cause of the new found paranoid thinking?

I agree I am not aware of any kind of relief if the 5500 was filed. We typically report them on the next 8955-SSA and plan on arguing good faith compliance. Not sure but about as good as it gets. I would add I don't think I have ever seen anyone actually fined for failing to file this form. I also agree if a person has to wait 5 years to get paid they should be reported on the 8955-SSA and taken off once payments start. Hope that helps.

You might want to do the following before you write the letter. (Full disclosure I don't work on government plans So some of this might not apply. I fully admit I am a CPA not a lawyer) But in many private sector plans they have a provision that revokes all prior beneficiary election upon divorce. If this plan has such a provision you need to ask why they paid the former spouse. I wouldn't be optimistic. The plan paid the money and they tend to make sure they are paying the person that ought to be paid per their records. You can write any letter you want but as a general rule you are on the losing end of this situation if you go to court. Judges are going to be very hesitate to overturn something written for claims of intent regarding a dead person from people who stand to gain financially from the conflict. I am not trying to be mean here. I am being realistic here. Anyone who works in this industry long enough sees this and you are most likely correct. You late sister most likely didn't intend for her former spouse to get the money but there is a written direct verse other people's word. Courts aren't willing to over turn the written directive. Add to it he has the money already. Sorry, for your loss.

There isn't much you can do. Sorry, I know that isn't the answer you were looking for. You can't really even say this person is lost and forfeit the balance assuming the document allows for that. The person isn't really lost. I have my share of these and they are a pain.

This group, myself included, can be a bit of retirement plan geeks so let us know if our academic discussions aren't answering your questions. We will focus on your specific questions more in that case.

We aren't helping the poor person who asked the original question now but.... The no later provision is pretty common and when you get into the document and/or distribution policy it is pretty clear the sponsor gets to decide when the first election will be offered. Once the offer is made the employee then elects. You seem to understand the installment provision correctly. Your example of a $266,000 balance is correct. The reason it says greater is because until you get to the very large balances you must pay within 5 years. So if an balance is $1,350,000 you would get 5 installments of $270,000 and that would be paid instead of the $265,000. In the extreme if a person had for example a $10,000,000 balance you could pay $1,000,000 over 10 years. It meets the law and is greater than $265,000.

Did they do a formal board resolution declaring the contribution? I believe that can make a difference but a lawyer could clarify that more if needed. Did they allocate it or deduct it? But most likely if it isn't required by the document my understanding they can change their mind. But given how angry people might be it might be better to talk to the plan lawyer and not count on free advice here.

Also note if the account's vested balance is >$265,000 the payment will be in the form of installments. But ESOPMomma nailed it.

I have never seen in done with compensation in the same year. I think the problem with the same year could be do you have a bonafide termination. There is a rule out there (don't have cite off top of my head) that says a termination isn't bonafide if a person terminates with an agreement they will come back. If it isn't bonafide the first termination doesn't count. This came up first in a plan where people were quitting to get a distribution and as soon as they got the check got rehired. There is an IRS rule that stops that kind of arraignment. They key to this rule is if there is a firm agreement to rehire the person or if they are at risk of never being rehired. A bit facts driven. I have a number of plans (all DC plans) that have rules that say the following about people rehired after they retire for on call work: If the plan pays via installments (typically my ESOPs) the person can come back and do some on call work and still get their installment for that year. Normally you don't get paid until the year after your termination. No retiree is going to give up their annual installment for a few days of work. The work doesn't pay enough to make up for the lost installment. If they do no work >1,000 hours and are employed on the last day they do not get an allocation. This is designed to allow only one bite of the apple regarding the provision that give an allocation in the year of retirement even if you work <1,000 hours and not employed on the last day. Check your plan. In subsequent years such a person might get an allocation as the allocation provision merely says if they terminate after normal retirement age they don't have to have 1,000 hours and be employed on the last day. If there isn't language that specifically says you that can only happen once it can happen over and over again. I have some clients that don't care and the person "retires" several times over a few year span of time as they come and go. They earn so little the subsequent contributions is too small to worry about and if they are asking the person to come back they tend to like them. Like I said those only apply to the year after the 1st retirement termination. I haven't seen it in the same year.

That is too plan specific to be answered on a general answer board like this. You need to read the plan documents and speak to your former HR or the 401(k) record keeper.

WE tell clients to set a policy on this based on factors Paul I and David said and document it. Be consistent is key. Most of my client what determines it is if there are regular working hours on the weekend the last day is the day of the month. If no one works on the weekend as a rule they set the policy if you work the last Friday of the plan year that is the last day. I have never seen the IRS or DOL challenge either way as long as it is done consistently.

Understand also it is hard to tell you exactly what is happening on a comment board. But someone at the company that helps your employer run the 401(k) plan should be able to give you an explanation.