ESOP Guy

I am not the biggest expert on pension plans but given what I know and am reading here is there someone higher up in the Pensions Department you can talk to? It sound like it possible there is a misunderstanding at the level you are currently speaking to. Also, you mention it is important you live in NJ. Do you work for a government body? That can make a big difference and can be an important fact for the experts around here to know. Public pensions have very different rules than a private pension plan as a general rule.

Don't take it as a slam on my part. I was just pointing out how to find it. Please don't be shy to ask questions here. That wasn't the point of my reply.

If we accrue it so it shows on the participant statement we put it in the RMD calculation. Anything besides that strikes me as overthinking the topic and doing more work than needed. Are you really going to back out the number from an allocated balance as of the valuation date the part that is the income accruals? Sounds like a major pain to me.

I agree with Bri. This looks like a classic example of the service spanning rules. https://www.asppa-net.org/news/2019/10/handling-rehired-employees/#:~:text=Elapsed Time Method%3A&text=Under the service spanning rule,or can use 365 days. I would add if you study the base document, assuming it is some kind of prototype, it will most likely have a discussion of the Service Spanning Rules and how to handle rehires. The guy who trained me in this business back in the early '90s wouldn't let you come into his office to ask a question unless the following two condition were true: 1) You had a copy of the plan document with you. 2)You could explain where you looked in the plan document you looked for the answer. He claimed, and is correct, 90%+ of all questions can be answered by reading the plan document. He was willing to spend all the time you needed with you showing you how to find the answer in the document if you met those two conditions. He threw you out of his office if you hadn't met one or both of those conditions. My guess the document really does answer this question.

As noted allowed and common.

I have seen the wrong tax period issue last year with a 2/28 client. We sent it in around the time everyone would have been sending the 12/31 extensions. That client hates waiting. At the time I assumed a person was just not paying attention. I think they need to go to an electronic filed/input forms.

I realize this is off topic from your question. But there is a lot going on here. If you haven't put a lot of thought on the beneficiary of the beneficiary question I would recommend going back to it. The late wife's beneficiary election in my mind is for her account as a participant and most likely says has language making it clear the election is for her account as a participant. I am amazed at how many plans that do say if a beneficiary can make a beneficiary election and I on a regular basis run across plans that clear say a beneficiary can't name a beneficiary for some odd reason. I don't get why you would put the restriction in a plan but I see it. So the kids might end up with the money as beneficiaries or via the estate but the full repercussions of which path can be different. I wouldn't assume figuring out who the beneficiary of a beneficiary is real easy to determine. Maybe you already chased this down if so ignore me.

Maybe but a shockingly large number of auditors I deal with will refuse to issue a report until the Sch H and their report agree. I can't tell you the number of times in my decades of doing this stuff I have had an auditor send me a pdf of the Sch H with the changes they want and it is things like round one type of income down by $1 and another type of income up by $1. I can't relate to them taking the time to actual mark up the Sch H and sending it to me.

If the auditor wants to put a reconciling item in their report let them and don't care. I can't recall that ever being an issue with the IRS or DOL when they come a knocking. In fact I wished more auditors would use that option instead of demanding I change the Sch H. Often times it is they want to reclassify something and not change the totals. Just agree to disagree and move on.

I am not an expert on UBIT but what I know is if there is leverage used in a plan you need to seek expert advice to see if UBIT will be due. If they have to pay a type of income tax on income inside the plan my guess is this idea will be less popular. I would add finding a CPA that knows how to file a UBIT return of a 401(a) plan is not easy. Because of that it isn't always cheap. One has to really watch out for any idea that makes it look like they are trying to run a taxable business in a qualified plan and if they get clever and try to use Roth dollars so they never pay taxes on the income ever gets the IRS' upset and they can be aggressive. Too many people try to get too clever. If it was real simple to never pay taxes on your business' income more people would be doing it.

I think you asking the wrong people. This forum is employee benefit professionals and I don't see an question that seems to relate to employee benefits and the divorce.

If the fact set is as you say there can be a fiduciary issue regarding timing taking people out of the stock is based on knowledge of a pending company sale. But if you knew that already why are you asking? However, at this point by your own admission you are speculating on a company sale. You are making assumptions about motives without any evidence. It is also very fact specific. Are you sure they haven't been segregating people every year but just haven't gotten to you? There is an order often times regarding who gets segregated first. I have plenty of ESOP that segregate the terminated people with the oldest termination date first and work their way towards the current year. They are years behind getting to the current year. If they can show that is the pattern for years and it was simply your turn to be segregated that alone could change the whole analysis. You need to know a lot about an ESOP before you can go off making the claims you are making.

You are most likely not going to like my answer. This is a very complex subject and I am hesitant to opine much on it. As a general rule they have the power to make all the changes you noted. I can't help but notice you are speculating on the takeover part of the fact set. So I am not going to go there.

The TPA I work for has different rates for positions that do the work and bill accordingly. We would most likely not bill for this kind of situation. It is penny wise pound foolish. As HarleyBabe notes they are upset already. A few hundred in revenue isn't worth making them madder. The cost to market a new client is pretty high. The cost of one lost client is higher than all the revenue you will collect billing for 10 or 15 people. I know very few management groups in the TPA world that would risk that.

My guess is if you get a letter you can explain it in a letter. I know I have explained the wrong EIN once years ago that way and the IRS was fine.

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.