ESOP Guy

I once had an ESOP that only allowed just the union foreman into the ESOP. It can be done. I believe there are issues with making sure the collectively bargaining agreement allows you to do it. But as a matter of retirement law I believe it can be done. The great thing is you don't have to do discrimination and coverage tests often times for the union group.

As stated above this all hinges on if the plan is terminating or not. But if the plan is terminating this kind of "wind fall" happens all the time. It doesn't make people happy but it is the law.

Does this question even make sense? I see the timeline as follows: Person terminates in 2015. The loan is defaulted and is taxable for that year. The loan was paid in full 3 years after you left employment. That is the part I don't get. They let you pay a 401(k) loan after you terminated and it was made taxable to you?

Yes

If you are accurately describing all the plans correctly, ie one is a 403(b), a money purchase plan and a defined benefit plan than none of them are a SEP or Simple or any other kind of IRA. All 3 are a type of Qualified Retirement plan. You should be able to open an IRA without a problem. Since you are covered by a retirement plan (3 in fact) there could be limits on how much is deductible when you put money into your IRA.

To me this is one of those rare times logic and retirement law work. What is the "loss" at issues here? The company is holding plan assets and has a 0% loan from the plan. When did that start to happen? It seems like that has to be pay date. That is the day the cash became a plan asset. So the loss date starts on pay date. The fact you are given a little grace under the rules to get the cash into the plan doesn't change that. So once you are required to decide when did the cash become a plan asset and the 0% loan started I don't see how pay date isn't always the answer.

You might want to check some of the other agreements the client had with the prior TPA. I have seen with some brokerage firm agreements outside the plan document saying the person agrees to stop using the brokerage firms document if they stop using the brokerage firm for trading/investing. In theory to keep using the old document would be a breach of contract. As Lou points out there are a number of good reason to change documents. See what the new TPA is charging for the new document. Some make it part of the conversation cost. Some charge extra but at a discounted rate.

As an aside I believe the hours would most likely follow the dollars. It seems like most plans I have define "hour of service" as an hour worked in which they were paid or would have been paid..... So the paid and hours don't get disconnected in my mind. I believe there have been debates on this topic before on this board. I don't recall how others came down on this subject.

Isn't one possible solution is to come up with some documentation that says the check paid on the 30th of every month is for services rendered from the prior months 19th to current months 18th? So the deposit is now on the 20th and he is paid on the 30th for a months services ending on the 18th Everyone agrees that can be done as far as I can tell. Although it seem easier to just cut the check and make the deposit on the 30th.

The topic you need to research is "bona fide termination". This doesn't sound like it is an actual termination. The only ruling I know if are things like this PLR http://static1.1.sqspcdn.com/static/f/665111/25950562/1423767694040/IRS+PLR+201147038.pdf?token=Tq9po4%2BbfuTlNL%2B5UBcPXqnyVb8%3D I think it would be hard to prove an owner actually terminated with no expectation of returning if he does return or the business keeps operating. This person is looking at plan disqualification if they try this in my mind.

Are you asking if they can deposit 401(k) deferrals before the actual wages are earned?

Belgarath has hit the real issue with the whole bona fide termination. This is more an employment law question than retirement law question. Is this person really not an employee is the real issue here. But per retirement law if it isn't a bona fide termination than you don't have a termination. The classic example of this is someone who terminates with an agreement to come back to work after they get paid the distribution. The whole purpose is to get the distribution. It is hard to detect but it is something the IRS looks for.

You are unclear when the earnings start. If we are talking about earnings after the split that is common they get those earnings. I have seen a few QDROs that say the person gets X and no earnings even after split but that is very rare. If it is earnings from the decree to the split that can be a different matter. You say it has been a few years between the decree and the QDRO being written. As Larry says if the judge as signed the QDRO that is that. If not, there is room to make sure everything is in sync with the divorce decree.

I had forgotten about that. It has been so long since someone asked me to cite the reason. I just know it is true and it is a rare day anyone questions it any more.

Question 1: Yes that is correct. https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans The only part that cite doesn't cover is the idea the shares in the ESOP don't count towards 5% ownership. There isn't a cite per say. The simple fact is the ESOP trust owns those shares and the participant is a beneficiary of the ESOP trust. So those shares don't count. If the ESOP really owns 100% of the outstanding stock than there are no 5% owners for RMD purposes. Question 2: You question 2 is vague. Does the plan allow for in-service installments or all these installments only after they terminate? Your question doesn't tell us this important information. It would be rare for an ESOP to allow installments for in-service distributions. You can find ESOPs that allow people over a given age to take an in-service distribution. However, they typically require an election every time you want such an in-service distribution. You need to get clarification from the plan if these installments payments are part of a termination/retirement distribution or in-service distribution.

If you are describing it correctly they won't take another $10k to pay the loan. You will get $48k in cash plus $10k in loan forgiveness as your distribution. I understand why some recordkeepers show the balance as $48k as that is how much you would get paid in cash if you leave your job. However, strictly speaking it isn't the correct balance. Your balance is $58k with $10k as a loan and $48k as the other investments. As an aside if you by chance have $10k (most people don't) or can borrow it at a reasonable rate you can avoid the taxes and 10% excise tax by putting the $48k you get plus $10k from an outside source into an IRA. It might even be possible to repay the loan quickly and get $58k from the plan as a direct rollover thus having no taxes withheld even. If getting that kind of cash is possible you might want to get some tax advice before you take the distribution.

Since almost all ESOPs are not publicly trade stock and done balance forward we have this conversion all the time also. In fact if a company has been my client for a while they are typically trained to point this out to the attorneys if they are asking questions while drafting the DRO. They might as well say split the assets as of a given 12/31 for a 12/31 PYE ESOP. I do get a few clever ones that say the valuation date closest to the divorce date. So for a 12/31 PYE starting on 7/2 you use the next 12/31 stock price. The fact of the matter is most attorneys think of just about all retirement plans from the daily 401(k) perspective. In fact I am currently getting calls almost weekly from one AP because her attorney told her QDRO resolutions are very quick. So she went and agreed to buy a house using her money from the QDRO for the down payment. The 401(k) money was split and paid very quickly. I just got the stock price for 12/31/2017 for the ESOP. We won't be paying the AP for another month while we get all the ESOP's work done.

If we get to this point in July for the 12/31 plans we file an extension for both the 5500 and 8955 end of story. We are not going to get caught without an extension. It has never been a problem.

Hate to say this but if I was the Plan Administrator and there was no order signed by a judge I would say you don't have any rights or benefits. The DRO isn't a QDRO until the judge signs it and the plan accepts it. The plan can't accept it until the judge signs it. If what you are saying is true and the judge never signed it you need to go back to court. The plan can't help you in my mind. But the best thing you can do is stop focusing on the plan. If there is no signed order your problem isn't the plan and any effort towards them strikes me as wasted effort. The focus needs to be on getting a DRO signed by the judge. To be clear I am not a lawyer but I advise plenty of plans on QDROs to know if there is no signed order that is the problem.

I am not trying to be mean here but please go back and re-read the whole document regarding distributions. If it is a prototype plan make sure you include the base document. There is AlWAYS a section on what happens if a participant dies before or after they have started their RMDs. It will always tell you how long a spousal or non-spousal beneficiary can keep the money in the plan before they have to take some RMDs or all the money out of the plan. In fact isn't there a very good chance the plan document is going to say a non-spousal beneficiary HAS to take the benefits within 5 years of the death? In fact I am struggling to think of an exception to the 5 year rule but it is early and I don't have my chart in front of me. (Yes, I keep a chart I got on these rules by my desk as I for some reason find these rules some of the hardest to keep right.)

The instructions to the 5500 has this under the Active count: Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit. Are these non-vested but not deemed dist people caught in the part I made bold? I have met people who count here terms who are 0% vested but don't forfeit until 5 BIS. They would argue since it says deemed dist don't count and this plan doesn't deem dist they must count. Fortunately, most of my plans have a deemed dist provision and/or are so far above the 100/120 threshold I haven't had to think about it hard for many years.

I am with David here. Start with the formal written claim for benefits and make the plan formally accept the claim or reject it. If they reject it than if you want a lawyer who knows ERISA (that is the key for looking into this is find an ERISA attorney) can review why they rejected the claim. They will tell you the basis upon which they reject the claim. There is a good chance however how the plan rules will be the correct answer. The Plan Administrator and their attorney doesn't have a dog in this fight. They just want to pay the correct person so they will do their best to pay the correct person. .

Thread way off topic now!

The really odd term a lot of my clients use is calling a contribution a "distribution" to the participants. I always have to stop and decide are they talking about putting money into a plan or taking it out. Not sure why so many of them do it but they do.

If the plan actually says a person doesn't forfeit until they have 5 BIS that is how the plan needs to operate. That is one of the fundamental rules of this business. You operate according to the document. So in my mind if it says a person doesn't forfeit until 5 BIS you keep the shares in the person's account until they have 5 BIS. Yes, you can shorten the time at least going forward. I would have to think about people who termed in the past. We have plenty of ESOPs that say you forfeit upon full payment or 1 BIS. You just have to restore people's balances under some conditions. If it is possible for a person to have a balance and be 0% vested look for a deemed distribution provision that says such a person is deemed to be fully distributions upon termination. This would allow you to forfeit that person in the year of termination but would need to be restored if rehired within a given time period. The conditions of when a restore happens and and if you restore to the dollar amount forfeited in the past or shares (in effect giving them gains/losses on the shares) will be spelled out in the document. Most ESOPs say without earnings. So if the person had 100 shares with $1,000 that were forfeited and the price has doubled you would restore 50 shares giving a $1,000 balance restored. But it could say restore the 100 shares for a restored value of $2,000 in my example. A word of advice from an old DC/ESOP person. The guy who trained me in this business had one hard rule you had to obey. You couldn't come into his office with a question without the document in your hand. You better have tried to find the answer in that document. If you came into his office without the document he would tell you to turn around and try and again and nothing else. The ERISA Outline Book is great, this forum is great but 99% of your questions on how a plan ought to operate can be found in the document. Obviously, questions like can we change a document to say this or that isn't there but how it ought to work is there 99% of the time. If you want to excel in this business learn to read documents. Once again the document should answer when all of your questions regarding this topic at least in terms of how it ought to be operating now. The plan has to have those answers so they are there for these questions.