ESOP Guy

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.

If you have the information contact the plan administrator and ask them how your mother files a formal claim of benefits as the beneficiary. It will start a process where they will have to tell her they are going to pay you or why they are rejecting the claim. If either of you have a copy of the Summary Plan Description it would have this information. The other thing this does is put the plan on notice there is a spouse at the time of death. There are rules regarding when someone besides a spouse can be the beneficiary. If they think there is a spouse they are going to make sure those rules are followed.

I am not sure either of the answers given are addressing the heart of the question. I am not sure the question is asked well. (Back when I worked on 4k plans we never talked about a loan being cancelled vs defaulted/paid/distributed for example.) For the below I am assuming cancel means the person defaults on the loan as the payments have stopped and the person doesn't appear to be terminated. To me the answer hangs on the following issues and since I don't do loans any more I am not going to give an answer: 1) Can you really say 100% of the loan is coming from JUST the after-tax source vs pro rata across the sources? Back when I worked on 401(k)s it seemed like we always did pro rata but that could have been a system or firm decision as I don't recall this question being addressed. 2) If you can take 100% of the loan from the after-tax source when a loan default happens can you really say 100% of the loan is basis vs a mix of basis and earnings? Given my memories of the after-tax rules I don't think you can say basis comes out first but it has to be a mix of basis and earnings unless the after-tax money is very old after-tax money. If it is a mix of basis and earnings than there is a taxable amount. I guess I could be reading the original post wrong but to me those are the heart of the question and I don't see that being answered. I would add even if you could convince me only after-tax basis was involved in the loan default you would have to 1099-R the person it would simply show no taxable amount. But there would always be a 1099-R.

I don't think an S Corp can take both. As you say the paragraph (C) precludes the extra principal and interest deduction. I have seen C Corps take some huge deductions well over 25% while staying within 415 this way but not S Corps. (9) Certain contributions to employee stock ownership plans (A) Principal payments Notwithstanding the provisions of paragraphs (3) and (7), if contributions are paid into a trust which forms a part of an employee stock ownership plan (as described in section 4975(e)(7)), and such contributions are, on or before the time prescribed in paragraph (6), applied by the plan to the repayment of the principal of a loan incurred for the purpose of acquiring qualifying employer securities (as described in section 4975(e)(8)), such contributions shall be deductible under this paragraph for the taxable year determined under paragraph (6). The amount deductible under this paragraph shall not, however, exceed 25 percent of the compensation otherwise paid or accrued during the taxable year to the employees under such employee stock ownership plan. Any amount paid into such trust in any taxable year in excess of the amount deductible under this paragraph shall be deductible in the succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year under the preceding sentence. (B) Interest payment Notwithstanding the provisions of paragraphs (3) and (7), if contributions are made to an employee stock ownership plan (described in subparagraph (A)) and such contributions are applied by the plan to the repayment of interest on a loan incurred for the purpose of acquiring qualifying employer securities (as described in subparagraph (A)), such contributions shall be deductible for the taxable year with respect to which such contributions are made as determined under paragraph (6). (C) S corporations This paragraph shall not apply to an S corporation.

This points to why repurchase liability studies are so important and having a plan to pay the benefits. You go to an ESOP conference and there are multiple breakout sessions on this topic at EVERY conference. it doesn't matter if the conference is small or large this is one of the big topics. If you think about it an ESOP will most likely in a 15 to 20 year period require most of the outstanding stock to be purchased. I know that doesn't help them now but I thought it was worth mentioning. You don't really define very large. However, have them check the document to see if it has the rule that allows the payment to go as long as 10 years if all the conditions are correct. Currently, the break point is if the balance is over $1,105,000 you can add 1 year and than another year for every $220,000 over that up to 10 years. So if this person has say a $3M balance it could be more than 5 years. I would have to do the math when it hits 10 years with these break points. These amounts adj for the CPI each year. These rules are typically some place in the distribution section of the plan document. If the person isn't retiring for a few years they could put in an in-service provision for people this person's age group (I am thinking he is like 62 to 65 or older for this to work) and allow him to start taking payments now to help stretch things out. So if he is a few years from retirement and they allow him to take a few hundred grand out a year now it should help get the balance down when the installments start. Of course if they have a bunch of people in this age group and they all start taking payments it might be worse. They would have to look at the facts. I would add it isn't uncommon for a person with these kinds of balances to be a long term employee who has a fair amount of loyalty to the company. A conversation of the situation and setting something where he chooses to take something less than a full payment (might require some kind of amendment once again) has happened before. it isn't really in his best interest to cripple the company with his first few payments either. In the extreme there are stories of ESOP companies that have to sell themselves because they can't fund the repurchase obligation.

Yes, while the law seems to say you can do this as a practical matter I have never seen a company meet all the rules regarding adequate security.

I think wording of the amendment carefully helps a lot in this question. The vesting changes are more common. It helps a lot to right the amendment to say things like, "A Year of Service for vesting will be 750 hours worked in a 12 month period after 1/1/2019" for example. Same with the service write into the amendment when the new standard applied clearly. Off the top of my head I don't see any rehire issues but think of them. Had a client recently amend the plan to say anyone hired after X date was on a 2/20% vesting instead of the old cliff vesting. Had I been asked I would have told them to make it clear how you handle someone hired and terminated during the old time period and rehired after the new period. Constantly amazed people don't take a little more time and ask these kinds of question and spell them out. You don't get extra points for using the least number of words in an amendment.

I thought an PTE 80-26 loan was a loan to the plan the original question says it was a loan to the sponsor. Am I missing something here?

Not full of real clear guidence but we had this conversation last fall. Here is the thread for your reference. My guess is anyone who wants to give additional thoughts or idea should as this other thread doesn't give any clear answers. It might be the nature of the problem.

So are we to understand the jokes go like this: What is 2+2 equal? Actuary: What do you want it to equal. Attorney: If I am being paid I have some interesting things to say about those numbers. If I am not being paid it is 4.

A document can be signed and executed after the effective date. You can sign a Profit Sharing Plan or ESOP on 12/31/2017 to be effective 1/1/2017 for example. My understanding is you can't sign a 401(k) plan on 12/31/2017 and have been putting deferrals into the plan all year long. The document has to be signed before deferrals can be put into the plan. You also can't sign the document in 2018 going back to any time in 2017. So the exact timeline and type of contribution is important. If you want to give the exact dates the attorneys on this forum ought to be able to give you better answers than mine. I am pretty sure in my answers although.

I am the first to admit daily 4k has never been my specialty. I have however worked for TPAs that have daily 401(k) practices and what I can tell you is the tech to allow daily trades has existed since some time in the mid to late '90s regardless of size. Once the internet got to the point you could upload deposits quickly and easily the idea trades didn't happen within the next business day they had the funds seems unusual to me.