ESOP Guy

.What MIGHT be interesting here is they are only a controlled group for employer security reasons. Maybe everyone else sees that right away but just to be clear does that mean they aren't a controlled group for testing (like coverage testing) purposes? I fully admit controlled group rules aren't a strength of mine so I wouldn't mind learning a bit here.

Regarding the fair/unfair concept the problem is laws and regulations like objective rules. So you as a rule can't have things like two businesses that aren't "related" as the main test. (note even the QSLOB rules have more than that) In your example does the real estate business ever help people invest in real estate? If so, is it related to his RIA business? I think you find it would be hard to find a good definition of Controlled Group that keeps separate the business you like and not allow the types of abuses these rules were designed to stop from happening some of the time.

Do you mean 12 months not 12 hours by chance? It is my understanding the service spanning rules still apply even when a document says "continuous" service. And maybe the definition of "12 month service fail safe" means that. That is the term I am not sure what they mean. Is that term defined in the Base Document?

I am curious why do you think he is owned a benefit? Do you have some statement that is recently dated? He told you so? You not sure but want to check? I mean if he retired 32 years ago why don't you think he took his balance a long time ago? I guess if these are too personal questions I don't mean to offend but it would be unusual for someone to leave money in a plan that long of a time.

We take scans of QDROs all the time. They do need to have the various court markings and we like to see a cover letter by an attorney. Since they come to us via our clients they have at least talked to the employee whose account it going to be separated. If a participant were to send me a QDRO I would send it to the client to know they want it processed.

Now you seem to be mixing topics. Can you have allocation conditions that require 1,000 hours to get an allocation? Sure, as long as you can pass coverage testing. One question is asking are you a participant? The other question is asking do they share in an allocation?

Yeah you need to read your document again and very closely. I have seen a few documents that say something about part-time employees are excluded and they define the term part-time like you have written. But to over come the concerns ETA is bring up it clearly says if they ever work 1,000 hours in a 12 month period they enter the plan. The practical effect of this "class" exclusion is it is another way of saying you don't enter until you work 1,000 hours.

Is this an S Corp ESOP? I ask becasue we have a few clients around here that are C Corps and are fine staying that way. The have started PSPs and done the odd allocations of the ER stock. They only have stock in them. There is strictly speaking nothing in the rules that says a PSP can't have ER stock as its only assets. That is how they then do the more creative allocations. PSPs as you say don't have the limitations on testing an ESOP has. Most companies however don't do this as the value of the 100% owned S Corp ESOP benefits are too great. Although we have some ESOPs that pass the general test around here and have some pretty creative allocations. They mostly are looking at adding a service component to reward the long term employee-owners. Also, if this is a group of companies and the desire is to only allow some of the companies to be in the ESOP you could set up an ESOP and a PSP and give similar benefit levels and pass coverage with an Average Benefits Test for example. In these cases parts of the Controlled Group don't adopt the ESOP or PSP as needed. As long as you think you can pass the combined testing you are good with doing this.

The reason I didn't use my real name when I first started coming around years ago I feared my answers could be interpreted I was speaking for my firm which I am not authorized to do so. It has been clear that isn't an issue. So now it is just what it is.

I work for a company with plenty of people. We tend to come here and ask questions when: 1) We want confirmation we are right/wrong on tricky questions 2) The area is kind of gray or there is unlikely there is clear guidance 3) The facts are rare to get other insights 4) Insight to practical problems- it never hurts to hear what others are doing. There might be more but those come to mind. Besides there are some real characters on this board so you might just get a good laugh out of it also.

I am not trying to dodge the question but I would recommend they go talk to an ERISA attorney that knows ESOP law. I am constantly shocked based on how plain that language in plans/law is written how often an attorney comes back and says there doesn't need to be a vote. When and how much you disclose can also depend on the at what stage in the sale process the company is at. For example most of the time management is rightfully reluctant to tell about a sale if it is still in the negotiation or due diligence phase as the deal could still fall apart. It seems like there is no duty to tell the people at those stages. It really is a vote to accept a valid, binding offer or not is what the rules are about. As an aside and you might know this but it is always worth pointing out. Be careful making any kind of distributions to people if the sale price per share could be larger than the last appraised price which is often what people are paid at. There have been court cases over this issue where the people paid claimed had they known they could get more they would not have consented to the payment. All of these issues need the help of a good ERISA attorney who knows ESOP law. No one likes to pay attorneys but in this case it is cheap insurance in my mind.

I don't understand. You aren't very clear on type of plan and type of contributions. If this is a DC plan and the non-deductible contributions are Discretionary Employer Contributions then why would there be any refunds? If this is a DB plan I don't know enough to opine. But if a DC plan.... Wouldn't the correct result be simply to keep paying excise taxes until they can be deducted? I have to admit I am not sure how one allocates this money since there was no compensation. Or the theory this money ought to have been refunded as a type of excess Annual Addition? If so, why wasn't that done back shortly after the plan year ended? Maybe I am not understanding here but I don't see why there are refunds. I see plenty of problems and a big mess but refunds aren't part of it. Happy to be told I am wrong so ignore me if you think I am way off base.

I did misunderstand the question. I agree with you. You don't have to use the FMV of the share released if they are higher than the cash contributions for the loan payment as Annual Additions. In your example the $700k is the Annual Additions.

Or am I not understanding your question? What is the $700k vs the $800k? What is the $100k? I guess that might not be clear. I was thinking it was the difference between principal and total payment.

The reason for this is becasue of this: (ii)Employee stock ownership plans to which the special exclusion applies. An employee stock ownership plan meets the requirements of this paragraph (f)(3)(ii) for a limitation year if no more than one-third of the employer contributions for the limitation year that are deductible under section 404(a)(9) are allocated to highly compensated employees (within the meaning of section 414(q)). If you look at 401(a)(9) it excludes S Corp ESOPs (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.

You are confusing the C Corp rules with the S Corp rules. A C Corp can ignore interest payments an S Corp can NOT ignore interest.

I have an ESOP that has a provisions that allow several things: 1) Once a person reaches Normal Retirement Age and terminates (ie retire) they can start receiving distributions. 2) However, if they return after such work they can still keep receiving distributions 3) As long as they work <1,000 hours they can not receive a contribution for the year. The plan says you can only get the waiver of conditions for retirement once. You don't have to give retirees a waiver. They did this because they have a few position that are highly skilled but they only employ one person in that position as they aren't a very large company. So when this person goes on vacation they bring the retiree back for those week(s). The retiree would only agree to earn a week or two's worth of wages if he can keep getting his annual ESOP installment. So it has been a win/win for all so far. So far no one has challenged this as an objective classification.

I had an ESOP paid the final benefits in April of 2018. So the final 2018 5500 is due 11/30/2018. We obviously don't have the 2018 forms. Something in the back of my mind says you can use the 2017 forms. I guess I can extend and by early 2019 we will have the forms but since the company was purchased no one wants to hang around to sign the forms almost a year from now. I just can't seem to find it in the 5500 instructions saying we can use the 2017 forms in this case. Is my memory faulty or does someone know where it is written saying we can use a 2017 form? Thanks

I agree with Larry on this one. DL are cheap insurance in my mind.

The remaining money will go to your brother's beneficiary. Hopefully, he completed a beneficiary form. If he didn't the plan has rules to determine who is the beneficiary.

I would advice you get a little help from a professional who can help you with the limits. I would recommend someone beyond a mere investment advisor/salesman. As ETA says you can't put any more 401(k) deferrals into any plan you start. However, there are other types of contributions you can put into these kinds of plan. There are a number of limits and they can interact with each other. It can be expensive if you go over a limit. The short answer is "yes" there is room for more to be put into some type of plan.

This might help.

To stress something Larry said I would have the plan adopt an objective test of when to do interim work or not. The last thing you want to have the plan to be is in a position where in down years you don't do one and a former own gets paid but in up years you are always doing one to the former owner's benefit.

The answer to your concern is to do the interim valuation. Yes, if one isn't done then any earnings/loss is forced on the remaining people. That is true every year in a balance forward plan with pooled investments. It is just in most years the amounts aren't material. I would be very hesitant to allow an ex-owner to put material losses on the rank and file participants. That is why people keep telling you to do (or recommend to your client) an interim valuation.

I guess I am at a loss for how the others in the plan suffer any kind of loss once an interim valuation is done. Are there assets in the plan that are illiquid that could cost a lot to sell or have to be sold at fire sale prices? (I see Begarath is asking the same question as I write this)