ESOP Guy

Yes to Q1 No to Q2

I always thought the problem was the PT issue. In particular it is the self-dealing issue. With IRAs you can't be the top dog in the company like you can with a 4k plan. See this article https://www.entrepreneur.com/article/178224 I didn't find anything in writing newer or more detailed. Other then the IRS website that does say you can't self deal. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions Or put another way you can't set your own salary for example with an IRA owned company but you can with a 4k owned plan. See: http://www.journalofaccountancy.com/issues/2000/apr/thedosanddontsofirainvesting.html Hope that helps get you moving in the right direction.

It really helps to show either consistency of the comp that was used and/or if an old document had the definition that was being used. You can then frame the proposed amendment correction as fixing an error and the comp used was always the intended comp definition.

One other possible thing to think about. As you get raises increase the amount you defer. Say after your first year working you get a 2% raise. Increase your deferral rate by 1%. You will find your take home pay stays about the same unless things like health insurance premiums go up a bunch. If did this when I was young and was so glad. My wife and I built a good base for retirement. At one point we were deferring over 10% and really hadn't missed the money. It built a good base for a retirement. When the kids came along and we had to go back to the 6% where the company match was max out it was great to have saved while young.

Just curious since I am a DC person. Does this really save the person taxes? You have to take an RMD from an IRA or a DB plan how does taking it from a DB plan make it more expensive?

The other big issue with the real estate is a value. If the owner gets the real estate and then sells it shortly after it leaves the plan for a large profit the charge the owner cheated the other participants by under valuing an asset in the plan can be made

Regarding the loan that is distributed it can be used to fulfill the RMD. I have helped with that kind of transaction before. If we focus on just the RMD and not all the other possible problems with distributing land in kind I don't see why not. They received a distribution that is taxable and it wasn't rolled over. I just have never been part of that kind of transaction in the past.

RestAssured As you set out the facts there isn't much to read. This does NOT fall under the late deposit rules. If the assets were segregated from the employer's asseets timely then the deposits were not late per the DOL rules. That does not mean there isn't a problem. If the fiduciaries can't figure out how to get the brokerage to do its job right then they are doing a breach of fiduciary duties. (One could make a case this is worse as I believe they can be held personally liable for such a breach.) So if there is anything to read it would be on fiduciary breaches but you won't find this specific example spelled out any place. The duty is the Prudent Man Rule and Due Care Rule (I think that is the correct name.) To me you nailed the correction. The trustee of the plan ought to ask the brokerage to make up for any lost earnings based on the actual investments. They should also get a written commitment on how they aren't going to allow this happen again. If they can't get this corrected a very strong case can be made they simply have to get a new brokerage firm.

it is the fact the estate needs its own TIN that is the big issue. Very few people deal with estates large enough to get one and file the related tax returns. The cost of doing this can really take a bite out of the payment and people aren't happy. They aren't happy about no rollover also but if the amount is small enough that isn't too bad. Moral of that story is name a beneficiary always. I know that doesn't help if the person already died and left the money to an estate but maybe the plan sponsor will see this as a reason to help the rest of his people by pushing the forms.

The way I read the original fact set there is no interest accruing on the loan. He said he terminated. So the loan was in fact distributed. I have always understood the idea of the interest kept accruing on the loan only applied if you defaulted on the loan and there was no distributiable event. His termination from employment was a distributable event. That should have ended the existence of the loan in any way share or form. In the letter are they demanding payment? Are they saying if you don't pay more something will happen? I find this letter very odd but I don't see how this ought to be your problem. Do you still have the tax records proving you got the 1099-R and paid the taxes on the defaulted loan? If so, I would keep them handy in case they start demanding payment or something else.

Although I do recall in the '80s the legal profession did try and go after the CPAs for practicing law without a license about their tax practices. Had the lawyers won that my guess Austin couldn't prepare prototypes. I also know a few lawyers that don't think a non-lawyer is qualified to complete the prototype check list.

I would use the word "terminated" in that situation still.

I would be careful with parts. For example someone who was made 100% vested on 8/31/2016 but would have been less then 100% except for the termination and then terminated on 9/2/2016 would still be 100% vested in my mind. I don't see how you take away a valid amendment that made people 100% vested by changing the termination date. There might be things like that if I thought harder about it.

Freeze is an unusual term for a 401(k) plan. What do you mean? How is this different from terminating the plan at 12/31/2016? Did they just forbid deferring into the plan but it will be around for years to come? I believe the answer to my questions can make a difference as to what the answer to your questions is.

Given the small amount of money this is how we would have done it back when I did balance forward PSPs. It would have been a "do to ER" on the plan's balance sheet and that would offset a future contribution to clear the payable.

I have had a 401(k) with a SDBA and it was during the 2008 and beyond time period. It did allow me to put some non-traditional assets in my 401(k) account that helped to manage the size of the loss and did set me up for some nice gains coming out of the time period. Not saying I got them all right- I didn't. But by the summer is was convinced that there was a lot more downside left. So I put a small amount of my assets in a ETF that gained when the market went down. I also bought a number of preferred stocks and funds that invested in preferred stocks in the winter of 2008. Those asset classes are never going to be made a regular investment choice in a 401(k) plan and they helped minimize losses in 2008 and set my account up for a nice return coming out of it. I suppose I could be said to be luck- so be it. I don't claim to be right all the time but it is nice to have access to some outside of the box asset classes at times. So to me there is some value to SDBA but I fully acknowledge they can allow people to hurt themselves pretty bad.

I know I have told the story before but I have been witness of this debate in real life. A dental hygienist in 2008 put 100% of her money into Ford in what turned out to be near the bottom for Ford that year. It turned out great for her but had she done it 12 months earlier in 2007 well.... The people I worked for convinced the dentist to set plan wide rules about not allowing too large of a concentration in a single stock, bond.... And part of the wealth management firm who was helping the dentist their contract included a provision to monitor this rule to not allow it to be violated.

I wasn't claiming it was real estate. I just said that to me many of the problems of real estate in a plan seem to be true here.

How do you value it every year? if someone is invested in it and needs an RMD and the rest of their balance isn't large enough what do you do? Is the value known well enough to even compute the RMD? What if they want a loan and the rest of their investment isn't large enough to fund what do you do? If they are invested in it and terminate and part of their benefit is in this how do they get paid their full benefit? Not only in terms of cash but value. It will look bad if while the NHCEs get paid out on this investment they value is x and when the HCE finally gets paid an appraisal says it is 2x or 10x especially if there wasn't a formal appraisal in the past. (Or even if all the NHCEs get paid from teh plan and then the plan sells the investment for 2x or 10x) Will this spin off a type of income that will trigger Unrelated Business Income Tax (UBIT)? Do a search on this board on real estate in plans and the problems. Just about everything I listed above has been the subject of real estate in a plan. It seem to me you will have same type of problems with this.

If I understand your question you are trying to saying that a SDBA is functionally the same as this investment in that everyone gets to choose. I am not sure a SDBA is the same as a discrete investment. Scuba, I think you are working too hard to rationalize to keep a client happy. I get the desire clients pay the bills, but if you have to work this hard it seems to tell you something about the idea.

Another great movie although I tend to use, You're killing me Petey!

As I read the thread you link to with the exception of the 2nd comment the general opinion on there seems to be it would be a problem/discriminatory. That seems to be the prevailing opinion here. Are you reading it differently? The 2nd comment quotes an informal opinion by the IRS that is over a decade given at a conference.

Another take on this issue: I don't think you can "backdoor" the restriction via an indirect condition that seem neutral in regards to all the people. Years ago I knew of a plan that wanted to offer a Self Directed Brokerage Account (SDBA) but really only to the owner. So the proposal was to offer the SDBA to everyone but announce that due to the cost of doing all the accounting for the SDBA there would be a flat $500 fee to any account that did an SDBA. Ever attorney and TPA I knew back then rejected the idea as discriminatory as the owner was the only one whose assets were large enough to reasonably expect could earn enough in the SDBA to cover the fee and not ruin the ROI on the account. He had millions in his account. The next highest account balance was around $25,000 so he would have had to earn 2% a year to break even after this fee. A $10k holder 5%. A guy with say $2M only had to earn a .025% return to break even after this fee. The point being in this case it was offered to 100% of the employees but a seemingly neutral (and reasonable sounding) condition made it effectively available to the one HCE. (I am ignoring for now if the fee was reasonable and so forth. The current question is discrimination and the consensus back then was the $500 fee would fail a facts and circumstances part of the test.) In fact since then the highest fee for a SDBA account I have seen is $50.

Just an observation: I am a CPA and every CPA firm I know that got into the TPA business is out of it now. They found it didn't work for them. They found they couldn't make the money they wanted or needed to justify it. You need specialist to do the work. It is easy to do an EO if you aren't a specialist. Obviously some people make it work as this forum is full of 401(k) TPA people but it was trendy about 10 or 15 years ago for a CPA firm to go into the TPA business and they all seem to have left it that I knew personally.

I have wondered about this before and if it has ever happened. I guess I know now. I don't think you will find clear guidance on this question. I would favor paying the people and issuing 1099-Rs. I am having a hard time imagining the IRS or DOL having an objection that got these people the money they were do and it being taxes the same way it would have been if they had not become lost. I freely admit I am making this up but any other action I can come up with seems overly complex. The only other choice that makes any sense is pay them and some how claim it is 1099-Misc or W-2 comp. W-2 comp seems like a the worse choice. to me.