ESOP Guy

I knew the Amish didn't believe is Social Security and are one of the groups exempt from paying and collecting if they seek a religious exemption. There are exceptions to this rule like any government rule. I didn't realize this extended to private retirement plans. Learned something new today.

So the key going forward is when hiring an Amish employee is to get a timely written waiver of participation. These need to be done right so I would get guidance from an ERISA attorney on how to do them. They can maybe even help you come up with a way to communicate to the person this decision is permanent. But as people say for those in the plan you are stuck.

This is a grey area. It would be nice if the plan document told you how to do this. Most ESOPs I work with break down like this: 1) For plans that make a person wait to start their termination payments they still give them a right to a diversification. I don't think I have ever seen them getting no payments. 2) For plans that pay the year after termination most give the right to diversification plus the termination payment. A small number only give the termination payment (most common if they pay lump sum as they clearly can take it all. But a few only pay say the 1 of 5 payment which could be less then the diversification) A very small number give up to the greater of the two. So if a diversification would allow 25% and the 1 of 5 payment gives 20% they would only allow the 25%. Obviously, in no case can the mix of payments be greater then 100% of their balance. As you can see your understanding is the most common but I have never seen anything that say you have to do it that way. If a plan does something other then your understanding I would get it in a distribution policy or plan and be consistent.

Not trying to talk down to you but I would get written acknowledgement this correction work is out of scope work and how it will be billed. I don't always do that but this is bill is going to be a large number and I wouldn't want any fights on billing after spending all those hours fixing all of this.

I 2nd the question on what basis do you do an escheat? As a general rule it is my understanding ERISA and the DOL say no to the idea of an escheat ever. I would be far more comfortable if the 5 year time limit happens to treat this as a lost participant per the plan document. If one of the heirs show up with a claim then restore the account balance per the plan document and make the payment per the plan document. I think that can be defended both legally and per the plan document.

The VCP filings I have been part of that make this case we send the IRS the following if we have them: 1) If a prior document had the desired provision that helps a lot. 2) If you can show that is how it has always been communicated to the employees. Being able to show HR material they use to explain the plan to the employees or such things. If the SPD has the desired provision and the document doesn't seem to help a lot also. 3) If you can show that the plan has consistently been ran the desired way helps. The longer the better. 4) Any other communication to about the desired provision helps. In a recent case we were able to show all the plan documents from the '90s to before the most recent restatement had the desired provision. It looks like whoever did the restatement just blew it. We were able to show the desired provision was how the plan was done before and after the restatement in question. That VCP was accepted 100% by the IRS. They just allowed a reto amend.

Not only don't they read the SPD they don't even read the couple page summary of plan provisions we send them every year as part of their annual reports package. I will literally (using the word correctly here) send our reports package to the client electronically and the next day when they see people's balances I will get an e -mail that asks me things like, "what is our vesting schedule?". The answer is found on page 1 of the summary of your plan provision which is about the 5th page into the annual reports package. At one TPA firm I worked for I was put in charge of all our balance forward clients. I got tired of having to check and update the summary of plan provisions. So I took them out of our standard report package. Not one client said a thing. The number of questions from clients about what they plan said did not go up one bit. Don't get me wrong for most clients their plan is one of many things they do in a day. So they have hired a TPA to rely on and that is what they do. So in one sense it is understandable. In another sense many of the ESOPs I work with is 100% owner of the company. You would think the CEO or CFO would have a better understanding of the owner of the company they work for.

Length has never been an issue for me. There are documents that are laid out better then other by a long shot as far as I am concerned. Some characteristics of good and bad that come to mind quickly are: Good: A good definitions section at the beginning Bad: Too many things that reference other sections. There are times when I need to know the answer I got to the section title what I want to know. It is constantly sayings as defined or reference in section .... and then that section says as defined or referenced in section... Good: In ESOP documents ones that answer simple questions like what is a Year of Participation for purposes of having 10 YOP so you can take a diversification. You would be amazed how many ESOP documents don't answer that question. I don't mind looking through lots of pages for the answers. You can get the document as a pdf often times and have use the pdf search function to get you close to the right section quickly. Actually have the answer in simple clear terms is the bigger challenge. Last one since you got me going intended or not! ESOP loan notes without trip up provisions. In world in which all amortizations are done by computers why write an ESOP loan that requires a 360 day year for its amortization? (More common then you would think but not super common. But has seen more then one ESOP have years worth of allocations redone when someone realizes all the share releases were computed with 365 day year amortizations and those done wrong.) And the loan pre-payment provisions I have seen have the most awkward wording on how that is done. I have literally been in a room full of CPAs and we have had to go back to the attorney and ask him what the note means on how the pre-payment should be handled. Off my soap box for now!

I would add I would start updating my resume tonight. I don't think I would want to work for this kind of company. It is just I would also rather me control the timing of the leaving instead of them .

What you are being told to do is not legal. There is no way around that. I am not being flippant here but you are in a tough spot. You seem to have 3 options: 1) Try and convince the powers to be not to do this but find a different solution that is most likely going to cost the firm money 2) Join them in a clearly illegal act 3) Refuse and maybe lose your job I feel for you and am glad so far I have not faced that fact set. Sorry, if that isn't the help you wanted. As I tell my clients some times I know that isn't the answer you wanted but it is the correct answer.

Let's just say for example you decide to do this how do the RMD rules work? When does the RMD start? Normally, if the person isn't 70.5 and the spouse leaves it in plan you have to start the RMDs when the deceased would have turned 70.5. Is that still true? If so, can your record keeping system track that as her balance doesn't have to be paid until she is 70.5 and termed (assuming not 5% owner). Or is it like any other rollover account of she has and doesn't start until 70.5 and termed? I see easy mistakes and/or confusion happening here by allowing this kind of rollover. I think these RMD questions need to be answered now.

If they aren't a controlled group why are these people working for "free" for one of the dealerships? I am also not trying to be flippant but in fact is the dealership that isn't paying these people in fact reimbursing the dealership that is cutting the checks? Or put another way why is someone working for "free" for a dealership? Obviously, the check they are getting is paying them for their work at both dealerships. So why is only one of them cutting a check? As MoJo says I think you are looking at it correctly but need more facts.

Not sure if this helps or hurts but I used to work for a large benefit consulting company and this was a rather significant book of business. The size plan you describe seemed the most common type of plan they did this kind of work for them. It caused a little tension as they had to promise to not even consider our own TPA business as that was an obvious conflict of interest. So the debate was always was the company better off with this one time RFP consulting jobs or trying to get the recurring TPA work.

Can't help you but it seems like you have a consistent business model.

If you want to give them an answer besides the one noted above which would be my preferred answers it seems like the reason is because an operational error would disqualify a plan. So tell them a plan has to follow the terms of the plan and failure to do so would mean the plan is no longer a tax qualified plan under the tax code. To agree to an operational error by a fiduciary makes the fiduciary liable for damages done to the rest of the participants.

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.