ESOP Guy

Just spit balling here but why can't he count is service as an independent contractor? If he owns a company now isn't his time as a sole proprietor part of his controlled group? I am not sure of this as I can't remember the last time I did a plan for an unincorporated business. But the claim isn't he gets to count the service with his father's business but as his own business before he purchased the father's business. After all he could have set up a KEOGH or a solo 4k plan for the two years he was an independent contractor. Had he done so he would have gotten two years of service in that plan. Maybe the question is can you count service for vesting before the plan exists and I think you can do so. I know he could write the plan for the new company to say all employees employed as of 1/1/2017 (or whatever year he set up the plan) enters on 1/1/2017. So can he count the service before the plan exists for plan entry. I am not sure the rest of you aren't looking at this incorrectly in terms of what business the prior service one ought to look to. It can't be the father's but he had a business for 2 years as an independent contractor. I am ignoring the employees for the father's plan at this point as that seems covered.

You really want to think through the practical issues before you change a plan to do this. How will this person pay the loan back? if by check do you have a system of tracking and controlling the checks so they aren't lost/stolen when received? What happens if the check bounces? How does this cash get transmitted to the trust? Do you really want to spend all this time and energy for a former employee? I have seen exactly one plan that did this and they valued their former employees. It was a very successful management consulting company. They treated their alumni very well becasue they often times became members of upper management of companies. This give this consulting company an "in" to generating new business. Otherwise I have never seen anyone think it is worth it.

If you can make regular and fixed increase payments on the plan loan you MIGHT be able to refinance the loan to a shorter period of time. But you are then locked into the new loan terms. You will most likely not be able to go back to the old terms. There may be a cost. But if what you want is random extra payments that is most likely not going to happen with a plan loan. Retirement plans offer loans but that is not their main purpose/business so they aren't going to have the features of a bank.

Seems like you are getting too tied up by the nomenclature and not looking at the facts. Let's re-label the "profit sharing contribution" they have the choice on to "bonus paid based on profits". If it is a bonus does that make the answer easier to you? it does to me. It is clearly a 401(k) deferral of a bonus based on profits. it is clearly taxable in the year paid and thus that is the limitation year you look to.

The easiest way to know if they did what you recommended is go to the EFAST 2 website run by the DOL and look up the Form 5500 for this plan. https://www.efast.dol.gov/welcome.html In the upper left hand corner is a search function. If you know the plan's EIN or name you should be able to find and see the Form 5500 as they are public filings.

Like so much of this stuff it can be more nuanced. That statement is true as long as the people who aren't fully vested are given the ability to take the dividend and the employer is deducting the dividend. I work with several ESOPs that only offer the ability to elect to take the dividend to the fully vested employees. The non-vested employees simply have no choice the dividends stay in the plan. The employer can only take a deduction for the dividends paid to the full vested employees.

If this is a KSOP you can have pass through dividend payments happen. They aren't supposed to be treated as regular distributions. There are rules on how they are supposed to happen and there is even a special 1099-R code for these payments- it is a "U". I don't know if I have ever seen a specific answer to the hardship question either. Sorry, we aren't exactly helping the OP much. My guess is this isn't a fact set any of the rule makes thought of so there is no solid guidance. When that happens we often invoke the plan provision that give the Plan Administrator the ability to interpret the plan document in a reasonable manner that is non-discriminatory. The fact they have been doing it the way they have been doing it might have set precedent unless you can make the case it is wrong. The fact they aren't regular distributions is the strongest fact pointing to the old method is wrong. Whichever way you go I would get it determined, documented and done consistently going forward. In the end the plan's ERISA attorney (maybe that is you) might have to opine on this.

To be clear when I said treat this like a lost participant to me that means you have some duty to try and find them. Before you can forfeit the balance that is part of the process. The DOL is clear on this point you have to do a search. What I am unsure of what that looks like with this fact set. They aren't lost in the sense of unknown address but lost in the sense no one seems to know who the heir is. That is why I haven't comments before now on what that search would look like but some kind of search seems needed. Not sure it will help much as it seems like you are in contact with of some family. But I have had great success in the past finding missing death beneficiaries by finding the person's obituary online. They often times list surviving family. In one case it listed the name of the church the service was at. The pastor of that church got us in contact with a sibling.

I wouldn't be shocked if you don't start getting letters asking why you stopped filing the 002 Form 5500 however,

At risk of pointing out the obvious one's faith doesn't have to make sense to you or me. I am not being flippant but I live near some Amish communities and they are at times splitting hairs I don't get but it makes sense to them. They will own a restaurant and want to be able to take credit cards and have access to modern cash management. So they will buy a modern cash registrar and hire a non-Amish person to always be the person who takes the customers payments. This might be the only non-Amish person in the whole place. Some how in their views they are not using forbidden technology. To me it is a difference without a meaning. My brother in-law worked at an HVAC/plumbing supply wholesaler. One of their regular customers was an Amish plumber. He pretty much had a non-Amish driver take him around in a pickup truck everyone assumes the Amish guy owned. This allowed him to get to appointments all over the county and comply with the faith's ban on driving cars. I don't get it but they all seemed happy and right with God. As pointed out they will save money and bring lots a cash to land auction but some how 401(k) match isn't saving or wages to them. I don't get it like the other examples but it does to them and I am not sure one will be able to fully explain it more. If someone here can I would enjoy reading it even if it is off topic.

Your verbiage is a bit confusing but if I understand what you are say the answer is "no". The reason is the regulations are very clear on this the FIRST dollars to come out of the plan in 2017 are the RMD. Your timeline suggest the last dollars in the plan are going to be the 2017 RMD. I would add it a rare plan that allows a partial termination payments. So does the document support the two payment idea?

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.