ESOP Guy

Back in my 4k days I always would have treated that as a 2016 contribution so the 4k plan and the W-2s match. To me an accrued 2015 contribution is more like a match of PS cont that is allocated as of 12/31/2015 but paid in 2016 I would add we would have always put that on the 2016 ADP test also. . When it came to 4k deferrals we always matched how the employees W-2 would have looked like. I would add if you make that a 2015 contribution do you make the comp it was deferred from 2015 also? Even though it is clear the W-2 would make it 2016 comp? How do you make the comp/def year for ADP or 415 testing work if 4k def is in 2015 and comp is in 2016? That is why we always made the W-2 and 4k def match in terms of year.

Another version of this that I never had to show my work to the DOL or IRS but how I computed a large group of people's lost earns was I put $100 in the DOL calculator. It came back with a result. For example, $117.29 was the result I got. I took any given person's late deferral times by 1.11729 in a spreadsheet. I checked my work on a few people via the DOL calculator and got within a penny for results. We used those results to compute the deposit and the excise tax due. Once you know the compounded interest rate factor if everyone has the same situation it ought to work. I haven't worked on 4k plans now for 5 years and like I said I never had to show my work to a DOL auditor or IRS auditor as they never asked but I don't see how that math doesn't work every time.

By the way, if the person doesn't want to read the regulations quoted above they could read and read again the plan document. The RMD section of the document is pretty much the RMD regulations repeated, but they should be clear also that there is an RMD due in 2017 also.

it would help if the government was forced to accrual accounting. That would help measure the long term costs. It would also get rid of SOME of the accounting games. The mandatory 20% withholding on distributions is a classic example. it was my understanding that law was passed to make a budget back in the day "work". It did this because it meant some part of the taxes on retirement distributions got paid in the current year instead of the following tax season. But in the aggregate all it did was move future revenue into the current year. It never increased total revenue. It also was a one time "fix" as after then the move from the next year was offset by the loss of the previously moved revenue. A business working on GAAP accounting could never goose its income statement one time by increasing its pre-paid revenue.

Observations on the double taxation of the interest: Someone is going to pay taxes on the interest. It can either be you or a bank you borrow the funds from. I would add too many people let the tax tail wag the dog. You are still better off after double taxation paying it to yourself than the bank as long as the double tax rate is less then 100%. Simple example: You are going to pay $100 in interest on a loan regardless of the source of the loan. If you pay it to a bank you have $100 leaving your net worth. If you pay the 100 to yourself and your effective rate of taxes because of double taxation is a whopping 80%. That means you will pay $80 to Uncle Sam and have $20 still as part of your net worth. Which one are you better off with? I am ignoring opportunity costs of what your 4k funds could have earned if they are stayed in the 4k plan. I think that can be real but it isn't a tax question. If you are looking at taxes and only taxes a 4k loan isn't a bad deal. These loans can be a bad deal but it is the other reasons people talk about. Too many people get the tax issue wrong on these loans wrong.

I think I put one in this thread all ready I showed that the total taxable income of taking a 4k loan and not taking a 4k loan is the same assuming no interest is paid. If the taxable income is the same with and without taking a loan there can't be double taxation. I know there are other threads on this board over the years were people have put spreadsheet as attachments showing the same.

I thought about the Microsoft case and I think you people might be blowing by the differences too fact. If I recall the case BOTH the sponsor and PA took the position the person was an IC. A court disagreed and made the plan cover them. So people started writing plans saying if a person IS TREATED AS AN IC and later ruled to not be an IC they are still excluded. But if the PA refuses to make a distribution it is because the PA is refusing to treat the person as an IC. So how can the PA say this person was never an IC for distribution purposes but a misclassified IC for contribution purposes? There is no after the fact change in classification like in the court case. I am willing to be convinced but at this point that seems like a material fact people are ignoring. The never was a mistaken misclassifications by the PA as an IC so it can't be changed after the fact.

Let's be clear this was NEVER a late deposit subject to the late deposit rules. The rules are clear the money has to be segregated from the employer's assets in a timely manner. These rules are silent on HOW FAST THE MONEY IS INVESTED. So this was never subject to a filing of a Form 5330 as there was no loan between the plan and the sponsor which is the PT at the heart of the deposit timing rules. Now there is a fiduciary duty to investment the funds timely and it sounds like that may have been violated and corrected.

Wow this can raise all kinds of secondary issues quickly if correct. So if the plan admin decides this person is still an employee and refuses to pay them it seems like in order to be consistent they would have to count the hours worked for vesting. This person might be elig for a contribution (which the sponsor might not want to fund- what happens if it is a SH plan and the sponsor doesn't send the funds??) If jpod is correct the words going through my head is stay out of the 3(16) business.

I know that no one from the employer and TPA can give tax advice but the employer might want to encourage this guy to talk to a tax person. So he is giving up a about $5k in current deductions. He is getting a basis in his IRA instead. For whatever current savings he is giving up how much in ER money? I am having a hard time seeing how he thinks he will come out ahead by giving up free money. This is one of those examples you can't help but suspect the person is allowing the universal dislike of paying taxes to make a bad choice. It is the tax tail wagging the dog metaphorically speaking.

And if the buyer didn't agree to pick up the cost of the contribution, the seller could still do it after the termination of the plan and the sale of the assets. An asset sale means the seller as a corporation still exists. It might be winding down but part of that process is paying the remaining bills. In this case one of the remaining bills is the SH contribution.

Do I need to go to the other board until called up from the minor leagues by Benefitslink?

Would it be cheaper and easier to just amend the plan to allow those few terms to get the contribution? I am assuming you are still early enough in the termination process there are still people who need to be paid benefits so creating account balances or increasing account balances isn't going to create a new round of distributions. My guess the reason you can't find any guidance on it is because most people's reactions was like mine when I read just the "headline" of your question- you can't have an over-funded MPP. I guess someone found a way.

Some other links that talk about it that are more current. I don't think it changed.

That was noted above when someone talked about the UBIT.

Yes double check you are reading the document correctly. I have never seen a document that allows for a repayment and restoration of forfeitures after 5 1-year Break in Services.

I think one needs to think through the practical issues that can come up. What happens if the investment goes bad and value goes to zero? Will the PS plan have enough funds to pay back the other plan? if not, will that cause issues? I realize since it is a one person plan it isn't like employees are out money but I would at least ask the questions what if things don't work as planned.

To be clear the choice has to be written into the plan document which is why I said you have to look to the document to find out how any given plan works in this regard. And yes the plan will tell you when to do it also. But it does need to be annually.

If I understand your question correctly your answer can only be found in the document. The people setting up the plan can choose if they want match forfeitures to be reallocated or used to pay for current match (or expenses). There is no required when it is always a choice of the people setting up the plan.

It isn't the annoying that is the problem in my mind it is the fact you can't charge for this annoying extra work. I say it all the time at work. A client can be as demanding as they want if they are willing to pay for the service. It is the clients that want top notch service combined with rock bottom pricing.

I added the word "if" for a reason. I fully admit I can be over assuming. I just noted someone from Benefitslink came to his defense.

If the author is trying to say loans aren't double taxes his does a very poor job of it. Here is what he says right before the part quoted above: Example Loan origination: $10,000, no tax impact Loan payback: One $10,000 payroll-deducted after-tax payment. $13,333 in gross earnings needed to realize the $10,000 after-tax payment resulting in $3,333 in taxes attributable to the payment. Distribution of this $10,000 at retirement: $10,000 taxed at 25% resulting in $2,500 in taxes. The total taxes paid on the $10,000 used for the 401k plan loan and then distributed at retirement are $5,833 (58%), more than double the amount of $2,500 (25%) that would be paid on a $10,000 distribution at retirement. I think any reasonable read of the whole thing leaves you believing that your effective tax rate of a loan is 58% vs 25% if you had not taken the loan. If he thought those numbers were wrong he can have said they are wrong and why in the next paragraph. However, sorry if this guy is upset that he is getting so much attention after his web page got noted in your newsletter. I fully admit I sent him an e-mail calling out his math. My intention was not to get a guy mad at Benefitslink.

It doesn't say tax document is says document so why wouldn't it cover even an informational document? I had forgotten about that court case Peter mentions. That was a big case as the IRS was trying to mandate minimum education requirements and other things on anyone who prepared 1040s for pay and they basically lost. It was a big deal as the IRS' rules were nicknamed by its critics as the H&R Block full employment rules. They were seen as making it very hard for a small tax prep outfit from meeting them but someone like H&R Block that has the size to do in-house classes could. Based on Peter's discussion I am willing to be told I am wrong. I was gong off memory from my IRS days and we were trained in the '80s that Circular 230 was very broad. I know they would have taken the position even an informational return was a filing that counted. Maybe they were just teaching me their biased take. I stand by my take that following Circular 230 just isn't that hard to do and in many ways represents good practices.

CODA was the term I was thinking of and went blank on it!

Here is my example (as if there aren't enough) As I say above if there is double taxation then it should show up as the person have higher taxable income with a 4k loan vs another type of loan and that doesn't happen. Example 1: 1) I earn $10,000 and put all $10,000 into a 4k plan pre-tax. At this point my taxable income is zero. 2) I take a $10,000 loan from a bank. At this point my taxable income is zero. 3) I earn ANOTHER $10,000 and pay the bank back. (I know I have to pay the taxes so I need at some point the $3,333 as you point out. But we are looking at taxable income not how I will pay my taxes.) My taxable income is $10,000. 4) I take a taxable 4k distribution of the full $10,000. My taxable income is now $20,000. You will note I earned $20,000 in wages when you combine steps 1 and 3. Example 2: 1) I earn #10,000 and put all $10,000 into a 4k plan pre-tax. At this point my taxable income is zero. 2) I take a $10,000 loan from the 4k plan. At this point my taxable income is zero. 3) I earn ANOTHER $10,000 and pay back the 4k plan. (Same $3,333 issue but it doesn't change the fact if you are right taxable income ought to be higher now then in example 1). My taxable income is $10,000. 4) I take a taxable 4k distribution of the full $10,000. My taxable income is now $20,000. It is the same both ways. If you were correct my taxable income would have to be higher here. Sorry for odd formatting I copy and paste from my e-mail to the guy whose article started this whole conversation and it margins are different it appears.