ESOP Guy

Anyone else have clients getting extension letters from the IRS saying their 12/31/2022 PYE are 6/30/2023 PYE and their 5500 is extended to April? We have seen a few.

Millennium Trust will set up the IRAs. Millennium Trust has or is changing their name but you should still be able to Google them. They have a pretty simple process which is one of the reasons they have become so popular to send lost participant money to them. PBI is a good search firm but I don't know if the full search service can be done by year end. Their process includes sending confirmation letters to the person. https://www.pbinfo.com/

The answer if this person gets a contribution for 2022 is determined by the plan document not the law. In the end the document will reflect the law but the law gives some flexibility regarding this issue. Once you determined they have the 1,000 hours in the 12 months what is the plan's entry dates? If it is the 1/1, 7/1 following the person doesn't enter the plan until 1/1/2023 and wouldn't get a 2022 contribution. If the plan's entry dates are the 1/1 of the year they meet the requirements then the person would enter 1/1/2022 and most likely get a contribution. So read your document and determine when the person enters the plan. Likewise, read the document if they stay a PARTICIPANT or not. I can't imagine the answer is anything but they are a participant until they terminate once they enter the plan. The plan document will likewise tell you the conditions of when a person will share in any future contributions.

Honestly, your question is hard to understand. Are you talking about someone who is a participant already? If so, the document defines the rules of when a person who is rehired re-enters the plan. I have plenty of plans that clearly say that a person who was a Participant in the past re-enters upon rehire regardless of how long they have been gone for example. Are you talking about an employee who never entered the plan? If so, a well written document tells you how to handle them when they are rehired. Depending on the exact facts and how the plan document is written they will get credit for their prior service and other times they will not. The document will reflect the law. The guy who trained me back in the early '90s was famous at the firm for saying: 99% of all your questions can be answered by reading the plan document. Even when it is a question of the law the document will simply reflect the law. This really is a read the freaking document question more than anything else in my opinion.

Assuming the plan allows rollovers in would you sign off on short cutting it by simply combining the balances or would you at least get a form completed? Just curious mostly.

The fact there was a plan termination is pretty important. There is a law that says you fully vest upon termination of the plan. I just had this earlier this year. An ESOP said you didn't forfeit until a person had 5 breaks in service. They had a cliff vesting schedule. We had to vest all those 0% people upon termination but that is what the law says. I don't see that rule/precedent being very applicable here.

I think the question that needs to be asked is: was this person terminated? If they were why weren't they offered distribution paperwork before now (assuming the plan document would say they can make a distribution shorty after termination)? If they though they could come back were the still employed but just not working? Once this non-plan question is settled you have an easy answer- follow the plan. If they were terminated years ago they don't get the 100% vesting because of death. If they weren't terminated years ago but terminated due to death they are 100% vested. So I don't think the most important issue here is one the plan's document or retirement rules can answer I think it is a facts and employment law question. When did this person terminate? Answer that question and you get the right result.

At our firm we would not combine the accounts. They are different types of money and while it might not ever make a practical difference the payment of the death benefit money out to have a death 1099-R code. Here money might have a different code and if surviving spouse is young getting a 1099-R of a 1 vs D might be of note. I even have one ESOP that the document for some reason says a beneficiary can't name a beneficiary. You might want to check the document to see if there are any differences like that. Since it is a spouse they can leave it in the plan but I would track two accounts if it were me. Once you mix the two there is no undoing that if it were needed.

Yup, Luke has a good point. You need to find a loan that looks like what is going on here. The credit union I use offers loans secured by one of your own CDs (why you take this out baffles me but they have offered it for decades so someone must do it) is CD rate +2%. The 60 month CD rate is currently 5.99% so plus 2% you get 7.99%. You have as a baseline a fully secured loan by your own assets being offered by a local lending institution. It is lower than prime+2 higher than Moody's. Although a lot closer to prime+2 Maybe the client of the person who asked original question should see if they can find that and document it if they really want to forge their own path. But given how small the gap between prime+2 and what I got in my area it might not be worth the work and risk.

Based on the sample of clients we have seen so far it appears to be clients that filed close to the due date are the ones being hit with these letters. It isn't even clear to me the IRS has statutory authority to hit people with a penalty or at least that was my conclusion many years ago. I haven't looked at it for many years I will admit. If someone wants to tell me I am wrong I can live with that.

Not the way I see plans written. If you find the definition of the Year of Service the 12 month period is just the period you look to see if the person worked 1,000 hours. Here is an example: The term "Year of Service" means, with respect to any provision of the Plan in which service is determined by the Counting of Hours Method, a 12-consecutive month computation period during which an Employee is credited with at least a specified number of Hours of Service with the Employer.. So the 12 months is the period you ask did they work 1,000 hours. It doesn't require you to work all 12 of the months. It is a computation period as it says. I typically explain it to my clients this way: We just look to see if 1,000 hours was worked during that time frame we don't need them to work all 12 months. Check some of your client's documents and see if that isn't how it is defined.

Part of the problem with your question is you don't say where the sinking fund is. Is the sinking fund on the company's books and a corporate asset(s) or is it inside the ESOP? If it is on the corporate books and their balance sheet the Qualified Plan rules don't apply. There can be corporate issues like is management running the business in a prudent manner..... But the ESOP gets no say and the ESOP rules get no say. If the sinking fund is in the ESOP than the rules for investing the funds is no different than any other qualified plan. It has to be prudent, for the exclusive benefit of the participants all those fiduciary obligations you have with a balance forward profit sharing plan or a DB pension plan. The one issue that is different is timing of payments. A DB plan knows some of its benefits wont' be paid for decades so buying a 30 year bond with some of the assets can make sense. If the ESOP knows it will need all the cash in the next 5 years is it prudent to be 100% stocks or crypto? I would tend to think that is too much volatility for that time frame. You go to ESOP conferences and you can get a pretty good debate over if an ESOP can stick to money market funds and maybe a little balanced fund since they are using some of the cash each year. I think you aren't find guidance because it doesn't exist. The rules here are the same as any other balance forward qualified plan . I would add if they are trying to out grow their repurchase obligation using crypto that could be questioned if the investment is for the exclusive benefit of the participants or is it in part for the benefit of the company. In a balance forward environment I don't see how you put something that volatile in the plan. Look at some years at how different the value at the prior 12/31 was compared to when they would be most likely be paying a person's cash balance out later in the year. It isn't too bad in a year like 2023 where it went up by a fair amount but in a 2022 where much of the crypto crashed late in the year could be sticking the remaining people with a lot of losses.

Most likely the answer is "yes". But read the base document if it is a prototype or volume submitter. I am willing to bet it tells you exactly how to work out when such a person comes into the plan. I don't really see a good path to keeping this person out but the document rules and if it is at all written well it tells you what happens to a person who met the eligibility requirement, termed and is rehired.

This really is the only answer that can be given. Some plans have the 5 break language in it and other don't. I would add the rule of parity could come into plan if either of these people had a vested balance while in the plan before. A good plan document will spell out how to handle rehires clearly. Some don't and I consider them poorly drafted by definition. But the document is your friend here.

I think you need to look at the "significant detriment" rule. https://www.law.cornell.edu/cfr/text/26/1.411(a)-11 I quote: (i) No consent is valid unless the participant has received a general description of the material features of the optional forms of benefit available under the plan. In addition, so long as a benefit is immediately distributable, a participant must be informed of the right, if any, to defer receipt of the distribution. Furthermore, consent is not valid if a significant detriment is imposed under the plan on any participant who does not consent to a distribution. Whether or not a significant detriment is imposed shall be determined by the Commissioner by examining the particular facts and circumstances. It is my understanding singling out just terms for a fee can run afoul of that significant detriment rule. https://blog.acgworldwide.com/charging-fees-to-terminated-plan-participants-okay-in-some-cases This guy seems to think it is a problem. The employer charges an account maintenance fee that applies only to terminated employees. This fee is not associated with any service performed for the plan. It’s just a way of encouraging former employees to move their money out of the plan. Such a fee does not appear to be permissible. You might want to Google the term significant detriment and see what you come up with. Hope that helps.

I wondered about the exclusive benefit rule myself. Not only for the reason given by MBESQ but it raises the question that only the participants employed the year the one payment is made gets any of the shares released. However, the facts given are hard to follow. You might ask the agent what exactly is the concern.

They can invest it any place a qualified plan can invest the cash as long as it is prudent. In many ways if a Profit Sharing plan can invest the cash in a given place so can an ESOP. There aren't special rules I am aware of for ESOPs. It is the "prudent" standard that could get tricky. If the cash is going to be used to fund payments and the share are being recycled can there be a justification for more short term investments for example and still be prudent? You can get a pretty good debate with that question at an ESOP conference.

Are you saying the original loan was set up for no payments until the 10th year and then the loan was going to be fully paid in that year? Are you also saying by that the 10 years aren't up but the IRS agent wants to disqualify the plan because the loan has only one payment at the end? I just want to make sure I understand.

Congress often times takes a sledge hammer to fix problems that need something more surgical. Take RMDs for example. I get not wanting people to pass on millions generation to generation without paying taxes. So you require taking money out. So what do we get is a complex set of rules they can't leave alone with no minimum or other levels. So years ago a plan that refused to force anyone out sent about $0.75 RMD check to one of their participants becasue that person's balance was that low and just refuse to take their money. They also refused to cash the RMD check.

Yes I once way, way back in the '90s and I was just starting I worked on a client that was a dentist. He had himself and 2 employees in that practice. He also owned a hobby farm that he lived on but had 3 farm hands. He owned 100% of it all. All one big happy controlled group.

I once worked for a company that allowed brokerage window in the 4k plan. The one restriction was you couldn't buy the employer's stock. They didn't want the brokerage window to be a way around the restrictions on company stock in the plan. You example might be harder to get a broker to keep a list of stocks that can't be bought and having to update it regularly but that might get to the same place it seems like.

The ones I see say it as simple as: Any fee for processing the QDRO for the plan administration shall be split 50/50. It might be a little tighter in the legalese but it is clear whatever the cost is the split is 50% each.

I have seen QDROs that specifically mention which or both parties pay all such fees from their benefits. That presumes the plan allows it.

You might want to search the term "real estate" on this board to see all the problems RE can cause in a qualified plan.

That is not allowed. The reason you are confused isn't a matter of pension law but employment law. You are either an employee (W-2) or an independent contractor (1099). Also, this isn't something that can be negotiated. Federal law defines if a person is an employee or not. The law isn't very clear but that doesn't mean the two parties get to make it up. I would start by getting the client to talk to someone who knows employment law and get it cleared up what these people are. Once it is determined they are an employee or an independent contractor I think you will find your issues pretty much go away. The only exception to the above could be if they are a type of insurance agent. If they are that let us know.