ESOP Guy

I guess from the IRS' view if the parent is in a much higher tax bracket then the kids there could be a net tax loss after the payroll taxes are taken into account. There could be estate tax consequences but that could get murky fast. It would be an all depends on the facts kind of situation. However, I have never heard of the IRS going after a TPA because someone else is playing the tax bracket game with family members. I agree with others at this point it is alleged problems not known problems.

The next obvious question is if they report a 1,000 hours how do you know the don't ever work for the company? Are they telling you the census data is false? They could be doing that but it seems odd. I say that because if they know they aren't working but reporting 1,000 hours that pretty much is admitting they know they are breaking the rules by sending false data because they know you need that data to make it all work. Then I guess the question really might be what is your obligation knowing the data is false?

Kind of related I would prefer if I only see one copy of each topic. For example currently if I go to All Activity I see this topic once where the original question was asked, then a second time where you replied and I assume after I add this I will see it a third time. I haven't found a filter to get it such I just see this topic once. If there is a way to just see it once it would be great and any insight how to set the filters to do that would be helpful. Thanks

To me the fact that you think there is a question is evidence enough to reject it for clarification. (Although if I received it I would read and if it is a DC plan I would read it as meaning your first interpretation.)

Is it possible what they did is legal? Maybe. It would depend on the facts. The facts would have to be rather narrow. I am thinking it might be possible if there is an ESOP loan to amend the plan to delay until the loan is paid off. But normally you would see that be prospective not retroactive. It would be nice if they were more transparent. I am one of the people on this board that tells people to go to the DOL only after all other attempts to get a resolution have been made. The DOL can be a rather blunt instrument and they can cause a struggling company more problems then it is worth. It can cost $10,000s in legal fees to defend yourself from the DOL and if this company is struggling that is just less money to fund your benefit payment. I would see if you can get an appointment with someone who is willing to tell you on what basis they think they can delay. Remember it is a lot of money and I am not trying to minimize your feeling that way but the goal is to get your money not punish the company. Every now and then people get on this board looking for advice and they have reached the mad point and they seem more interested in emotional satisfaction then getting their money. So try and talk to them and see if you can get an idea what conditions have to be true for the delay to be lifted.

Read your plan document again. Some where the definition of allocation compensation is limited to that limit. It has to be written that way by law.

Once again if the plan administrator has reason to believe the loan isn't going to be paid back the loan can't be issued. The rules are clear the loan has to be issued on terms that are commercially available any commercial bank would only give a loan that is expected to be paid back. Strictly speaking is there a way to do what this person wants to do? Sure if you are willing to play in the grey areas and ignore things like is this a sham termination or a sham loan. But you could very easily get all the right paperwork. Even have a few loan payments be made from this person (The loan would have to not require payroll deduction payments.) and the chances are you won't get caught. But if the question is will I get caught don't bother asking here just do it. If the question is there a risk free way to do this then the answer is "no".

I will admit I had the rule wrong. At least where I work we don't send electronic if the person hasn't consented. Management around here can be a bit conservative when it comes to these kinds of issues and I mistook concern on their part for required in rules. . Edit: Or maybe management around here couldn't figure out what level of access was needed per this discussion and went for the more objective rule of consent or no consent as that is easily documented. Maybe I will ask some time.

Because you left off this part of the rules: (A) Except as provided in paragraph ©(2)(ii) (B) of this section, has affirmatively consented, in electronic or non-electronic form, to receiving documents through electronic media and has not withdrawn such consent; I have never seen any place that gets 100% of their people to consent. So you are either forced to send paper to everyone or make two groups. Now I have a client that has over 17k employees. For them the savings in postage is enough to go through the cost of making two groups of data and delivering one set electronically and one set by paper. I am not sure where that line is but most of my clients that has 2k or less in total employees seem to think just sending out paper to everyone is just as easy and cost effective. As for your various groups. Most of my clients that have employees who aren't "desk jobs" (think factory workers or your cleaning lady) feel uncomfortable with the idea those people have true access to e-mail and don't do it. For my clients that are like my engineering firms (where everyone has a desk job and pretty good with computers) the reason goes back to my first comment. Enough of them will not consent so they stick to paper.

I think you do have the serious answer along with the not serious answers. You need to make the person whole and document procedures that allow you to avoid such a mistake in the future is pretty much all a self correction requires. Where you expecting a more complex fix being needed?

I agree with all of the above. Since I didn't see it mentioned above but the correction to the 3 people will have to include some kind of lost earnings in addition to the contribution. Once again someone at your service provider ought to be telling you this. However, as you can tell from the earliest comments you have a bigger problem then the 3 people. There is a systematic problem that allowed this to happen and not go detected for years. That systematic problem could cause larger issues with the IRS or DOL.

David isn't referring to an IRS audit but the fact even a plan with fewer then 100 participants can need an audit any more if its assets are the wrong kind of assets. https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/faq_auditwaiver.pdf

Point the advisor to this IRS website https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions#5 This FAQ I quote: Can an account owner just take a RMD from one account instead of separately from each account? An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts. You are correct and the advisor is not.

There are plenty of DC plans that define disability something to the effect of: The person is permanently unable to perform their job performance. To determine that all it takes is a doctor's declaration that is true. There typically is something in the language about the doctor has to be acceptable to the Sponsor. Here is a quote from one of my client's documents Disability is a physical or mental condition you suffer while you are a Participant that, in the opinion of a doctor approved by the Administrator, totally and permanently prevents yon from performing your specified duties. You will not be considered disabled if the disability is caused by (I) chronic or excessive use ofintoxicunts or other substances, (2) an intentionally self-inflicted injury or illness and (3) an unlawful act you commit. (Not sure why my copy did such an odd margin thing.) One of the problems with using Social Security determination is they can be VERY slow. Just had this happen recently. Plan X has an employee terminate in the spring of 2014. Everyone agree it was for health reasons. He applied for SSA disability benefits. The SSA ruled in 2016 he was disabled as of the date he terminated back in 2014. It was everyone's opinion that means he terminated due to disability in 2014. Since we didn't know that back in 2014 and the plan has last day language we had to go back and compute his missed contribution. Being an ESOP we had to figure out how many shares he should have gotten. How much dividends he missed between 2014 and now....... This is NOT the first time we have had to do a correction due to a retroactive determination someone was disablity termination and not a regular termination. I have seen forfeiture restores be needed because of this along with lost contribution and earnings.

The VCPs I have gone through one of the earliest questions we got was have you made your proposed corrections? It was clear they were expecting a "yes" in my mind. I guess I could have been misreading it. In fact what is the real risk? In most cases if the IRS doesn't like it they want more put in not less. I don't think I have ever seen the IRS come back and say you are proposing too much of a correction. So really unless they say we simply reject the very idea of your correction putting it now makes sense to me. I will admit I am a TPA not a lawyer and I am not an expert on VCPs. I am merely telling you what I have been a part of in the past.

Some of the information about this question can be found in the other thread about this topic. http://benefitslink.com/boards/index.php/topic/59926-small-sh-401k-going-to-arbitration-former-employee-requesting-money/

Assuming there is a provision in the document that allows this person to take an in-service withdrawal it is allowed. The need for the loan to not exceed 50% of the account balance only applies to when the loan is made.

I understand why you would want to check the box "yes" there has been an appraisal but strictly speaking there is no legal requirement to get one done in a plan like this. Only ESOPs have a legal requirement to get an appraisal. In a ROBS the trustee has a fiduciary obligation to make sure the assets are fairly valued when telling people their account balances and making distributions. I say this not to encourage anyone to not get an appraisal as I think getting one is the best choice by a long shot. However, years ago (2009 or 2010) I worked on a PS plan that had a bunch of employer stock in it. We checked the appraisal box "no". We got a letter from the IRS. WE explained the plan got an appraisal the first year the stock was in the PS plan. Every year after that the trustee used the same discounted cash flow method the original appraisal used to determine the new price. We never heard back from the IRS. At least then that was prudent enough for them to determine a value. Risky in my mind but it worked back then for what it is worth.

I know it is off topic a bit but it has been brought up. I worked for the IRS back in the '80s and one of the things we were trained in was looking for 1099-R people who were in fact employees. This is NOT something you can just agree to do. Too many people think if a person signs a contract saying they agree they are an independent contractor then they are one. That isn't how the law works in this area. You are either an employee or an independent contractor if you meet the definitions of either one under the law and no agreement can say otherwise.

So are you saying there isn't enough money in the plan now? If so, why not just pay the person? Has the account balance gone down or up since when it should have been paid? If up, no harm no foul in my mind. If down maybe a making the person whole is in order. If not, that will require some thought.

The is confusion here still. If a person turned 70.5 in 2016 and is a 5% owner then: They need a 2016 RMD. That RMD can be paid either by 12/31/2016 or 4/1/2017. The amount paid is the SAME regardless of which of those two dates is picked. You would use the 12/31/2015 balance and the person's age as of 12/31/2016. For the 2017 RMD it has to be paid by 12/31/2017 it would use the balance as of 12/31/2016 with no adjustment and the age as of 12/31/2017. I don't know DB plans either.

I agree with Lou this is too complex to decide without proper legal advice. The cost of a prohibited transaction violation is too high to risk it One thing to look at is taking the stock and not putting it into an IRA. You should look at the Net Unrealized Appreciation (NUA) rules. If this stock has been a C Corp the whole time your cost basis could be very low (it should be the price of the stock when the ESOP bought it way back when) and if you take a stock distribution you would only owe taxes on the cost basis. The appreciation isn't taxed until you sell and then it is a the capital gains rates. You lose that when you put the stock in an IRA and it all becomes ordinary income when you take it out of the IRA. So you may pay some taxes now but have a lower tax bill in the long run skipping the IRA. If you never sell the stock you may never pay taxes on part of the distribution or at least income taxes it would still be part of an estate An IRA you would have to take RMDs at 70.5. So besides a lawyer for your question it might be worth having a CPA help look at all the tax options. Not trying to spend your money on professionals but this sounds like one of those cases were a little up front costs could be cheaper then the costs of getting this fixed afterwards or done wrong. I admit I am assuming here a bit. You very well could have run the NUA numbers already. If that is so I guess ignore the above.

If you changed to this system you would need to check the loan notes on any legacy loans to see if the change can be made. Most plan notes, which are contracts, bind the parties to payroll deductions. To switch without an agreed to modification to the contract could be seen as a breach of contract. To me the real issue is the plan administrator has a fiduciary duty to make sure they have a reasonable belief the loan will be paid back and to adjust the interest rate for any increase in risk of it not being paid back. The great thing about payroll deduction is as long as they person is working the plan gets paid. A person could easily tell Securian about an account that might not have enough money in it. In fact could this set up become a backdoor in-service withdrawal provision for some people? They purposefully set up an account that will default on the loan to get their money from the plan. Less cynical is what if they simply spend all their money as fast as they earn it and while they planned on paying the loan back the money isn't there? Once again I seem to recall the rules require there is a reasonable expectation the loan will be paid back as the terms have to be the same as what is commercially available.

I know some ERISA attorneys that would say "yes". They tend to be the more conservative ones I know who take the position advise people to operate their plan in the way that will always be the least likely to get you in trouble with the IRS or DOL. There aren't many C Corp ESOPs around so there is less discussion and consensus regarding these types of issues. What I can tell you is the very few (2 to be exact) C Corp ESOPs I worked on since these rules have been in place neither of them did those notices. On a related note I have exactly one ESOP whose attorney took the position that because one of the options under the diversification rules was to stay in stock that was a participant directed choice/ As such we give the people a notice covering what it means to stay in the stock. The other two choices are go to the 401(k) plan or take cash. We give them a copy of the notices for the 401(k) plan along with the ESOP stock "choice" notice. So based on my experience I would say as a general rule if you don't give notices you are doing what most people are doing. Does that mean the group is right? Obviously "no" but you would be in good company.

I have never seen anyone use anything other then shares if the shares have the same rights. I have never seen someone say, "we need to get the outside share appraised to see if their value is different do to different discount measurements.". You raise an interesting question but I simply have never seen it done.