ESOP Guy

I find Turbo Tax can explain and justify what their software does rather well. That isn't to say I haven't seen it have an error in its programming. After all they do put out patches so they are correcting something. But by this time in the year you simply aren't the first self employed person to try and have it figure out this deduction. So if I were a betting man I would bet on Turbo Tax being correct and either you have coded something about yourself wrong or you misunderstand. The above explanations are the most likely reasons but give them a call.

FYI, I think you have to disclose such a switch for such a reason. In fact what you wrote above is the most common reason I write for this disclosure. The next most common is the CPA firm was bought or merged with a larger one. In that case it is a little more grey in that the partner who did/ or was in charge the audit before and after is the same. It is just that person was getting close to retirement so they sold their smaller practice to a large firm as part of their plan to retire At which time I typically write some version of what I said above. The firm was merged/bought and the same lead partner before and after is performing the audit. .

the odd part is even if the 80/120 rule did apply (which to be clear I agree it doesn't) the rule isn't mandatory. If you have under 100 participants in the past you can wait until you reach 120 before you are required to get an audit There is nothing stopping you from getting the audit as 101 participants. (I guess there is nothing stopping you from getting an audit at 50). Most people just don't want to spend the money for an audit if it isn't required but you aren't required to file as a small plan even under the rule.

Peter you are over thinking it. This is a simple notice that is easy to produce. I have never (and I mean NEVER) seen an issue from one of these notices. I will admit I have never had the prior auditor submit a comment regarding issues either. Unless there is an issue that might be commented on if the name on the Sch H changes do the notice and move on. If there is an issue I would think a better course of action is manage the problem with the prior auditor then hide it.

No, I have not heard anything like that. It would be interesting to know when they report people normally. Is it the form for the year they terminate or the form of the year following termination.

I would add while the OP is looks like mere mistake or preference is cause of the change I have seen others that as a practical matter are bigger problems. I had a situation recently where we had a check cut and it turned out that something had changed at the rollover institution between the time of the request and the check cut. ESOP distributions can be a little slower then 401(k) payments. It turned out the check wouldn't be cashed by the rollover institution. Obviously since the check wasn't made out to the person they couldn't cash it. (Although it is amazing how many times I have seen a rollover check get deposited into a personal account) So what are we supposed to do just leave this person with a check that has no value? You could reply as long as the new payee was another rollover institution there is no tax effect but it isn't clear the objections raised here are merely taxable issues. I guess what I am saying is this conversation is one of those "its great in theory to say this is the law but I can find plenty of times where the law just didn't seem to account for what can happen" conversations. To be clear like I said at the beginning I am NOT claiming ever case is a hard case but there can be plenty of them also. As I said in my prior comment nor do we merely limit what we do to the hard cases so if one wants to accuse me of rationalizing so be it.

jpod I am not sure what my answer would be. I also think that it would be nearly impossible to detect it happening. We typically get a new form or some other written instruction from the person. I have also found that IRS agents don't tend even look for this. They see there is a 1099-R. The sum of them equals the distributions that came from the trust as they rarely go so far into the weeds to see the in/outs. We can produce forms if asked which is rare. So do I have some complex legal answer? No, but I do see what was described above all the time as a practical matter.

What you describe there I see all the time. We even do it at my current job. Basically void the check and its a do over.

I would strongly recommend the amendment to be done and clear. This makes it clear a type of loan is allowed and why others aren't. It also makes it clear that just these and not other rollover loans are allowed. In short I see a well thought out amendment stopping future debates and charges of "but you allowed this rollover you have to accept these now". Or why does Joe have a 401(k) loan and I can't have one?

I agree with the others on this isn't a plan problem. The loan rules only talk about the loan being paid back. It doesn't require any kind of source of the payment. My guess is the rule writers didn't even think of the idea someone might pay the loan for the participant. One issue that hasn't been addressed and it might be minor but most loan notes do specify that the loan will be taken from the person's pay check. That is a valid contract that hasn't been followed. I can't decide if that would change anyone's answer regarding implications outside the plan but my guess the terms of the note were not followed here so a contract was violated. .

This one might win the weirdest of 2016 award!.

I don't see a valid plan. He isn't a sole proprietor if nothing else. Put the burden on the broker to show why there is a valid plan in light of the evidence to the contrary.

I guess I am having a hard time on how they don't know the ending balances. How did someone produce the participant statements for those years? The ending balances in a 401(k) plan ought to be the sum of those statements. Once again did they produce W-2s? They had to know the 401(k) amounts then. Have the payroll records been lost? Did they take a deduction for any match on a tax return? As noted above the world is imperfect so I can see how after years the data might no be as easy to get as one would like but it seems like the data has to exist.

Full disclosure here I am a DC not a DB guy. However, my basic take on this before any of the DB experts commented was like My 2 cents (I waited to reply to see if there was any unique DB issues the DB experts would bring up) -- The sponsor/administrator signs the Form 5500 they get the final say on how it reads. So unless you can show what they want is some kind of reckless disregard for the law that could harm your practice I don't see a good reason for the sponsor's wishes to not be the final result. I can see why you might want to document why you think your answer is the better answer with the client but the TPA isn't the plan sponsor or plan administrator.

I am NOT an expert but I seem to recall using the employer's EIN is a problem. I seem to recall that the IRS reconciles the deposits to all the forms sent in. So if you deposit on the sponsor's EIN and file the 945 on trust's EIN you will get a letter asking where the deposit is. The sponsor will get a letter asking why the deposits exceeds the various reports say ought to be deposited.

Are cite and site sight words?

Can't speak to the safe harbor portion of the question as I just haven't worked on them in almost 5 years. A couple of points however: 1) When you say it fails by how much does it fail? The failure is not defined well. The HCE and NHCE ratios have to be different by no more then a "de minimis" amount. I have seen lawyers be fine with as much as a 7 percentage point spread. (I am not comfortable with that large of a spread but I have seen it.) So there might be some value in finding out how comfortable everyone is with what de minimis is in this case. 2) I have also understood the correction is to allocate based on a definition of compensation that does pass nondiscrimination.

NUA issue is the only wild card here. If this person can take a stock distribution and NUA applies then they could be taxed at cap gain rates. If you roll over to a plan or IRA you lose that. There can be times where taking the tax hit now makes sense. Otherwise there is nothing about ESOP money that makes it harder to rollover then other types of money from qualified plans.

The answer is "depends". As Mike says I would go talk to an expert to get help. It really depends on the facts. Something as small as forfeitures in the future in the plan might cause problems with keeping the plan as is. On the other hand one can easily imagine a set of facts that allows you to keep the PSP and putting more money into it. It just depends on so many factors. To decide what can be done is going to take way more facts then you are giving here and most likely can be given efficiently via a forum like this. This is a good time to spend a little money for expert help in my opinion.

If there is an outside trustee (and in particular if it was a bank or trust company) I am 99.99% sure they have a legal opinion from an attorney on the voting issue. Their downside to not have such an opinion is too great compared to the costs saved by not getting such an opinion. Likewise if the outside trustee is a bank or trust company I would be more relaxed as to if this change is designed to help or harm the participants/company.. The trustee has a legal duty to only the trust and the participants. Once again the downside to not doing that well are rather large. Having said all of that I still would encourage you to ask questions. All of these questions seem like fair questions that people ought to have the answer to them.

I would tend to say a pass through vote should have happened but on these issues I tend to error on the side of caution. As a side note this is one of those odd situations I just never understand. This transaction had to have had lawyers involved. I am just stunned none of them sought out the advice of an ERISA attorney to see if there were any issues they aren't thinking of because they don't know anything about ESOPs and that is an important factor here. Or if there is was an ERISA attorney then it should be a matter of documenting why they though the trustee could do the voting and no pass through voting rights triggered. I would recommend talking to the trustee. If it is an outside trustee I am sure they had this conversation and can document why no pass through vote happened. If it is an inside trustee then it is more likely no such conversation happened. And that would just go to show yet another reason why outside trustees might be worth the cost.

It has always been my understanding that both hardship and loan availability is a benefit, right or feature that has to be offered on a nondiscriminatory basis. So it has to be in both or you would have to test to prove it passes nondiscrimination. The latter isn't practical in my mind so you pretty much are left with the former.

Your question is a bit hard to understand so I am making some assumptions in my answer. It sounds like the CPA is trying to do a Limited Scope Audit. In order to do that a qualified trustee or custodian has to certify the investment information. My understanding is only banks and insurance companies can be "qualified" for these purposes. Some reading: https://www.aicpa.org/interestareas/employeebenefitplanauditquality/resources/accountingandauditingresourcecenters/pages/limitedscopeauditsresourcecenter.aspx

Let me make sure everyone understands the facts. In the previous years was this extra payment made by you sending a personal check to the 401(k) company or was in an extra loan payment from a bonus check at work? What I can tell you is if you were sending in a personal check that is pretty rare to be allowed so I am not shocked someone is saying they can't do it now. I have my doubts that making an extra payment outside of payroll is a protected benefit.

This is a classic example of: what does the document say??? I have never worked with a document that didn't answer this question clearly and if the lawyer who wrote the document was even remotely competent you will comply with the law if you follow the document. Read the document or the base document if a prototype. In fact the guy who taught me this business would throw you out of his office if you came in it with this kind of question without the document in your hand. You better have been able to demonstrate you had looked for the answer. Only then would he take the document and walk you through finding the answer in it.