ESOP Guy

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.

To me this is up to the company the salesman works for to determine. Is the guy terminated or not is the question. If he is out there still making sales calls on behalf of the company and they still have him on their payroll system as an employee then why isn't he an employee? Getting paychecks seems like one of the worse determining factors for this question. To me if his boss says he is still employed and they can show he still does some work even if he doesn't get a commission check then he isn't terminated. If the boss says he is no longer employed as he no longer tries to sell for us then he is terminated and they should be able to get you a termination date. This simply isn't a plan issue it is a sponsor issue. Does the sponsor say he is employed? If so he is. If not then he isn't.

Are you supposed to write about a topic to explain what it means or more like GMK's suggestion of policy change? If it is the first thing that you would write about the fiduciary standard and rules for qualified plans. If the 2nd then GMK's suggestion is good. In particular in my mind is how holding them to those rules and maybe even funding rules could have helped prevented the public pension funding problems or how it could help avoid it in the future.

Yes plan termination is one of the few times you can force everyone out. The plan amendment terminating the plan hopefully allows for it. Some people might make the case the amendment doesn't have to say so. The law is clear you can do it. But in the end you can force the money to an IRA set up in this person's name. They can't hold the plan hostage.

What you describe was normal back when balance forward was the norm. Back then most people figured it would all equal out in the end. Some year there were gains and some years a loss so the effect pretty much was a wash over time for everyone. The hard part was years like 2008 and the plan allowed in-service distributions. I had a balance forward plan that was annual and allowed for in-service distributions. People started figuring out that they could get their 12/31/2007 balance out in Oct of 2008. There was a run on the bank. They were just forced to amend the plan to stop such things by making it quarterly valuation and you couldn't get paid an in-service until after the next quarterly work was done. It is why people moved to daily once technology made it practical and affordable as others are saying.

Which POTUS candidate will embarrass us the most the next 4 years. I used to joke in the past about wanting a "none of the above" choice on a ballot. This year I am serious I want one of the ballot. (I know one shouldn't get too political on this board as it is one of the few safe places so sorry if I offended anyone up front.)

One can rant and rail against companies that make the client determine the HCEs but my experience has been those clients mostly bring it upon themselves. I have always worked for TPA firms that were full service and tended to pride themselves on being technically very sound. We were almost never the cheapest player in the field. Starting some time in the '90s those kinds of TPAs really started to shrink and leave the field or went out of business it seemed. The reason was simple many of the plain plans that just wanted a simple 401(k) plan wanted it to be cheap also. Along came companies that offered very cheap services. Some did it by only offering a very small set of prototype plans with very limited plan provisions. They got the costs down by being able to train fairly low paid people how to use a simple flow chart. If the client has a plan type A then this is how distributions work. No one worked on a client. Instead you had distribution clerks and contribution clerks.... all of them worked for a fraction of what a person like me would be paid. Another group did this by pretty much subsidizing the TPA work with the assets management fees they were getting on the investments. Anther group did it by making the client do the "hard" work. The client was forced to fill out long questionnaires that basically meant they were determining who was an HCE, who could be excluded from coverage and so forth. There were in fact some that pretty much did all of the above. And they were cheaper then us often times by a good amount. So we lost client after client to these low cost providers. On a regular basis the year after they left we could get panicked calls from the former client saying their ADP test either failed/passed when it had never done that before. They wanted to know had we done it wrong in the past or the new person doing it wrong now. We could justify our work. We even won some testing business back but not very often. I got laid off twice during this time period to TPA firms losing their business to these types of competitors. So in many ways I don't have tons of sympathy for those clients. They got the service they paid for by going cheap. This is part of the reason I now only work on ESOPs. So far no one has figured out how to do the above to this part of the business. The margin are higher then 401(k) TPA work. I so happen to find ESOPs more interesting then 401(k) plans also. I also found I could get a job with as little as sending one resume out when laid off if I knew ESOPs as it is a much rarer skill then 401(k)s. So that is my rambling story but to repeat my main point. My guess is ADP doesn't charge the client much for the service and the client thought they were being smart by saving so much money. Now they are learning they got what they paid for-- sorry if this comes across as a little bitter. I don't think I am but I am tired of seeing people thinking someone could do the work I was doing for 30% less and the quality wouldn't go down.

When I say someone ought to have the records to me that someone is the plan sponsor. In all the years as a TPA we always gave the client (the plan sponsor) either a paper (until some time in the mid to late 2000s) or pdf copy of all the data that showed everyone's account balance and the change from period to period. I know they don't always do a good job of keeping them but your ex-spouses employer ought to have the data needed to compute this accurately. I would ask their HR department or the person in charge of the plan to search their records.

I will admit now a days someone prepares all my 5500s and SARs and I just check them (and give very little thought to this costs). But back when I was doing it the answers would have been: too much to hope for. You had to hard code the cost in or use some default setting.

Here is a link to the rule https://www.law.cornell.edu/cfr/text/26/1.401(a)-14 Note is says: 60th day after the close of the plan year in which the latest of the following events occurs -

An ESOP can be set up to make you wait the 5 years. It doesn't HAVE to be that way but it CAN be that way. If the plan you were in is set up that way then most likely you have to wait. There some exceptions if you are age 65 or at Normal Retirement Age and been in the plan for 10 year which you seem to be aware of based on your question. You might be reading the 401(a)(14) rule wrong. It is the LATER of: 1) Age 65 2) Normal retirement Age (NRA) 3) 10th Anniversary of Participation 4) Termination So if you have the 10th Anniversary part and terminated but are only age 50 you would have to wait until age 65 or NRA which in most ESOPs is 65 for this rule. Obviously at age 50 the 5 years would happen first. If you were age 62 at termination and was past the 10th Anniversary of Participation then you would only have to wait until the plan year after you were age 65 which is 3 years. If you think you should be paid and you are being told you can't start by asking questions of the people at your former employer who deal with the ESOP. Get a copy of the SPD. They should be able to explain when and how you should be paid. Hope that helps.