ESOP Guy

I am going to admit I don't know the answer to this but here is something to think about before this gets done. Back in 2008 I still worked on a few 401(k) plans. A client I had that was a dental practice. The dentist wanted to have his own brokerage account in his 401(k) plan. So he set everyone in the practice with a brokerage account inside the 401(k) plan. In what turned out to be a brilliant move in hindsight one of the dental hygienist put 100% of her money (many years worth of money-- for her it was a lot of money) into Ford stock towards the bottom of that stock's price She tripled her money in the long run. But I couldn't help but think what if she had put 100% into GM right before it went into bankruptcy. I can imagine a lawsuit coming from the later decision. To me the question is if the people start picking so radical investments are there any fiduciary concerns? As pointed out be others the rule isn't if they decide there is no liability on the part of the fiduciaries. I am not sure you should do this without some limits and I am not sure what those limits ought to be. But I keep thinking this could be a lawyer's dream fact set.

Are they trying to apply incorrectly some of the Sch C fee disclosure rules? I quote from the Sch C instructions: You must enter the information required for each person who rendered services to or had transactions with the plan and who received $5,000 or more in total direct or indirect compensation in connection with services rendered to the plan or the person’s position with the plan during the plan year. I would call it a bad reading but I could see how someone might read this such they needed that information. To me the "person" paid is the TPA firm but they could be reading the word person more literal.

Haven't we had this conversation before? http://benefitslink.com/boards/index.php/topic/49354-withholding-on-hardship-distributions/

Why are you withholding 20%? A hardship can't be rolled over to an IRA so I thought they are subject to 10% withholding per IRC §3405(b)(1). Been a while since I worked on 401(k)s so willing to be told I am wrong but I am thinking 20% is not required here. So I think this person could elect 15%.

Years ago I was put them on 2015 and move on 100% of the time. Now I am still that way but it is more complex. The IRS will send a penalty letter if they detect a late filing. (I had a client get one) So if you file the 2014 late prepare you client to get a penalty letter from the IRS. The instructions to the form tell you what the amount is per day per person. Also, the most recent IRS audits my clients have had the IRS is asking about terms and the 8955-SSA. So if 2013 gets audited they will ask when and how the people who needed to be reported were reported. Things could get detected how they went in an audit. I don't have any relevant experience to this situation yet. So if you file them on 2015 and either 2013 or 2015 get audited the issue might come up and problems might happen. I think the strict letter of the law answer is file the late 2014. You might be able to get the penalty waived (never tried it) or you might not. Like I said I sill favor the 2015 but might have a talk with client to make sure they are comfortable with it. (Might have talk with my boss also)

We can do it for all of our client with an online questionnaire (this doesn't include the name, ssn...) that is 5 web pages. Most of the data rolls forward from the prior year and we ask them to update it if changes (it is a rare day the company name changes, they might change attorney now and then but not often for example) . I have not counted total questions but I would be shocked if it is over 50 in total. Critical test data is not rolled forward. For an ESOP we make them give us the synthetic equity every year and will actually do a follow up e-mail as 409(p) is that important to get right. I have never worked for any place that would send 30 pages and would imagine my clients would balk at the idea.

As a practical matter the very few times I had to deal with this I seem to recall it was more trouble then it was worth. Constantly making sure deposits were made on time to deduct and 415 limits and so forth worked out. It has been a long time but I think the reason you don't see this much is it isn't very practical.

Just to be clear the loan is current correct? It is not in default correct?

Back in the '80s my wife and I knew a couple whose baby did a number of ads for P&G. The baby got paid really well for pictures of it being put into print ads. The parents said at the time it was the baby's college fund. I kept thinking 60+ years of compound interest in an IRA wow! Might not make sense for a company but might make sense for the 2 year old.

If the sale was indeed $18M then even with a "discount" $3.1M is grossly undervalued. What we don't know is the actual purchase price of the 51% stake, the $18M appears to be a "best guess" of the participant. I admit the discount would seem very large. My point was primarily that it isn't obvious that the 49% owners would get the same as the 51% owners in every case. A 51% owner already has control of the company and doesn't need to buy more shares to control the company. So there could be a discount. I stand my my basic idea start by asking questions about how the process was done. If there was an outside trustee (which any more every lawyer recommends just for these questions) then the participants in the ESOP were in fact represented by someone who had a fiduciary obligation to them. That makes it less likely the price was a problem. If it turns out the trustee for the sale was a corporate officer then there is a stronger case to follow up on the price.

Who was the trustee of the ESOP? How do you know there wasn't an independent valuation for the stock? It isn't obvious that you should be paid the same as the 51% owner. There is always a discount for minority interests. I am not saying you don't have a valid issue but based on what you have given it isn't obvious you have an issue either. I think you should start by asking simple questions of the people involved with the termination and sale of the stock. I would ask who was the trustee overseeing the chain of events. I would then ask that person/organization what steps they took to determine the sales price was FMV.

If I recall the self correction rules you need to also set up procedures to document how the plan will avoid the error in the future. Flogging might be a good part of the procedure!

I would advise this person go talk to some ESOP financing experts. I am not sure this is the best idea. Things that come to mind off the top of my head 1) Why not have the company hold a key man policy for the amount. When he dies the company collects the benefit. The company uses the cash to buy the shares and make them treasury shares. Now the only shares outstanding are in the ESOP. (I have never seen this done but strikes me as easier. The odd thing is the infusion of cash upon the person's death would increase the value of the company whose shares are about to be bought. That might be the reason you don't see this idea.) 2) Why not sell the the ESOP now? If he wants to stay CEO and run the company that can be done. I don't think I have ever seen an outside trustee remove the founder from the CEO position. My guess it would have to be pretty extreme reason for it to happen. You do have to look at compensation issues as now the trustee does need to prove the former owner is being paid a reasonable compensation. But in the end the ESOP experts could really help meet this guy's goal of still running the company now and working through the sale. I am just trying to figure out how you allocate the death benefits and as a result the shares upon the owner's death in the original idea.

To some degree you have to be careful on what you recommend but I don't see why the two people don't get a QDRO. I remember when my parents were getting a divorce decades ago my father who had a high income was more interested in preserving retirement plans (he figured he could get a mortgage on a new home if he had to) and my mom having kids in the house and lower income valued the home that was mostly paid for. So when splitting the assets dad got 100% of the retirement funds and mom got 100% of the house. Nothing in the rules require a QDRO to split things 50/50. If he wants the house and she wants cash a divorce decree and QDRO could be written to do that. I suppose the ex-spouse doesn't want to be the one to pay taxes if they got the QDRO proceeds. Then again the QDRO amount can be grossed up for taxes. Like so much in life it is all negotiable.

I think your amendment has to answer that question and ought to do so very clearly. You can write the amendment to give back years of service or only going forward. (See My 2 Cent's comments about discrimination and so forth). But a vague amendment is only going to be trouble. You are going to have to constantly explain why it isn't retro if it is silent to people who didn't work 1,000 hours in the past but worked 500 This is a great example of a time you really want to think about how to word an amendment to make sure you don't create any unintended consequences. For example is the 500 hours after 8/1 or for all of 2016? (Assuming a 12/31 PYE) I would make the amendment clear on that point. I would think it is all of 2016 but state that.

I don't see how it can be the participant. He isn't the legal owner of the investment. The trust owns the investment and has legal control. I THINK it has to be a trustee. Warning: This is not my area of specialty so I will gladly defer to the opinion of any lawyers in the group if they say otherwise.

The trustee has a fiduciary duty to determine the FMV. I doubt the county's appraisal meets that standard. They need to come up with a method that can be defended from a fiduciary's duties perspective. I would add getting this right is a more important issue if this is more then an owner plan. If there are employees in the company that aren't owners of the company and part of the value of their benefit is this land. Obviously when they get paid a distribution the right FMV is important. The last thing you want to see is at some point in the future after the rank and file have been paid the land is sold for 2x or 3x of what it had been recorded at and the owner of the company gets 100% of the wind fall. I once saw a version of that in a doctor plan.

Are you thinking something like this? https://www.dol.gov/ebsa/newsroom/tr11-03.html https://www.relius.net/News/TechnicalUpdateDetails.aspx?T=P&1=1&ID=886 http://www.relius.net/News/TechnicalUpdateDetails.aspx?T=P&1=1&ID=659

A little off topic and this might have been thought of but.... If you give everyone stock will you still have under 100 (I think that is the number) shareholders? An S Corp has a max number (think 100) shareholders. I agree with RLL S Corps have the Put Option requirement. It is just people can't demand stock and keep it otherwise large S Corp ESOP companies could go over the stockholder max limit if enough people demand stock and keep it. In other words S Corps can have a mandatory Put Option upon distribution of the stock-- ie the person HAS to sell the stock.

Why do you even bother get involved in this question? The plan sponsor and plan administrator have engaged you to do a service. They ought to pay you for that service. if they want to collect from the participant or alt payee (or some combo) that is their business. The sponsors I work with have always accepted the idea they are going to pay us. Everyone has agreed this is what is meant by an "out of scope service" that is part of our engagement letter. The EA is clear they will pay time and expenses for requested out of scope services. We do enough QDRO reviews I can tell him the amount of time it will take to do a normal review and I let them know if something comes up that will make this beyond a normal review.

Other possible issues are bounced checks and related fees. Is the person or place receiving checks equipped to handle them in a way the funds aren't lost of stolen? How do you transmit the checks existence/receipt to the record keeper/TPA. (I once worked with a plan where the sponsor got the checks scanned them and sent the scans to us at the TPA firm so we knew the payment was made.) I have seen a few plans allow payment outside of payroll deduction but it is labor intensive and difficult. If you agree to this make sure your fees cover your costs.

Did the distribution forms say the share were distributed? Does the plan allow for shares to be distributed? Was the intent for the shares to be distributed? If so, isn't the error the share never left the plan? If so, isn't the correction to get them out of the plan now? If the intent was for the shares to stay in the plan the whole time and there was suppose to be a contribution to the plan to fund the distributions I will have to think about it a little more. Can you confirm what the intent, forms and document say? I think that will help determine if there is an easy or hard correction.

A version that might be a little easier to administrate that will get the sponsor to where they want to go in time would be to do something like this: Amend the plan to say any employee hired (or enters the plan) on or after 1/1/2016 can only take an in-service distribution if they are 100% vested. Within a few years the people hired before that date ought to be 100% vested (assuming most employees are full time) and you have an easy way to track people and balance that the new provisions apply. Note if this sponsor has lots of re-hires this would be a pain also.

I think we need more information to come up with an answer. Are these "profit interests" paid in cash every year that is taxable or is it some kind of deferred comp? If paid every year in a way that is taxable why isn't this just a type of cash bonus?

It agree with others it is my understanding not getting the funds invested timely is a fiduciary breach and not covered by the timely deposit rules. If I recall correctly (and I admit I might not be) but aren't fiduciary breaches bad in that the person can be held personally liable for damages?. The deposit rules the sponsor pays the lost earnings. A fiduciary breach the person responsible can be made to pay from their pocket.