ESOP Guy

Am I missing something here? Are you just wanting to do this so you can know if the amount you get seems reasonable or is someone demanding you do this? I have been in the TPA business since the early '90s and no firm I have worked for would ever make such a demand of a Alt Payee. Nor has any client of ours thought it was the Alt Payees job to figure out what they were owed. I have seen it where we charge for this calculation and it is passed on to the two people involved in the divorce but not once has someone demanded the Alt Payee prove what they are owed. That is the job of the plan administrator. Like I said the Plan Administrator can pass through costs if the plan is set up that way but it is their problem to come up with the correct benefit payments-- period end of statement. It is also their job to keep the needed records to compute the earnings and benefits over time. I know that doesn't always happen in transitions (even for clients I worked on it can be hard to get great records from the prior firm) but someone hopefully kept some kind of records that were produced annually about your spouses' annual account balance. Once again if you are just doing this because you want to know if it is reasonable fine. But if people are putting the work on you that doesn't seem right based on facts on hand.

Not sure about this but could anyone raise the question if the husband was really "hired" by the wife's company? It looks like there might have been some kind of pro forma hiring for the sole purpose of allowing him to roll the funds into the 401(k). It has been a long time since I studied the topic but the IRS has the power to challenge otherwise legal transactions on the basis of the Economic Substance Doctrine. (Not sure if this will be worth their time but it looks like a classic example of why this doctrine exists) https://www.irs.gov/businesses/codification-of-economic-substance-doctrine-and-related-penalties http://www.journalofaccountancy.com/news/2014/oct/201411106.html Once again the IRS in the end says ROBS are legal but clearly doesn't like them and appears willing to hit them with technicalities. This comes across as a ROBS on steroids. https://www.irs.gov/retirement-plans/employee-plans-compliance-unit-epcu-completed-projects-project-with-summary-reports-rollovers-as-business-start-ups-robs https://www.irs.gov/pub/irs-tege/robs_guidelines.pdf It sounds like there is a fixed buy/sell agreement where the 401(k) has to sell the asset upon it growing to a fixed sized. Would there be any fiduciary concerns? The plan can lose 100% of its investment but can't gain more then 100%. Most investments are lose 100% in theory unlimited upside. Besides PT issues which I am not an expert on that topic come to mind quickly. This sound risky at best and trouble at worse. Honestly a simple ROBS seems like it would have been easier and less trouble-- but not liked by the IRS as noted above. That is unless there is an expectation of employees and they simply don't want to share equity in the new business.

My guess you have thought of this but it is worth asking. Does the plan allow them to be used to pay fees and are there any fees? That would solve a lot of problems which is why my guess is you thought of it. Other then that I don't see what choice you have but to allocate based on the last set of compensation that was in existence. Can I cite anything? No, but you have to use some rational method and the only other method would be based ratio of balances like earnings and with forf it seems like comp is better.

Remember also if it is decided the plan document doesn't address this situation all plan documents allow the plan administrator to make reasonable nondiscriminatory interpretations of the plan provisions. In this case it sounds like you should make some recommendations to the plan administrator as to what they should and could do. (I agree with others the best decision is immediate entry) After precedent is set I would make sure that decision is documented and followed in the future. There might even be some benefit to making a note so that the next time the two plans are amended or restated the decision actually be added to the plans so it is clear.

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.