ESOP Guy

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.

My understanding the intent of the rule was to solve the problem of the money never making it to the trust. You have to remember the rule was made back when many 401(k) (especially small 401(k)s) were balance forward. So what you had was people being reported balance of X in the plan when the assets weren't in the plan. What made up a large part of X was a receivable from the sponsor. I had a client back then where it wasn't uncommon for the receivable to be 8 or 9 quarters of deferrals that hadn't been put into the plan. The amount of cash in the plan was much lower then what the sum of the statements said everyone's balance was. What happened a few times is the sponsor (not my client but others) went bankrupt and the the receivables were never paid. That is when people found out the money coming from their pay checks wasn't in the 401(k). In fact my brother had this happen to him. He lost over $30k when his employer went bankrupt. It turned out towards the end the company was staying afloat with the employees' money. So the DOL made the rules you had to get the money into the plan ASAP.

Unless the sponsor can use the psychic hotline to know this person was going to terminate after the in-service distribution I am not sure what that procedure would look like.

Who is the e-mail from? It isn't clear from the question. If IRS I call scam alert. I am not aware of the IRS ever using e-mail to notify people about filing problems. Willing to be told I am wrong in this case but that is my first reaction. If it is from Reliance then as other are saying ask them.

The real issue in my mind is fair = consistent. Sure the market could be up a bunch this year but a few years back it was down a bunch at this point. If you are consistent about it then in the long run it seems reasonable to figure it will all balance out in the long run. That was the basic thinking back in the '90s when I did work on a good number of annual balance forward plans. The thing you need to avoid is allowing people to game the system. Back in 2008 I worked on an annual valued PS plan. Most distributions happened shortly after the annual work was done. However, without thinking they had allowed for in-service distributions years prior for anyone over 59.5 at request. These payments were based on the prior 12/31 So in 2008 a bunch of the 59.5 people figured out in Oct of '08 they could get their money out based on their 12/31/2007 balance. There was a "run on the bank" if you will of these people getting their money out without having to take the '08 losses. This was millions of dollars and the loses were in effect being picked up by the people stuck in the plan. The problem was they were inconsistent. There was only one group that could in effect wait all year to see how the market was doing and then decide to take their money. The provision was quickly changed. So to me the way to do this is make the rules and give as little discretion to anyone as possible Then be as consistent as possible with those rules. In the long run it ought to be fair as it should wash out in the end. Also no one can be accused of gaming the discretion in their or someone's favor. Maybe I just stated the obvious and what was basically said the same as above but that is my 2 cents worth.

The lease sounds like a clear Prohibited Transaction unless these is a DOL exception I am forgetting about. The purchase and co-ownership sounds like a PT also to me. PTs are not my area of expertise I will admit so another person might chime in and add value. However, it it clear to me that in both cases those are the rules you want to research. As an aside just do a search on the words "real estate" on this board and you will get threads describing all the reasons why real estate in a qualified plan is a bad idea. I have seen too many times where RE in a plan ends badly.

Have I seen smaller gaps between the mailing of the distribution form and the first payments? Yes The gap being discussed doesn't seem outside reasonable. By law they have to give people 30 days to reply to the forms. So if they want to do them in a single batch that means they can't send checks before 6/15. It does take a few weeks to get all the checks ready and make sure no one is over or under paid. After all if someone is over paid they aren't very likely to return the payment when told about the over payment. So it is important to get the amounts right. So if you add a week or two to the 6/15 date you are getting to around 7/1. They should give you a copy of the SPD but I doubt it will tell you that they are required to make the payment faster. It most likely uses "as soon as administratively feasible" language. So they will claim the time frame outline is what is administratively feasible. If the question is it normal to wait until the IRS issues the Determination Letter that is very common practice. Does it sound like they could have done a better job communicating-- yea it does. But bad communication and you have an actionable complaint isn't often times the same thing. Hope that helps.

I have always wondered if this could be seen as a fiduciary issue. Is the choice of plan document a sponsor decision alone as it could have been done before the plan even existed? The closest example I can think of is back in the '90s you heard of banks requiring companies to move their 401(k) assets to the bank's trust department as a condition for a loan. The objection was the transfer wasn't done for the exclusive benefit of the participants. In this case the choice of where to put the assets could be seen as being done in part to save the sponsor money on a document and not to benefit the participants. I am more spit balling then making a strong case as fiduciary issues aren't my strongest subject but I have come to believe that of all the issues in retirement plans this is often times one of the most ignored.

Or slightly more accurately you have to add the 2015 excess to any amount contributed for 2016 to see if over the 2016 limit. If still over the limit you pay the excise tax again. So if they put in exactly 25% for 2016 you would pay another year's excise tax on the over contribution amount.

I can't help but wonder if the reason the IRS wants the EIN on the Form 5500 is to solve the inactive EIN problem. I don't recall ever having that problem back when the Sch P existed. You were using the EIN at least once a year back then. If it comes back to the 5500 you will be using it once a year and maybe it won't go inactive I don't see a good reason for most plans to have one either but the IRS doesn't need good reasons.

Are you sure the match formula is mandatory and isn't discretionary? It isn't uncommon for them to tell employees how they plan on running the discretionary match if they make it but it is still discretionary.. Re-read the SPD and other notices very carefully to see if they hedge if the match will be given with some kind of language that points to the employer having discretion. It doesn't ever hurt to ask but if you didn't get a match based on the facts given it doesn't sound like it would be a last day of employment issue.