ESOP Guy

Actually part of your issue here is you don't appear to understand what "received" means in this context. The IRS rule is consistent with the Constructive Receipt Rule. https://www.law.cornell.edu/cfr/text/26/1.451-2 The moment the check is written the money was "set apart" for him he is considered to have received the funds. So the moment the distribution is made he did in fact receive the funds legally speaking. The fact the person didn't have physical possession of the check is irrelevant. Your comment indicates you think it could be important. So for example if the check was written on 12/31/2015 and put in the mail on that day but the taxpayer didn't get the check until 1/4/2016 per the Constructive Receipt Rule the taxpayer "received" the funds on 12/31/2015. Or as the IRS said and you noted in bold in "the year in which it was distributed". In the IRS's mind distributed and received always happen on the same day so it always happens in the same year. So as you described the facts BOTH the distribution and receipt of the funds happened in 2016 so it is 2016 income. The above link and explanation gives you the legal details behind all of this and I share it for that purpose.

​A reasonable question, the answer to which is companies in parts of the country where you don't need to make 120k to keep from starving. I know the government writes regs, rules, etc. based on their assumption that the cost of living is uniform across the country ... but (spoiler alert) it ain't so. Too bad they think that it's too difficult to factor real-world pay diversity by region into regs. (thanks for letting me soap box) I actually live in a fairly low cost Midwest city so I know what you mean. Having said that most officers in companies even in this area are HCEs. The not for profit fact makes sense. I have seen plenty of not for profits that don't have any one making enough to reach the HCE limit.

To be a little cynical here but who makes an NCHE a trustee? I guess it could be the new CEO and since there is no look back pay they aren't an HCE. But if that is the case I would think about it a little harder. Maybe it is all fine but that seems like an odd fact pattern to me.

We understand the rule doesn't apply to TPAs but that doesn't stop the plan sponsors to come knocking on Austin's door looking for answers as proven by this thread. (And it is all about Austin at this point! )

To be fair the forever standard to determine benefits payable for a DC plan could be as little as a copy of the 1099-R once paid. Presumably if not paid they are still on the record-keeping system. A DB plan strikes me as more difficult as you could be asked to keep pay records to prove a person's highest 5 year average for example. As a practical matter I am mostly on Austin's side of this. The large TPA firms I worked for kept those records forever as they could afford it and spend the costs out over many clients. The smaller TPA firms I worked for I don't think ever kept the records forever. The costs of offsite storage back in the paper days was too high. So once the onsite storage had to be cleaned it got cleaned. Add to it if there was a TPA change things got complex fast. I did conversion of 401(k) plans in the '90s that within 60 days of the client no longer being the former TPA's client they said the records were gone. Maybe that was a line but you never got anything from them after that time frame. This was true even if the client offered to pay.

Ok I am willing to be told I am wrong. Have to admit I have never seen it done in all my years.

Maybe I am not understanding the question here but.... I have never seen anyone take the position you can deduct a contribution in the current year and allocate them in the prior year. For example: You can deposit a contribution in 2015 and as long as it is before the due date of the tax return you can call it a 2014 contribution. You would use 2014 compensation for all of it-- allocation, 415 limit, deducible limit.... You can deposit a contribution in 2015 and call it a 2015 contribution. It would be deductible on the 2015 tax return. But you would use the 2015 compensation for everything-- allocation, 415, deducible limit. You would never deduct it as a 2015 contribution and allocate it as of 2014 using 2014 compensation for any of it. Willing to be told I am misunderstanding something here but that is my take on the question.

I would add most IRS inquires also give you a fax number you can send a reply via that method. So if the concern is significant fax the reply with a mail follow up. The reality is both back when I worked for the IRS and now reply to the IRS I have never seen the reply date be all that hard and fast. They are more interested in a reply then when they get it as long as the time frame is reasonable.

So did Leonard Nimoy manage to live long and prosper? I would say "yes".

If the document says it will comply with USERRA then doesn't that mean you can put in a contribution to make this person whole? That is how you comply with that law. You give them their missed contribution. Maybe I am misunderstanding by what you mean by special allocation.

The standard diversification rules are a minimum. You can be more generous. I don't recall every seeing someone do something as complex as you are talking about. I have seen a one time diversification for anyone over the age of 45 can take up to 25% of their share balance for example. I have not 25% at 45 to 50 and 35% for age 50 to 55 for example. My reaction is you would have to test something like nondiscrimination. I would only allow it for vested shares if the cash is leaving the plan-- I guess are you planning on allow them to invest the cash inside the ESOP? If so are the investments going to be participant directed? If so, I would recommend rethinking that. Any more participant directed investments are subject to all kinds of fee disclosures and so forth. Very few ESOPs are equipped to meet those requirements. On the other hand the 401(k) provider most likely meets those requirement already. So sending the money to the related 401(k) plan can solve all kinds of problems. Same with letting the money leave the plan to an IRA or the person. This would obviously take a plan amendment. I would get a good ERISA attorney to talk to you about any possible problems of doing this only once or on a regular basis. You really want to make sure it doesn't look like you only open up these windows when HCEs would benefit for example.

My thinking is when in doubt if you can justify a D do it. That is much easier then someone showing up years letter with a letter from the SSA saying they might be due benefits. If that happens you have to try and search to see if they were paid or not. Not getting the letter send is clearly the easier option for everyone concerned. (Just do a search on some of the comment threads on this board from people faced with trying to figure out someone was paid who terminated 20 or 30 years ago.) Add to it I have never seen any down side to filing a D and the person wasn't reported for an A before. Until that happens it is all upside and no down side to file a D when in doubt.

The firm I work for would tend to compute the amount of shares this person would have gotten in each year after they get back and you knew USERRA applied. To get the shares you would take them from the current release. There really isn't any other source at that point as you are setting up the facts. (Are there no terms whose shares need to be repurchased? If so, the sponsor could put in the cash to fund the payments and call that the USERRA cont and that person repurchases enough shares to make him whole. That would be first choice if the facts allow for it to happen.) I realize that The people whose share released in the current year aren't exactly the same group and the ratios of the years they got "extra" by the person on military leave being out of the allocation in prior years. But if that is your only source it is your only option and most likely the effect is not very material. I for one don't care for the yearly suspense account. I see no support for it in the rules. This is one of those situations where the section of a plan document that allows plan administrators broad discretion in implementing plan provisions in a reasonable nondiscriminatory manner applies. So once you set precedent I would document and make sure you do it the same way going forward. This is the type of situation when a little money spent on getting the plan's ERISA attorney's blessing is wise in my opinion. The company could put treasury stock into the plan to make the person whole if you really don't like the idea of using the current release. Obviously increasing the total shares outstanding would have a dilutive effect on the share price. But unless this person made a large wage that wouldn't be that material would be my guess. I don't think I have ever seen the treasury stock idea used vs the current release or using the repurchases. Then again you don't see the fact pattern as described very often.

My problem with the 12% rate is it in fact looks nothing like what the market would charge for a similar loan. This loan is after all over collateralize. If the person defaults the loan it becomes a distribution and no one has been harmed by the default plus they had to leave 50% of their balance in the plan to "secure" the loan that was already secure. (At least in a daily valued 401(k) plan. A balance forward or DB plan someone might get hurt depending on the exact way the loans are treated. But back when I did many balance forward DC plans a defaulted loan only hurt the participant who defaulted not the whole group.) What I can tell you is that if I go to my credit union right now and I wanted a 5 year loan secured by a 5 year CD I owned (I guess people do it as they offer these types of loans on their website). I would pay CD rate plus 2%. The 5 year CD is paying 1.45% so plus 2% = 3.45%. Given the loan is secured by a CD the bank holds the website seems to imply (I guess if I was the one advising the sponsor maybe I would talk to my CU and check this) that credit score doesn't matter. The bank is making 2% to loan you your money. I just described a plan loan! Assuming that is how it works where this plan sponsor is how is any rate above 3.45% "commensurate" at this point? I don't see commensurate as meaning no lower but meaning equal to if similar situations. I would add all the legal debate is interesting but my experience with the DOL is it is mostly irrelevant. Most DOL auditors I encounter see themselves (right or wrong) as the guys that need to protect the "little guy" from the "man". As such they simply look skeptical at anything that at first blush hurts the "little guy" and a 12% rate does that. Maybe if you demand to see a manager or go to court and so forth you MIGHT make some of these legal arguments work. If you just want the DOL auditor out of your office as fast as possible a 12% rate isn't going to do it.

It is my understanding that in a stock purchase the company that sponsored the plan never changed so that company is in fact liable for the prior actions. As Belgarath a buy/sell agreement might have something to say beyond that. This does point to several observations: 1) I know plenty of ERISA attorneys that would say either do an asset purchase because of this liability or have the old plan terminated and start a new one. Yes, I understand since same sponsor there are replacement plan issues. 2) If #1 can't happen a due diligence review before the buy. (I realize that doesn't do anyone much good now in this case.)

You might want to look into ASPA and their certifications. It might help to attend some of their conferences. You can meet vendors and future competitors. You can talk to people and get insights into which software you might want to use for this work.

In fact I am seeing more and more documents that say in these cases the old beneficiary form is not valid. Just had a situation recently where a guy died. He never changed his beneficiary form when he divorced his wife. The client was saying we need to pay a payment to her as she is the beneficiary on record. I pointed out to them their plan document is very clear upon divorce a beneficiary form to the former spouse is no longer valid. We had to treat the situation as if they had no form. In this care it turned out the plan pointed to the children which the ex-spouse had custody of them. They were minors so she had control of the money. She was fine with her kids getting the money and her watching over it until they were 18. I got the impression she never asked (or had any expectation) for the money the client simply looked to the form and was saying the ex-spouse is the beneficiary.

This is why every TPA firm I have worked for the standing orders were to not approve QDROs and hardship requests and so forth. The letters are very clear we were making a recommendation that the QDRO be approved as we believe it is a valid QDRO. We were recommending the hardship be approved as we believe the request meets the rules. But the letter was clear the administrator was doing the approving. I have no idea if that was enough to protect the firm I was working for or me as I have never been part of such a suit. On the other hand I doubt you are getting paid enough to take on the liability you are describing with no defense that you aren't a fiduciary.

You need to have your client talk this his ERISA attorney in my mind. Many of your questions should have been answered in a plan amendment. It sounds like your client didn't really think through the sale and what he wanted to do with the plan. Otherwise this questions would have been asked back when the sale was be thought about. However, if there is no other answers then I would say the last day language stands and people can't get an allocation because of it. Because of coverage and TH the owner might not be able to get allocations. I would have to think about it. In the end this is a lesson in the need for better planning. I know that might not help you much now as you might have not found out about the sale until after the year end and so forth.

As far as I am concerned you have it right there. You compute the earnings using the until values plus the fund might have paid a dividend around 12/31/2015. the goal should be to make this person so they are no better or worse off then if the mistake wasn't made. The best way to do that is make sure they have the exact number of units they would have had without the error.

It has been a while since I worked with plans with life insurance in it. But when I did I never saw a insurance company that issued the 1099-Rs for the PS58 costs. Not only did we as the TPA have to issue the 1099-Rs but we had to often times fight with the insurance company to get the PS58 costs from them. We worked on our clients to work on the agent who sold the plans to them to do the footwork on getting the PS58 cost with mixed results.

I know they aren't finals. I am just saying they have programmed their computers to look for one every year until you tell them it will stop.

To answer your question yes the IRS is being stupid. Or at least making a bad assumption. Here is what is going on as far as I can tell. Their computers are set up to expect a 945 every year. That is the bad assumption that once you start distributions you would have them every year. They are looking for non-filers. This is why it is so important to mark the final 945 as final or you will keep getting notices you failed to file. I had this happen once. We forgot to mark the 945 as final and no more would be sent. We kept getting notices until a few years after the 401(k) had been terminated and fully paid we filed a final 945 showing no withholding. It is all about how their computers are programmed as far as I can tell.

My 2 Cents I agree it is most likely the letter of the law when it comes to how to correct it. My first job out of college was with the IRS. I quickly learned there was letter of the law and there was realistic. Just to be clear I am not saying IRS agents should think of themselves as a law unto themselves but there were solutions back then I never proposed because they just weren't workable. My point was some times talking to someone with a little more experience allows for a little more flexibility in finding a solution that protects everyone.

We just had a client go through a rather painful VCP. One of the issues what the plan's failure to offer annuity payments as an option going back to the early 2000's. This agent's idea of a correction was to send letters to the all the effected people offering them a chance to pay back their benefits (once again some paid out over 10 years ago) and then they could request a distribution in the form of an annuity. Her boss quickly killed that idea.