ESOP Guy

I go back to my first comment and what Janice said. Tell the auditor they should complete the reconciliation showing why the Form 5500 and the auditor's report are different. They don't have to be the same. I just had a client file a form with one of those reconciliations in the auditor's report.

I would agree a complete ending of contributions will resulting in vesting for people.

You need to define freeze better. What do you mean by freeze?

A couple of observations: 1) I appreciate anyone who tried to be active and knowledgeable in their own financial situations. So I respect the idea you have been doing your own research. However, you might have reached the practical limits of it in this area. 2) There are a lot of very complex things that can happen here which require specialized knowledge. I would echo if you think a solo DB plan is a good idea you need to find an TPA with an actuary to run some projections for you. 3) One of the things that could trip you up is the amount you can put defer into a 401(k) plan is a personal limit. So if you work for a company that has a 401(k) plan and you defer there it could limit you deferral into the solo 401(k) plan. It won't limit a Employer Discretionary contribution into the solo 401(k) plan however, #3 above is a simple example of the type of thing a good TPA with an actuary could guide you through. in the set up process. I don't normally recommend some stranger spend their money on this board but in your case a little up front spending could result in a lot of value in terms of making good vs bad plans going forward.

You know auditors are allowed to put into the notes of their report a reconciliation of the differences between their FS and the Form 5500 Sch H. Why not suggest they prepare their work as they see fit and prepare the reconciliation note while the Sch H stay the same? it really isn't true the two have to be the same. There just has to be an explanation of why they are different in the auditor's report. By the way I normally give the auditors what they want as to me most changes aren't important. This would be one of the few I would push back on. It is for the reason BG5150 gives. If the IRS were to ever compare the deduction to the Form 5500 I think they should match. Just like the distributions and the 1099-Rs for any given year ought to match. Which this change will make not happen. That is another argument you can give to the auditor in my mind. Why wouldn't you want any given year's 1099-Rs and 5500 distributions to not be the same?

A little context here might help. One the plan is obligated to show that it tried to collect the money before the plan sponsor can just reimburse the plan. As for the timing while it is a little late it might not be as late as you think. A 2013 plan can drag filing their Form 5500 (the tax return a plan has to file) until Oct 15th 2014. That is when most likely the plan audit was done by an outside auditor. So the error very well might not have been discovered until about this time last year. Next everyone has to look into what do we have to do to fix this and the lawyers chime in. That is how you get to the summer of 2015 to get the first letter asking for the money back. Most likely they won't take legal action. It will cost more then they will collect. Like I said the plan is obligated to show they tried to collect. Lastly, if it is determined you in fact owe the money it seems like ethics would say you should pay it back. I agree you have a right to have them document you in fact owe the money. Also, there is the issue of taxes. There will be some costs to you if you pay it back but I doubt they are that large.

Did anyone enter the plan--ie meet the eligibility requirements? If so don't you have participants?

I am with recine46--- why do you think there aren't participants as opposes to there being participants but they merely don't have balances>

Do you have to let them enter the plan if they work over 1,000 hours? If they are regularly sch to not work a 1,000 hours and that is the class they are in why can't you keep excluding them? If you wrote an exclusion that said all interns aren't eligible no one would claim if they work 1,000 hours that have to be let into the plan. So why now? Mind you they have to be on the coverage test after they work 1,000 hours but it isn't clear to me they have to allowed to defer or given employer contributions. I am willing to be told I am wrong here but at this point I am not seeing it.

I know a few attorneys that object to a 0% MP plan. They always set up a 0.5% MP plan. They fear that Government will take the position this isn't a real plan as the purpose wasn't to provide benefits but as you say simply allow for money that you couldn't take a loan from to now take a loan. They also questioned if 0% is really a benefit level. I never have heard of a 0% MP plan blowing up but I know lawyers that don't like them. I am not sure why it matters if you don't have substantial and recurring contributions. I thought the only effect was you had to vest people. If 100% of the money is rollover money isn't already vested? It has been a long time since I had a substantial and recurring contribution problem so I could be forgetting something.

If you are friends with an auditor you might want to ask them about this. While I don't think there is a rule there might be a practical limitation. Something in the back of my mind says that a year from now when they do the audit they have to audit both years to give an unqualified opinion. Otherwise you have a mix of audited and unaudited FS. I think that is a problem. My memory could be wrong but a quick call to a friendly CPA might clear that issue up.

If you want to get academic about it the whole collateral idea is silly. Even in a balance forward plan the loan is self collateralizing. If you default on the loan your account balance goes down by the amount of the loan defaulted. The plan and no other participant can suffer a loss. In a daily plan it is all the more obvious no one is hurt. The only possible exception to this would be those very rare balance forward plans that had the loans as part of a general bond/fixed income fund and thus the loan was a general asset of anyone in the plan. But those were so rare back in the day of balance forward plans and now my guess next to none exist. To use an extreme example that violates the rules. If I have a $10,000 account balance and I got a $10,000 loan some how then defaulted how would anyone suffer for the lack of collateral? My account balance would go to zero the same as if I had just gotten an in-service distribution of my whole balance.

I would include them also. I would also agree they help your coverage test as they would be HCEs and not benefiting. I would answer the same way if they are excluded by a 1042 election.

The short answer is "yes". An ESOP can buy more shares even if 100% owned. The hard issues here are the fiduciary issues. You can't make any of these changes for the benefit of the corporation. You need to be able to show that the CURRENT participants are benefiting in order for the fiduciaries to be able to sign off on of this. The DOL takes the position the participants need to be better off. They do not count future participants. You will want to study up on this in regards to the loan refi: http://www.dol.gov/ebsa/regs/fab_2002-1.html This talks about how you might want to give "sweeteners" to the current participants to show that it is in their best interests-- in regards to the loan refi. Such as better diversification rights, more match in the 401(k) plan.... I have also seen where the plan was required to stop using the S corp earnings distributions (dividends) to pay the loan and had to leave the cash in the plan for the participant's benefit as the "sweetener". By the way other ideas to think about is you could seek to have the loan principle written down to a level that doesn't cause an issue with 415. This would be most easily down if the loan is an internal loan with the company. Not sure why you want to increase the amount of the loan here as that would seem to work against what your primary problem is but I guess if the term of the loan is long enough it doesn't matter. Lastly, there is growing debate on how long you can go out with the term of an ESOP loan. We are seeing more and more 40 to 50 year loans. There is growing concern that is never a sound fiduciary decision. For example since this is a refinance and let's say you are going from 10 years to 50 years (to be extreme) a current participant is going from could realistically work the whole time to share in every share release to that no longer being true. Is such a change in terms ever really in the current participant's best interests? I would strongly recommend you get an ERISA attorney that knows ESOPs and not just any ERISA attorney before you do this. (edit was a few changes to make more readable)

Great it will just give my clients a reason to wait another month to send me their data.

I am not trying to be mean here but I get a chuckle out of this kind of question. You will have until 12/30/2016 to get the money out but might not be able to do so but the New Year's Eve weekend is when the big push will happen to get it done????

Yes that allocation language is designed to make sure the plan always passes coverage. Bird is correct. Someone who terminated and worked >500 hours already has a right to an allocation. I think it is best to make the change effective 1/1/2016.

Then it is a good thing you went to work for the competitor because your former employer is either too stupid or greedy for you to want to work for them.

In the past, I would include earnings in the amount removed. Someone is now questioning that method. Is there anything that requires me to include investment experience along with the over-match amount? I am trying to figure out what the difference between "earnings" and "investment experience" is. Is earnings using the DOL rate and investment experience the actual earnings? If so, I would think in this case you would use actual earnings.

Not trying to be rude here but I would like to ask one more question because I am shocked someone would try this. When you say ESOP you mean it is an Employee Stock OWNERSHIP Plan and NOT some kind of stock OPTION plan correct?

Then as others say that would violate the law. The reason I asked was because what they are doing is such a well known wrong I am having a hard time believing that any lawyer would ever agree to the idea. Maybe make sure you understand it correctly once sure of that you will need to decide on the next course of action. However, the rules are clear that they have to pay a vested benefit.

Are they saying you will get no benefit or you simply can't take your benefit in the form of stock? I am reading your description as the former and not the latter. I read your description as it is your understanding you will simply never get paid, is that your understanding? Thanks

Is a recordkeeper's QDRO-review service worthwhile? Yes. I find that the plan administrator often times needs someone to review the QDRO. Maybe it is because I work in the TPA world I find our reviews are better then the attorney's. While the attorney is often times very sharp on the law they tend to have never had to deal with the practical aspects of QDROs. Just read a random selection of QDRO questions on this board. What at first glance seems like a reasonable description that is very specific on who to split the accounts often times isn't very clear when the TPA looks at it. Simple example that happens all the time with ESOPs. Since most attorneys are used to 401(k) plans that are valued daily we get ESOP QDROs that will say split the account as of 9/8/2015. The reality is the valuation only happens once a year for most ESOPs and if it is a calendar year plan that mean the last annual work was done 12/31/2014. So do we split the account as of the 12/31/2014 value as that is the value as of 9/8/2015 (my preferred answer by the way) or do you reject the QDRO as not having a good enough description of how to split the account (the preferred answer of some of my co-workers at this ESOP specialized firm)? Like I said to many attorneys why wouldn't you give the date of the divorces as the date to value the account for the split? To an ESOP TPA that causes issues. An ESOP TPA will note this on a review every time. Even when I review a QDRO while I think my answer is good I note the issue in my review for the plan administrator to decide if they want to reject the QDRO or not. Back when I did 401(k) plans I found often times an attorney signed off on a QDRO only to have me start to ask really good questions that pointed out that the order isn't clear on earnings from the date of split to date of payment and I could go on. Once again read all the QDRO questions on the board and you see real quick a lot of practical issues get missed until the TPA is forced to deal with the QDRO.

A TPA should keep the sponsor informed of what is due. They can keep the people informed about the penalties of not paying. I once had a client back in the '90s that hadn't deposited 401(k) deferrals for years. Other then informing people as for as I am concerned I didn't owed the participants anything else.

A little off topic but I guess this means (at least in this case) all those new fund disclosure rules aren't working!