ESOP Guy

Or search real estate in this board. Also you can simply move to it being a bad idea.

I think the better question is why do they want to keep the plan open? The plan document should tell you what to do with the two lost participant's account balances. If nothing else it seems like the conventional wisdom says you can always open an IRA on their behalf and send the money there. the plan document most likely says if the two are lost and you do a diligent search you can forf the accounts and reallocate their balances. Might have an issue now with 415 and other things like that as their is no comp to reallocate. That is why I suggested the IRA idea. So unless there are some assets that aren't liquid to sell quickly why not just shut the plan down?

You talk about doing a general test on an ESOP. You can do that for an ESOP it is just you can't combine it with the other plans. I have found that just using the general testing allows for rather aggressive allocation methods. Obviously I don't know your objectives but I thought I would throw that out there.

Took you long enough to get back to me as promised!

I am not sure about discriminatory issue but the plan fiduciaries are required to make sure the fees are reasonable. Are the people going to get $5,000/year worth of service from the advisor? I have been in a 401(k) plan with a self directed brokerage account since 2008 and the plan charges me an extra $50/year to have it. I am hard pressed to see what I would get for $5,000. My guess is it is discriminatory also. But that is more a gut reaction then something I can prove. All and all I would rate the idea as a bad one.

I agree. I just added my comment because the original question was about the maximum amount he could take.

I would add that based on what we are told here I would think the person could take 100% of his account balance is they so wished. They could take about $100,000 in cash and $30,000 as the loan in kind. So the taxable amount would be about $130,000 and the cash they received is $100,000. Unless there is something in the plan document that says they can't take the loan in kind I don't see any reason why they can't take their whole balance. It just wouldn't all be in cash.

I agree the IRS question is at best vague on the point in this question. Can you pay more then the RMD? Yes. I agree. If you complete a set of distribution forms because you are terminated and the plan allows for lump sum you can pay the RMD and the rest of the balance. If the plan allows for an in-service then you can pay the RMD and the in-service. Those last two sentences are a perfectly reasonable reading of the IRS' response to the question. Until I see something that says the RMD language alone allows you to take more then the RMD I stand by my opinion. I see the other people's point but I think that is not the best answer.

I think most of this topic has been covered. However, I am having a hard time seeing how you (prog or whoever) is making the leap of accepting a form equals saying it is valid and nothing can change that fact. Simple example: We receive distribution forms all the time. We mail out hundreds of them for some of our larger clients and they come back by the dozens in the first few days after the mailing. Does accepting the forms really mean we have accepted the from is valid? I have never seen it that way. We have in fact gone back and asked for additional information when it is signed by a power of attorney or something doesn't seem to be in proper order. So you accepted the form. You had no reason to believe fraud had happened at the time. Now you do have reason to believe that and have changed how you are handling the issue. That seems prudent to me. Is it prudent expert? I am not 100% sure as I am not a lawyer that has seen all the case law on that topic but I just don't see how accepting the form equals you are now bound by that to the point the plan's sponsor and fiduciaries have can't change their behaviors as new information comes to light.

I know we have had this conversation but couldn't find the thread quickly. I am in your camp on this. You are only allowed to pay the RMD if there is no in-service language in the plan. I know there are some who are regulars on this board that disagree. In particular look at your plan's section on RMDs. Some point out their plan says the plan has to "pay AT LEAST" the RMD amount. Those who disagree with us will point to that and say at least means you can pay more. If you have the at least language and the administrator is consistent interpreting it as meaning they can pay more I can see that is a reasonable position but still not the best position. I am still of the opinion that the best position is to only pay the RMD amount absent in-service language.

To echo others: I have seen a few people try and run their taxable business through a qualified plan thinking it is a clever way to not pay taxes currently. It tended to end badly. Other possible issues you will want to look into is will what they are doing going to trigger any kind of Unrelated Business Income tax (UBIT) within the trust. For example if they used debt to buy the RE it will most likely cause the trust to owe taxes on the leveraged portion of the investment. You don't see UBIT very often so it can sneak up on people.

We send all of our Form 5558 without the street address via certified mail every year. No issues have happened. My understanding is (and it could be the wrong understanding) that with the 9 digit zip code the last part of the zip gets it done. That part of the IRS gets so much mail that only the section of the IRS has that last two digits for a zip code.

I didn't find a cite quickly. I am sure someone out there has it.

We always use participants who are eligible to receive a match. To be clear by that I mean people who had they deferred would have received a match. Or to put it in the negative the reason they didn't receive a match is they didn't defer. I think the rules are rather clear on that issue.

This does seem to be legal although depending on if you go get D letters and so forth or not might not be worth it.

I agree if there is a last day provision the case is stronger (i would say I agree with you but I know a few people who would disagree with us).

The possible exception to my comment above would be this. When I first started working in this business it was a commonly held view that if a plan has a discretionary contribution no one had earned a right to a benefit until the contribution was declared. As such you could amend the formula all you wanted until 12/31. That argument seems to have fallen out of favor in most people's minds I know. It seems like the conventional wisdom now says people who have met the allocation requirements have a right to no worse then that allocation method for that year.

I think the easiest way to explain this might be this: You should allocate whatever dollars the company is going to contribute to the plan under the old formula and the new formula. If the new formula results in someone who has worked 1,000 by the time the amendment was put into place to receive less dollars then under the old formula you have a problem in my mind. It seems like anyone who has worked a 1,000 hours before the amendment is entitled to an allocation of any dollars put into the plan under the old formula. However, if the new formula were to be better for them the law doesn't have an issue with an increase only a decrease. Given the point of the change has to be to give less to the rank and file in favor of the higher paid I think you have a problem.

A few additional observations on this question: Even if the owner is entitled to allocations in the ESOP (which is very likely) it might not be as bad as you think. Between the compensation limits and the 415 limit the benefit is capped. So the benefits might get spread pretty good. One of the things that gets lost when a company is sold to an ESOP and the previous owner stays on as an employee is that the prior owner is JUST an employee now and needs to be paid like an employee. Before the owner pretty much got to set his pay package how he wanted and that was most likely driven by tax considerations. So the mix of salary, benefit, dividends tended to not reflect market value of work but the owner's wishes. That was fine when they were the owner it is basically their money at that point. This person is an employee now. Most likely they are an executive. The board of directors now had a fiduciary obligation to the stockholder (now ESOP) to make sure executive compensation (including all benefit like the ESOP) is reasonable and reflects the market price for that position. So maybe the better question is has the board's compensation committee reviewed the executive compensation to make sure it is market based?

The 1042 question is the key question here. We have to know that answer.

To me self correction would be needed if they payment did in fact happen after the rehire had happened. There is no distributable event if the rehire had happened. If they payment happened while the person was still terminated then there is no issue. The original question is a bit vague on the timeline. But I am assuming Pam wouldn't be asking unless the payment happened after the rehire had happened.

It doesn't matter if the person has a cash balance. I don't see how they aren't a participant under the terms of the plan document. They are due a benefit under the plan's terms regardless if the cash is in the trust or not as of 1/1.

My first job out of college in the '80s was with the IRS. I did regular taxes and not plans. However, if an IRS agent did what is described here I would be making the case to management and the client we talk to this person's supervisor. There were times I thought the person needed a new tax preparer but I would have never dreamed actually saying that. That isn't the job of an IRS agent. I know the common response is I don't want to get this agent on my bad side in case of a future audit but that is poor behavior.

I believe what Mike is summarizing is from the latest instructions on self-correction. I would start your research there but I believe Mike is correct.

As a general rule once a person starts RMDs because they are a 5% owner they don't stop when they stop being a 5% owner. It is in the regs and it seems like if you read the document they follow the regs and they say the same thing. The only possible twist is the plan merge. Unless there is some kind of exception for plan mergers the answer is "he has to keep taking RMDs".