ESOP Guy

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".

In fact to just to leave an audit trail I would strong think about having the wife complete distribution forms. So the paperwork is in place to show she really had a choice to take the money and keep it, put in IRA or roll over to another qualified plan. My guess I wouldn't do a 1099-R but I think you could make a case one should be done. After all what is happening legally is she is taking her benefit as a beneficiary from the plan and then rolling it into the plan. I also wouldn't write a check to the plan only to have the check cashed by the plan either. Like I said I would most likely do the forms showing a paper trail the money was distributed and rolled. Mostly as a paper trail for an auditor.

The other interesting question on this topic is crossing the audit threshold. I am doing this from memory but here is my recollection. If a plan was a small plan in 2015 with 119 employees. Say two people meet the eligibility requirements on 7/26/2016 but the plan has only one entry date of 1/1 these two enters the plan on 1/1/2016. Assume no one left so there is no decrease in the counts. It would seem like for the Form 5500 you ought to have 121 people as of 1/1/2016 listed. Sal's book has a discussion in it how these two might not count for purposes of needing an audit for 2016. So you have 121 on the 5500 and no auditors report. That tends to get you an error message. I had this come up once a few years ago. It is why I no longer like 1/1 retro entry dates any more. That was a pain.

To play devils advocate: If the plan doesn't pay the distributions per the terms of the plan that is failing to follow the plan document which is a disqualifying defect of the plan. I would maybe ask the plan's ERISA attorney what they think or maybe pay everyone one cent. I am spit balling on the one cent thing. But if the stock is worth nothing and everyone is comfortable with that idea I am having a hard time coming up with a reason to not make the "payment" per the terms of the plan document. I think this issue is beyond a free discussion board even one made up of industry people.

You can ask but the amount is clearly determinable and it isn't your job to 2nd guess the agreement. I would ask the Plan Administrator is that is their understanding. If you want to be kind you could suggest they ask the participant if this was intended but there clearly is no requirement to give earnings from 12/31/2014 to time of split..

I stand by my advice. Feel free to ask as many questions you need to get comfortable to determine if you owe the money or not. If you conclude you owe the money work to return it and if not explain to the plan sponsor why not. You now know the basic issue. Your account had both cash and stock in the plan. They believe the earnings on the cash was flawed. If you want to know more details of that flaw ask. There is a chance you won't fully understand the issue but you might understand it. The one oddity in my mind is the timing. ASSUMING (if you are willing to tell us if this assumpstion is true or not might help a little) the plan year end is a 12/31 plan year end the letter seems a LITTLE slow in being sent. The annual audit for a 12/31/2013 plan year end would have been done by 10/15/2014 if they filed their plan tax form timely. So why send the letter now? A little slow but not unreasonabley slow. I would still recommend you start by calling your former employer and asking them if you can talk to the person who can help you understand what happened and maybe help you get enough documentation to help you feel comformtable with the issue. But no they will not ever share with you work papers and so forth that allow you to recompute the error size. They should be willing to help you understand how the error happened and how it got past everyone's checking process. However, understand part of the process is the plan was required to be auditted by a CPA firm and they typically check earnings allocations. So the audit is the last check that is supposed to help find these errors

I rarely disagree by name but I disagree with Jpod on this one. Josh I agree you have every right to protect your interests. As such you should ask all the quesitons you need to determine you really were overpaid or not. But if you owe the plan money you should pay it. This is simply good ethics. I have been on both sides of this. I have made mistakes that have caused participants to be overpaid and underpaid. If I find a person is underpaid I work to get them paid. The reality is I could many times let ignorance be bliss tell no one I made a mistake and no one would know there was a mistake and an underpayment happened. I don't let it happen. I have made mistakes where a person was overpaid and was relieved when they agreed to repay the money that was a mistake. And yes you shouldn't have to pay taxes if the IRA returns the money to the plan via a trustee to trustee transfer.

I would also say you have to make that last MP contribution which would be subject to all the MP rules. You can't make an MP contribution into a PS contribution by merging the plans and then putting the contribution into the PS plan. That is my take. No I can't cite a specific rule other then that strikes me as the only reasonable way to read an MP document.

I agree 100%.

For question #1 the answers going to be in your document. It is a rare day that I have seen a document that allows a non-owner who is active to even take an RMD much less decide on a year by year basis. This is one of those cases where knowing the law isn't enough. The law allows options so you have to know what the document says. For question #2 I believe the answer is "yes" the 20% withholding applies to the amount over the RMD because what is happening there is there are really two payments even if only one check is being cut There is an RMD and an in-service distribution. The RMD gets 10% withholding and the in-service gets 20% withholding. You can find threads on this next subject so I acknowledge there are people on this board who disagree with me on this but this is how I read the rules. (Understand how the document is written makes a big difference here). But in my mind the only way a person who is active and taking RMDs can take more then the RMD amount is if the plan document allows for it. So the plan document needs to either have in-service distribution provisions or you MIGHT be able to make a case if the RMD section says the RMD is the minimum amount a person can take. That MIGHT imply they can take more but I for one am uncomfortable with that reading.

A name that only a mother and a marketer could actually like!

I don't do small plans like this any more but I didn't think you could make any kind of qualified plan contribution based on real estate investment income you don't pay SE tax on. It sound like this person wouldn't be paying SE tax on the RE income. I am more then happy to be told I am remembering it wrong or my thinking is out dated but that is my recollection.

See other thread with this question.

I have done allocations before on YOS vesting/Total YOS vesting before. You have to pass the rate group test when you do something like that. What you describe is the same thing. That 401(a)(4) rules will have to be worked. out. I would agree with Lou is that a form of 10 year elig. Lastly, coverage isn't that hard of a test to pass. In theory you could give the bottom group all $1 and you would have 100% coverage for coverage test purposes. All coverage testing asks is does everyone benefit. It doesn't look at how much everyone benefits which is why there is nondiscrimination testing.

I did miss QDRO's pun the first time I read it.