ESOP Guy

I thought the same thing and assumed he used the wrong term. As far as I know there is no such thing as a five wheeler. The correct term is 5th wheel. For those who are interested in a little history the term comes from the horse drawn wagon days http://en.wikipedia.org/wiki/Fifth_wheel_coupling.

How is this a PT? I don't see that line of thought at all.

I like shERPA's logic. I think he is right. But clearly the IRS doesn't agree with that logic Kevin C's post. The IRS' problem I think is they don't see the loan as 100% secured. That is why they keep coming up with the silly idea that you can't borrow more then 50% because the remaining amount is needed to secure the rest. That is nonsense. The loan is self securing. If the borrower defaults the plan writes a 1099-R for the default amount and no one loses anything. A taxable event happens but no one has lost anything. That would be true if you allowed loans for 100% of the person's balance. But the person got their full benefit. Everyone else in the plan would get their full benefit. It doesn't matter if the plan is a daily valued plan or a balance forward plan. The account of the person taking the loan would fully secure a loan of any amount that is no more then 100% of the person's balance as of the day of the loan being made. By the way my credit union would loan you for 60 months at CD rate plus 2% a loan that is secured by a 60 month CD you have with them. The CD rate plus 2% comes up to 3.45% barely over prime. I think you ought to be able to run a loan program with that rate but I think the IRS would not take kindly to it.

That is my thinking when I wrote my first comment and if the HCEs happen to be in exclusively in one of the groups that will make for a testing mess.

Strictly speaking I think you have two different types of contributions. You have a match for group one and a profit sharing contribution for group two. So for testing you have to test them like you have two different types of contributions. So you have to show both types of contributions are non-discriminatory and pass coverage. It seems like some types of testing like the Average Benefits test you bring all types of contributions into the test. But I think this is a mess for testing because you have two types of contributions. There might be some combination of ACP testing and other tests that can be done to show this is legal but I doubt it is simple.

I am assuming their plan year is such that you didn't have the 120 on the first day of the plan year. At risk of pointing out the obvious but the date you look at is the 1st day of the plan year not the end of the plan year to determine if you need an audit.

Parties can put the IRA rollover into the divorce decree which can be enforced under state law. My guess (and it is a guess) is they didn't want to do that for fear that ERISA would preempt any such state ruling or law. I provision like that seems to be a type of alienation of the benefits as you can't take the form you want.

Off the top of my head the following issues come to mind: 1) Is it really prudent to invest 84% of the plan's assets into a single investment. After all you say it is a pooled plan so you are investing not just the Dr's money but the rank and file's money. A trustee has a fiduciary obligation to invest in a prudent manner. This doesn't seem to come close to that idea. If you say it is just the Dr's money you have a discrimination issue of why he gets to direct his investment and the others don't 2) What happens if the investment goes negative cash flow and the plan doesn't have the cash to cover its share of the needed investment? Now he has to put in a contribution. 3) There can be small plan audit issues 4) You would need to review this for PT issues. 5) You would need to review if there are any UBIT issues 6) Don't know how old the Dr is but what happens when he needs an RMD is he going to be allowed to take all the remaining cash out? 7) Are they really going to value it every year? If not, how do you pay one of the rank and file members their correct benefit? 8) Will there be enough cash if people start asking for participant loans if allowed? You can do searches on this board and read horror stories from people who do this kind of investment and run out of cash or can't sell the investment fast enough to meet various plan requirements. I will go on record as saying if they were my client I would advise them to not do this.

The 5500 the plan files is irrelevant to this question. The trustee is obligated to have a reasonably value the assets as of every allocation period. So the trustee has to be able to show the value they are using is a good value and obtained via a reasonable method. If a distribution is needed to be made obviously a good value is important. Likewise when it come time to pay an RMD a good value is important. I agree it isn't clear if he is buying real estate of shares into a company that owns real estate. It matters a lot. If it is shares what kind of shares are they? If they are shares in a C corp it MIGHT be ok to do this. But if it is an S Corp then only an ESOP can own those shares. If it is an LLC or partnership that has pass through income then it raises questions about Unrelated Business Income tax. There might not be any but I can't say that for sure. I think you are looking at an issue that can get bad and complex fast.

Are you sure they are legit? I have never heard of either the DOL nor IRS using e-mail to inform people of missing forms. That sounds more like a scam that is trying to get information. The only odd part would be the information is on the DOL website so why use a scam to get it? I don't get that many IRS or DOL notices but like I said I have never heard of e-mail being the method.

I think you can put a D. Here is how I would decide. If the partial payment is part of a series of payments-- even if not an annuity I put the D. It is common for ESOPs to pay people over 5 years. I put the D after the first payment. If the partial payment was a one time event I would not report the D to try and help the person get a reminder they are do more in the future. We have a fair amount of debate around here on ESOPs and the 1st of the 5 or the 5th of the 5. Also, of the 5 stops do you put a new A out there or not. I have yet to see a fine for a bad code so I think anything reasonable will work. Be consistent.

the other thing to remember is this person would still be in the coverage test as includable but not benefiting. That may be obvious but thought I would add that.

When you distribute cash and stock the withholding is the lesser of: 1) 100% of the cash or 2) 20% of the distribution (like normal) Or put another way you don't have to sell shares to get to the 20% but the withholding requirement is still there. Honestly it has been so long since I did an after-tax distribution I don't recall if you withhold 20% on the after-tax basis. But the rule is simple. Compute the 20% like you would assuming it was all cash being paid to the person. (The amount to the IRA doesn't count obviously) Then apply the limits above. On the stock I believe it is just the cost basis that counts toward the 20% not the total FMV.

I agree it sounds like the recordkeeper is confused about NUA and after-tax basis. I don't see how they can use the after-tax basis to lower the taxable amount on a portion of the plan that the after-tax wasn't invested in also.

Are they returning part of their fees by doing this? If so, would be a reduction of fees? Does the auditor have an opinion? If it isn't material other income might work or like I said net against fees also work. I would see if the auditor has an opinion.

The question is confusing. Is there a 401(k) plan and an ESOP or is it a KSOP? If there are two plans was the After-tax money put into the 401(k) plan or ESOP? If there is only one plan was the After-tax dollars used to acquire ESOP shares?

One of my former employers (A very large benefits/human resources consulting firm) used to offer as a service taking your business out to bid and helping you review the bids to find the right service provider. They also did work on those size plans. (They never allowed their own firm to bid on the project if they were consulting). One can't know for sure without details but that price tag sounds high for a 1,200 life plan. You might want to put it out for some RFPs just to see what happens with or without a consulting firm helping you. Hope I am not offending my fellow TPAs out there by saying that.

What kind of plan are we talking about here? A DB, 401(k), ESOP???? That could make a pretty big difference. However, if I am doing my math right your are paying around $114,000/year for this plan-- is that correct?

The only part I feel qualified to speak to is if the new company is going to be a S Corp it can't be done. An IRA can't hold S Corp stock and an ESOP is the only qualified plan that can hold S Corp stock.

I am with Peter on this one. Has a request been made that the people who over charged pay the people back? Not sure the fiduciaries can escape problems by throwing money at the plan.

Although do check the document. I can't remember the last time I saw a document that doesn't cover rehires in almost every situation. I say this because so for this conversation is talked about the legal rules. I have seen plan documents that pretty much say "once a participant always a participant" and the person enters upon rehire basically always. You can write a document to allow for more generous rehire entry provisions then the law requires and like I said I have seen it.

Maybe some kind of business transition happened and it is easier to wipe the slate clean??????

I would suggest it might not require a PT for the trustee to act. Two examples I have seen and as far as I could ever tell (i was an observer not in all the meetings) even of 404c the trustee has an obligation to make sure the investment is suitable and so forth. I once belonged to a 401(k) plan that had self directed brokerage account. You couldn't buy the pink sheet stocks some kinds of thinly traded preferred stocks. As far as I could tell the trustee with the brokers help had decided these investments weren't suitable. I also once saw a small dentist practice that allowed all the employees to have a brokerage account so the dentist could. The CPA firm I worked for after reviewing all this as part of their investment advisory practice made changes. One of the changes they made was force one of the dentist's employees diversify. She had put 100% of her retirement funds in Ford stock. (odd thing was she made great money-- she had bought near the bottom in the 2008/2009 time frame. It didn't change the fact she had put all her eggs in one basket.) In that case I know the justification was even under 404c people felt the investments offered were not suitable. 404c isn't a blanket coverage the that says the trustee can't be called out. I know they have to look at the people's choices and decided the choices are in the universe of suitable choices. Can a case be made this partnership isn't a suitable choice? Just to be clear this part of retirement law isn't may strongest area of knowledge but the above is my first reaction to this question. I give the advice as something to look into more then saying I think I can win a legal case.

You need to better define "freeze". Depending on what (if any amendment) has been done it might qualify as a type of plan termination which would vest everyone. If the employer is merely not going to make any more contributions and require share distributions then it might be a few years before you have to vest everyone.

The due date of the SAR is extended with the Form 5500. So it is 2 months after the extended due date of the 5500 if it is extended.