ESOP Guy

it has been a very long time since I have done 4k loans but I do think you have been doing it wrong. Here is the code. Notice in the highlighted part the highest balance over 12 months ONLY applies to the $50,000 limit. You see it doesn't apply to the 50% of the balance (blue line under it). What I have always thought stupid is that paying off the first loan and ending up with just one loan will just about always (maybe always) hurt the person wanting to take out the new loan .

What Paul is addressing is 409p testing. It is very complex. At the risk of coming across as a bit self serving but failing 409p can't happen. You need to get solid advice from an ESOP service provider who knows what they are doing to help you with the 409p rules. The family attribution in 409p is much broader than any other testing. But no it doesn't apply to 401k plans.

That would be my take on the facts above.

The term is accurate however. Here is the definition of a third party. https://www.investopedia.com/terms/t/third-party.asp If someone asks me what I do for a living and I think they want the polite short question I say: I specialized type of tax accounting. If I think they want a bit longer answer I give them a short discussion of what an ESOP is and what I do. But to tell a client we are their ESOP TPA strikes me as accurate and I would expect business people to know what the term third party means.

For Key and HCE purposes the shares in a person's account in an ESOP do NOT count. The cite above is good. Also think of it this way the shares are legally owned by the ESOP trust not the participant. They are a beneficiary of the ESOP trust and they have little say over how those shares vote for example. There is only a narrow set of events the participants in an ESOP must be given the right to vote "their" shares.

They are also a participant for most purposes other than accruing a benefit. So they have the same rights to notices, payments, loans.... as other participants.

As a tax person I can tell you now this will be fixed retroactively in a technical corrections law. After every major tax law there seems to be a technical corrections law that fixes this kind of silly stuff. The fact this kind of stuff happens so much is more proof of how rushed our laws are and how overly complex they are. But as long as this was a typo and not a decision agreed to this will be fixed without much to do.

Yeah that is why the DOL program that caps the fine is so important. It used to be you could try to ask for some kind of forgiveness but at this point the down side is too much. Likewise the filing a form without the auditor's report but a note is getting riskier also. That fine for an information return with no tax implications is just plain silly

That might be true for state law in MD but for purposes of federal tax law I would take the position this distribution is done. In tax law there is a concept known as "constructive receipt". The wife had control of the check even if for a short period. She had constructive receipt. I am confident the IRS would say the late wife had a taxable distribution. Most of the time once the check is mailed constructive receipt has happened. That is why a check mailed on 12/30 but not received say until 1/3 the following year is on the 1099 for the year mailed. The only question would be is if the husband can roll it over to an inherited IRA or not and I can't cite anything one way or another.

How many people are in the plan? Most plans I worked on with individual broker accounts are pretty small. It shouldn't be too hard to get proper plan forms. My first question does the form by the broker make it clear this is a plan asset or is it just some standard broker form? Just talk to the client and broker and make it clear since this is a plan rules beyond normal securities law apply here. I am not trying to be mean but what I hear is someones wants to add complexity and ambiguity because they aren't willing to get on the phone and make sure everyone is on the same page. I will get off my soap box now.

This has been true for a while. I have been convinced any plan that wasn't designed to be simple is out of compliance if you look hard enough. Part of why I got into ESOPs was they were more interesting than small 401(k) plans which is how I got into this industry. They have gotten so complex the chances of making an error are huge. And I don't know how some of you folks do small 401(k) plans any more. All the silly notices and disclosures that if you miss a simple deadline can put things out of compliance. The volume of them is beyond sustainability. And they add no value as no one reads or understands them. I am becoming a cynic I think.

It is going to help you retire by aging you prematurely.

There are way too many unanswered questions here in my mind. What kind of plan are we talking about? Was the DRO sent to the plan? Was it accepted by the plan as qualified and thus making it a QDRO? If that happened why didn't the plan separate the funds? What is your relationship to this? Do you work for the plan? Are you the ex-spouse? If you work for the plan does the plan document say anything about this? It might tell you who the Alternate Payee's beneficiary is if they pass before the benefits are paid. I would recommend start by talking to the people in charge of the plan and start getting basic information like this.

Depending on the amounts and if the plan allows forfeitures to pay plan expenses will the cost of filing the back 5500s eat up the funds? That might be a lot easier than finding the people.

I would add a well thought out amendment to the vesting schedule would cover this fact pattern. In the last 5 or so years I have had two clients amend from a 3 year cliff to a 6 year graded schedule. I asked for a change to the amendment before it was signed that makes it clear that we will look to a person original hire date to determine which schedule they will be on if they are rehired. Both of these firms have thousands of employees and they have a lot of rehires. It was decided it would be easiest to track if we looked to original hire date to decide which vesting schedule to use. If the amendment is silent on the topic I would agree with Cusefan that the years of service should apply to the new vesting schedule is the most reasonable way to read things.

This is a classic: What does the plan document say? A question like this is almost always answered by the document. So much so the guy who trained me in this business would throw you out of his office if you asked him this question and you didn't have the document in your hand (started in this business in 1991 so it was all paper) and you couldn't show him what parts of the document you looked at. Since he was 100% vested I think the Rule of Parity needs to be factored in and I think this person will most likely not lose any years of service for vesting. See this conversation.

Have you asked them for their justification of including them? Maybe they have the cite.

Both of the people who answered made it clear the document has to allow a stock distribution. This is qualified plan 101 and it applies to ESOP and other plans- you have to follow the plan document. So if the document requires cash distributions there isn't an NUA possibility.

You can do share distributions of S Corp shares, if the plan allows but most likely prohibits you keeping the shares, and then the shares are bought by the company or plan. You can get NUA treatment at that point. The IRS has ruled this "1 second" ownership of the S Corp shares doesn't blows the S Corp election, creates too many shareholders....... I see it all the time. In fact there are all these rules on how you adjust the cost basis of S Corp stock for the pass through income and how that will effect the NUA calculation. My point being if you have to worry about cost like that it is because you can get NUA treatment if set up right.

The plan document will tell you how the forfeitures will be used.

Most plan documents have a provision saying what to do with lost participant accounts.

If you are the TPA it isn't your job to decide when the DOT is but for the client to do so. I have a number of staffing firm clients and when a person terminates vs just isn't assigned to a client is a constant conversation. But the client decides every time.

You can find prior discussions on this topic if you search the threads. The word "religious" is a good search term.

Another vote for PBI.

I admit I am a DC guy not a DB guy so I normally read this out of curiosity and not say anything. However, I will at least suggest you think about how rehires will be addressed and get that in the amendment. What if a person was hired and left before the date 1/1/23 and only had 2 YOS so wasn't vested in the plan and gets rehired after 1/1/23? I would make it clear how they will be treated in everyone's mind. I work with a number of firms with very high turnover and to keep it simple everyone agreed it was original hire date and that was written in the amendment. Maybe it is obvious in this type of plan how this will work but I am throwing it out there as I have seen this turn into a debate after the fact in DC plans. You can nip this up front if you think it through.