ESOP Guy

I don't do this very often but auditors can put a small reconciling sch in their report to explain differences between the 5500 and their audit report. Most people don't like that idea as they think you should resolve the difference. This might be one of those times the 5500 and the auditor report need to be different. Normally I give the auditor what they want on the 5500 as I figure it isn't that important. But as you say I wouldn't want the tests and 5500 be different. Maybe it is time to agree to disagree.

I tend to go with other income just so my distributions = the 1099-Rs and so forth. I have no idea if anyone checks those numbers against each other but that is what I do and why.

I believe you are reading those regs incorrectly. That whole section starts with this title: (3) Compensation paid after severance from employment— So those rules only apply to compensation after you have left employment. Those words you highlight I believe are just reiterating that fact. If you want to know what the rules are for before employment has ended you have to go to an earlier section which reads: (b) Items includible as compensation. For purposes of applying the limitations of section 415, except as otherwise provided in this section, the term compensation means remuneration for services of the following types— (1) The employee's wages, salaries, fees for professional services, and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan, to the extent that the amounts are includible in gross income (or to the extent amounts would have been received and includible in gross income but for an election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b)). These amounts include, but are not limited to, commissions paid to salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan as described in § 1.62-2©. Remember this is just 415 comp. You can use a different definition of compensation for allocations and testing if the plan allows and you pass the needed tests. This is what Kevin C was getting at. If your plan uses 415 comp for allocation comp you would exclude this severance pay. To the original question I would read the document carefully on how it defines allocation compensation. Does it mention for services rendered or not? Does it reference 415 comp or not. If not, you might have to allocate on this severance pay but can't use it for tests that require 415 compensation or you might have to test your allocation comp as it isn't safe harbor. If it is the last one I would think someone made a drafting error as you shouldn't build such traps in to your document. It has been a long time since I have had this situation but that is how I seem to recall it. Your 415 comp might exclude this pay but in effect other types of compensation in the plan might include it. Once again I think part of the disconnect in this conversation is some people are assuming allocation comp and 415 comp are the same. I don't believe that has to be true and in fact I see no reason to believe that allocation comp can't include something not in 415 comp. It just might lead you to odd testing and allocation results but possible. But I am doing this from memory and I am willing to be told I am flat out wrong on this one.

Not my areas of expertise but isn't this a simple as they client would have to show that this benefit/rights/feature (BRF) is non-discriminatory. It seems to me if an IRS agent showed and saw how this plan is working he would ask for a BRF test then cross his arms and wait. Failing to produce the test would result in him saying this plan is operating in a discriminatory manner. So the short of it is I don't think you will find rules about brokerage accounts that say if you can or can't do this because this is straight forward BRF question.

I know this might not help you sleep but.... I made a mistake last year and just plain forgot to file the 8955-SSA by July 31 but did file the 5500 by July 31. The client got a notice saying they filed late and owed a penalty. I wrote a letter explaining the error and why it happened. The IRS waived the penalty. You have a strong set of facts. I would file the 8955-SSA and if you get a penalty notice ask for mercy. My guess is you will get it.

This one of those bizarre rules that gets extended retro back to 1/1 every late Dec. Thus, either leaving you no time to do it or doing and risk they don't get around to extending the law for another year.

Not selling also save brokerage fees. Not as meaningful in the days of $10 trades vs when it was 1% or 2% of the purchase price. But the advantages seem small to me but the idea also seems harmless enough also.

I think austin wrote something but it was too small to read!

We have been doing more digging. The ERISA Outline book in section 13A seems to suggest you could interpret the DOL regulations as to mean people who meet the eligibility after 1/1 but are given a retroactive DOE of 1/1 don't count for the 1/1 count purposes. Does anyone have any experience with this idea? Anyone have an opinion on ignoring someone who met the eligibility say on 8/14 and was given a retroactive DOE to 1/1 from the beg of year count?

Deemed has been added starting in 2014. For many reasons we can't go back to the document writer but I agree not all documents are created equal. There are other flaws in this document related to this whole count thing. For example everyone enters 1/1 so every new entrant is in your count the year they enter the plan. You could have gotten what they wanted by just using full year comp and a 1/1 and 7/1 entry date. Having a 1/1 and 7/1 entry date would have done it as they are only over 120 by a few people. Although in the end they are a growing firm so they would have hit the audit mark at some point. The prior TPA doesn't appear to have done a good job of warning them about getting close. So I agree not all plan documents are created equal.

Strangly the answer I am most often getting is they would be listed under Activies as they don't meet any of the other groups: Here are the instructions for 2013 for Actives: 1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit. You will note it also includes any nonvested individuals who are retaining credited service. These people don't seem to meet any of the exception in the following (a) and (b).

They have solar powered calendars now to solve that problem.

We have a plan that doesn't forfeit until you have been fully paid or have 5 BIS. It has no deemed distribution language. There are a group of people who have a DOT are 0% vested and have an ending balance. Are these people in the beg count? It is the difference between needing an audit and not needing an audit.

While I understand QDRO's concerns would their be less if the questions were asked this way? Can a participant ask for an in-service distribution that includes nothing but the loan in kind? My guess less difficult would be a 100% in-service request since the person isn't selecting the asset be distributed. If the in-service distribution is 100% of the account balance then the loan is merely distributed as part of the payment.

Yes, they have to receive the cash contribution. In part because of the reasons you describe you will find many ESOP exclude the 1042 people by say job title. Say the former owner stays on as CEO for example. It just eliminates the problems you are talking about. As a side bonus if such a person is a HCE, which often times they are, since being excluded like that isn't a statutory exclusion it tends to help your coverage test if you are having problems with that. As you now have a HCE who is not benefiting so less then 100% of the HCEs are benefiting. So you can now have less then 70% of the NHCEs benefiting. I have had that fact help me out more then once with ESOPs. In fact I have an ESOP that because of high turnover only 30% of the NHCEs benefit as it has last day language. But because only 2 or the 10 HCEs benefit, the rest of them are 1042 people or their family, it passes coverage. So unless this person just really wants the cash think about excluding the 1042 people form the allocations by amending the plan. Sorry if that is more answer then you wanted.

A 1042 person can receive cash contributions and accumulate the cash in an ESOP. I know I have worked with ESOPs where the 1042 people had just cash in their accounts.

My understanding was the same as QDROphile. The reason was what would stop the participant to take a loan with the intent to default. and thus deny benefits to the spouse?

I believe it is 20%. The whole 30% is for non-citizens that don't live in a tax treaty country. if a non-citizen lives in a tax treaty country the rate can drop down to 15% in some cases.

Does this notice talk about getting the penalty waived? You can also simply ask the IRS to waive the penalty and I have found they are willing to do so if you can show a good cause and there isn't a pattern of late filings. I have found the good cause can be simple miscommunications and so forth if you can show this is an aberration. These IRS people tend to not be the kind of revenue collectors other parts of the IRS like to think of themselves as being.

What I still find interesting (and now funny that I don't work on any 401(k) plans just ESOPs) is how much mental effort all of you are putting into getting out of the excise tax return. That is the least time consuming part of the process often times. Or at least it was for me. But I never did many 401(k)s so maybe I am slow. In my original question there were 8 late payroll payments. This client had 6 employees including himself. So I had to go to the DOL calculator and input around 48 amounts and dates to get the lost earnings. The numbers had to be put into a spreadsheet to get each person's total correction. Someone had to double check it all to make sure I did not typo any of it. That had to be communicated to the client and I had to talk to John Hancock to make sure it all got deposited correctly. That took way more time then the silly excise tax form. I guess if it was really just one late deposit with very few employees the tax return will take more time but still. When we computed the final bill of my time if we had charged full price this client would have owed hundreds of dollars in fees and the tax return was a very small part of the cost. If we would have taken the partner's idea of just throwing $100 in the plan and call it the lost earnings and given it to the NCHEs and completed the tax return based on that the total cost would have been less then what it was even though the lost earnings was around $12 per the DOL calculator. The Dr. would have gladly agreed to put the $100 in the plan and give it to the staff to keep his bill down. To me the effort still needs to be to get them to come up with a simple, practical way to compute the lost earnings not get out of the excise tax return. Not that I am opposed to not having to file an excise tax form that says one owes a couple of bucks. But the effort to save time and cost seems misplaced to me.

To answer your 1st question I agree the count would be 7.

I think the point may have been that the IRS seems to be using the old name for the forms and not the correct new names. How long has it been Form 5500 Schedule SB and not Schedule B? It is at least a few years since Schedule SSA was the name of that form. Shouldn't the IRS late filing penalty notices at least use the correct form names? Maybe but the fact I have had to send two letters instead of one when they make a mistake causes me problems. And it is all about me!

Does it have to be the actual metal? I mean obviously the easiest way to get into the asset class any more is ETFs. If he has to have the gold coins in a vault that is a different story. I just don't remember if you can have gold bars and coins in a 401(k) but I know you can have the ETF as I have seen them a number of times without anyone objecting.

Yes, they are now sending penalty letters for SSAs. It is a pain because it is often times a separate letter then the Form 5500 letter. So now you get to reply two times instead of once when they are wrong. Oh joy!

Doesn't B mean in 409(e)(3)? A has 500 shares in his ESOP account. B has 700 share in his ESOP account. A gets one vote and B gets one vote. Per A but B says the Trustee will vote the share in proportion of how A and B vote. So A got one vote and said "Yes" and B got one vote and said "No". The trustee would vote 500 "yes" and 700 "no". The reality is I have never seen an ESOP that doesn't in effect allow the participants vote the shares in their account. Some allow fractional shares to vote and other only allow people to vote their whole shares but I have never seen just 1 vote person.