ESOP Guy

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.

Remember a short plan year can create an "extra" year of service for vesting and participation for diversification counts. Not tragic but worth taking note of when you do it. You might have a few people diversifying earlier then you thought and vesting a little earlier then you though.

No you ask for it after the notice arrives. I tried once to get ahead of a penalty notice by explaining. It did no good. The notice explains how to ask for a waiver.

Sort of the short answer is for a not for profit where they are no owners it is possible to have no HCEs. I have had it happen before. No one made enough comp as it spend it money on its not for profit purpose and not executive comp.

If you file it today the IRS will send a penalty notice. You can ask for a wavier of the penalty and there is a good chance if you have a record of timely filing forms it will be waived. Moral of this story is when in doubt send the extension. As a rule it doesn't hurt to have an extension filed and not need it but it does hurt to not file it and need it. Don't let 7/20 (for annual plans) pass without an extension. This is one of the few things we can do that cost someone money so be paranoid.

Yes we have been involved with a VCP while a transfer is going on. In fact in several cases the error that was at the heart of the VCP was the reason there was a transfer of service providers. The tension that happens is you need the cooperation of the old provider (TPA) in this case to get all the records needed to make sure a good correction happens and allow for the VCP filing. In one case the prior TPA had to rework 6 years of annual allocation work and the client wanted us to review their work. That can be a little uncomfortable. I see no reason why a transition can't happen. If the old provider doesn't give up the records needed they need to be informed this issue will given over to lawyers to settle. I have never seen it go that far but I have seen reach the point where the prior TPA insisted that everything they send out or received go through their attorney as they feared that large of an EO claim.

For what it is worth I have general tests that pass the rate group test with all the ratios over 70% all the time. It is just a matter of how aggressive your plan wants to be. I had an ESOP once that allocated the non-Elective ER based on this formula: 25% of the contribution was allocated YOS for vesting (for elig employees)/YOS for vesting for everyone in the numarator 75% of the contribution was simple comp/comp formula Every year it pass the rate group test with all the groups being over 70%. What it did was reward long term employees but the rate group test was fairly easy to run.

Last year I filed an extension with the wrong information. We filed in time if we had a good extension. The IRS abated the penalty. They tend to be pretty good at that if you can show a pattern of otherwise filing on time. But like any request for grace you don't know if you will get it until you get the abate letter. So the odds are good if you wait for a penalty letter it will be abated. You just don't know. I think you will get a later because as far as I can tell it is sent by a computer and not a human.

Audit is sounding less expensive for the owner!

Agree with Lou S.

I can't cite anything other then the instructions say you must attach the auditors report. So I think failing to do so means you have not filed a complete Form 5500. Which means I think they could be fined as if they had not filed one until the auditors opinion is filed.

I think they can do that. That is not how I understood the question nor is it how my example reads. Based on follow up comments from the original post I might not understand the question correctly. However, what I read the question as saying is the shares are DISTRIBUTED OUT OF the plan as shares and the $3,000 is used to buy the shares and making them treasury stock. What you are talking about is typical recycling of shares. You allocate the $3,000 to people's accounts based on their share balance in the ESOP. You then use the cash in their account to fund the distributions. You will note the shares are staying in the plan in your example. You will note I mentioned recycling in my first comment as being doable. I think I was thrown off by the use of the word liquidate the shares in the original question. Or maybe I just got it wrong. But I got it in my head when I read that the shares were leaving the ESOP and becoming treasury stock.

The short answer is "yes" there are uses besides paying the loan.

If I am understanding the question correctly the reason you can't find anything that says it is ok is because it isn't ok. You can't do what you are proposing. The plan document should tell you what you do with the S corp distributions. It will be different for the S corp distributions related to the allocated shares vs the unallocated shares. But that money has to be allocated to the participants. It can't be used for the benefit of the plan sponsor. And that is how I understand the question to mean. Here is a simple example of what I think you are saying: The company is going to pay $10,000 of S Corp distributions. The ESOP portion is obviously $3,000. The plan sponsor wants to use that $3,000 to pay the benefits of terminated employees from the ESOP by buying the shares (after the ESOP has made share distributions) and making them treasury stock. If true then wouldn't that slowly but surely mean the owner's share of the ownership is going up and the ESOP's is going down? Assume there are 10,000 shares so the ESOP owns 3,000. And the terminated people get 500 shares of stock distributed to them and the sponsor uses the $3,000 to buy those shares. Now there are 9,500 shares outstanding the the ESOP has 2,500 of them and only owns 26.3% of the shares. In effect the 70% owner wants to use the ESOP's money to increase his/her percentage owned of the company. That can't be done. Now you can allocate the $3,000 per the plan document and recycle the shares within the plan. My guess is the money related to the unallocated share will have to be used to pay the loan per the plan document. The Plan Administrator might have more flexibility to on how the allocated shares money is used. For example that cash might be allowed to pay plan expenses. I guess let me know if you think I don't understand your questions.

If a prototype have you looked in the base document? It should have the provision as it is required.

I have worked with PBI. Good costs and tend to find most people. The thing I like the most about them is when they are done you can get a close out letter from them if you want one. This letter describes the process used for the search. It give you something in writing to support the claim you did your due diligence for a search. http://web.pbinfo.com/