ESOP Guy

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/

I don't even see the benefit of not using the interim valuation other then someone knows the plan has had income and doesn't want to share. The work is done. Once you know the knew value for one person you know it for everyone.

The odd part of all this is while VERY rare a 401(k) could offer an annuity as an optional form of benefits. So this idea the vendor can only handle 401(k) assets makes very little sense. Also, is there anything stopping the plan from taking the MP money from the vendor if someone asks for an annuity and buying an annuity from an insurance company and using that to pay the annuity? It seems like there are options here. Including the finding a new vendor as pointed out by others.

The well-written ones, anyway. What is the answer if the amendment just changes the schedule as of the amendment's effective date and says nothing about former employees or hours on or after or anything? I for one think they are stuck and have to give the wind fall to the terminated person if they just talk about the effective date. If someone is mad look to the person who drafted the amendment. Being careful and drafting it to only include people who worked 1 hour after a given date is vesting amendment writing 101 and I find the sloppy writers learns the hard way only after making the sloppy mistake once.

it really depends on how the amendment was written. A carefully written amendment will say who the change effects. You would like to see some thing like this in the wording, "this vesting schedule applies to anyone who worked 1 hour after xx/xx/xxxx". A poorly written one will just say all participants as of xx/xx/xxxx use the new vesting schedule. If it reads like that the terminated person has a much stronger case. A terminated person with a balance is still a participant and if that was true as of xx/xx/xxxx a simple and literal reading says they are 100% vested now. So read the amendment carefully.

The funds ought to be allocated to the people who suffered the loss. Obviously if those records don't exist that is a problem. (What can't help but wonder why the question is coming up now if the check was received in 2008 not that it changes anything. What is done is done.) Does anyone have copies of the 1099-R for the people paid? That would allow you to establish everyone's balance at the close of the plan. Not a perfect proxy to allocate the $20,000 but better then nothing. I guess have all the plan's fees been paid? (Raise you fees to $20,000 ) If not you could pay fees with it. It sounds like it is a trust asset and it should pay trust expenses or be paid to the participants. Just spit balling ideas here.

I am not a legal expert but here is my take on it On day 1 participant dies so you need to look who is the participant's beneficiary. On day 2 the beneficiary dies but at this point this person is the new participant so you need to look who is this beneficiary Even if the record keeping system hasn't kept up with events it seem to me the Spouse took legal ownership of the benefits for one day. Then the next day they passed and now you have to see who gets the assets from that participant. Maybe there is a lawyer out there that will tell me there is a solid legal reason to see it any other way. However, given the risk I would recommend you don't take a position. To me this is the type of risk a lawyer is paid to take. They make a whole lot more per hour then the typical TPA or internal benefits employee. Part of the reason they are paid more is to express legal opinions for their client that they may have to defend. In short get a lawyer that knows plan law and estate law to opine on this one. That is why lawyers exist.

I think that is the cleaner way to do it.

If the plan reallocates forf I would think about having the employer making plan whole so no one can say the other people in the plan were harmed.

There is a 2009 rev ruling on this topic http://www.irs.gov/pub/irs-drop/rr-09-31.pdf

I am with David, without a QDRO what is the distributable event? This person isn't terminated if they were never an employee. How do you separate the accounts without a QDRO? You just violated the husband's anti-alienation rights-- even if he isn't objecting.