ESOP Guy

I got lost as to what you mean among all the words you used. That can happen when you work with ESOPs. From today's news, you can't presume too much, I guess. Or maybe we should say, "from today's news, you can't presume too moench, I guess".

I got lost as to what you mean among all the words you used.

My understanding is that the amount in box 12 of the W-2 is merely information. I would have to go back and re-read the code sections about W-2 compensation but I believe it relates to Box 1 and then you add to that if deferrals are added back. http://www.irs.gov/uac/Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage

I have seen SPDs that merely refer to the loan policy.

I tell clients all the time in most documents if the person meets the age/service requirements they have retired under the plan. It isn't about giving the person a gold watch or calling it retirment or in this case what the person does after they leave the employere. In fact if you read Riby's definiton which is common if you fired the person and they were of the right age and service they just retired.

As a rule if the document is silent then all plans have a provision in them that say the Administrator has the authority to reasonably interpret the plan provisions as long as doing so is non-discriminatory and reasonable. I think either date can have a case is made meets those criteria. But to me LOA doesn't mean terminated so the more natural or dictionary meaning of the word employed says a person on a LOA is employed. As such that points towards the 7/1 date,.

Yes it is deductible. As far as I can tell the determination if a contribution is deductible is one set of rules. And none of those rules relate to how the money is used in an ESOP-- ie to fund distributions or make a loan payment. The rules for how the loan payment works is totally independent from the deductions rules and via versa.

To be more clear as I did in the edits above also: (My first version was vague I guess that is the price you pay by writing late at night) The FMV test is this: The shares release because of the loan payment from JUST the allocated share's dividend must be worth more then that dividend. So if the allocated dividend's are $6,000 then compared to the shares release by that $6,000 payment must be worth at least $6,000.

The transaction related to the allocated shares is a dividend payment to the plan. The dividends then pay the loan and release shares. Since it is a dividend those amounts and shares don't count as annual additions like any other dividend for example. On the FMV test I am unsure about your description. The value of the shares released by JUST the dividend from the allocated share must be worth more then the cash value of the dividend. In your example the shares from JUST the dividend from the allocated shares released have to be worth >$6,000 Also just to be clear it helps to think of your example as having 3 parts: 1) Contribution that is used to pay the loan and release shares. 2) Dividends on unallocated shares that are used to release shares (The dollars in both #1 and #2 are allocated on compensation which will result in the shares allocated on comp) 3) Dividends on allocated share that are used to release shares (The dollars are allocated pro rata on share balances) The amounts in #2 and #3 are dividends and are treated as such for testing. So both #2 and #3 are not annual additions for example. The amounts don't count for deduction limit. Hope that helps. Edit to fix typos and make it a little more clear

My first reaction is the 7/1 date but I don't think I could point to anything in black and white. Being on leave isn't a form of termination so I think the person is still employed. Just my opinion like I said.

Taking a distribution that is taxable at your age is a very expensive thing to do. Let me ask you this question. How much are you putting into the 401(k) plan as a percentage? At what level does your employer match? The point I am getting at is it worth it to reduce the amount you are putting into the 401(k) down to the level where you employer stops matching and use that saving to make an extra payment on the loan? For example: Your employer matches 50% of the first 6% of pay. You are currently putting 8% of pay. Reduce your deferral rate to 6% to get the match. And take the 2% of pay to make extra payments on the student loan. This allows you to get the full match which is valuable. It allows you to keep what is in the 401(k) fully invested. The only taxes you pay are the regular income taxes on the 2% you are no longer putting in the 401(k) but at least you aren't paying any excise tax on early withdrawal. You are not at risk if you lose your job of having a 401(k) loan becoming a taxable distributions. Maybe the fact set doesn't fit you but it might be worth to get some advice from a paid professional after they have looked at all of your information and have a better idea of all the facts.

2 in particular if you are close to the audit/ no audit break point. Method 2 is clearly the correct method if you read the instructions. I worked for a place that had almost all large plans and for some we were a little lazy and just brought forward the prior year's numbers but it just didn't matter on the audit/no audit question.

What is a "leave cash outs for unused vacation"? Is this where a person gets cash for unused vacation days when they terminate or do they get cash at the end of the year if they have unused vacation days or something else? If it is one of the two above I have a hard time seeing how it is a bonus which tends to be paid for above average performance either at the individual level or the company level.

I agree with Kevin C. I am thinking having 2 accounts makes the most sense. I bit of a pain but I think in the long run the best answer.

So is your question basically this: A = husband B = wife Both A and B work for Z Corp B is the Alt payee of A. Can you combine the amount from the QDRO with B's regular account? I am thinking that is the question. Am I correct?

I once has a client where the court agreed to a reduced sentence if the person repaid the employer and the only source of money was the ESOP. So the person agreed to a distribution made to the same bank as the employer and then transferred the money to the employer. Then they person got sentenced by the judge. So no they can not just take the account balance. However, if the sponsor's attorney talks to the prosecutor and judge maybe strong incentives can be created to make a deal that is legal.

I think if he has a balance when the resolution to terminate the plan is effective he is 100% vested. This person simply gets a windfall upon the resolution to terminate the plan. However, if the forms came back before that and he is paid before that he isn't 100% vested would be my thinking. The only thing that can make this person 100% vested is if someone can make the case he quit because of the partial termination.

I would ask nicely to speak to this auditor's supervisor. This person needs to be able to answer the question: "why do you believe this is backdated?" to someone like their boss before you agree to anything. I will admit I worked for the IRS in the '80s on the income tax side but we were told we had to agree to a meeting with a supervisor and the taxpayer if it was requested. Assuming that is true that strikes me as a good first step.

Now with more details I agree with masteff and retract the idea there has been an error. I would also say that the OP doesn't describe it correctly. The outstanding loan balance isn't larger then their account balance. For example in this case the husband's loan balance is: $33,000 which is made up of $13k in investments and $20k in loan. That seems to be part of the issue here. The loan is part of their account balance so their loan can't be larger then their account balance. At most it can be 100% of their account balance if they took 100% of their cash as an in-service. In this case the other participants aren't at risk of not being paid.

I haven't worked for the IRS since the '80s and it was on the income tax side. But we were told all the time you had to always agree to allow a meeting with the taxpayer, your supervisor and you if asked. I would start with a friendly request to have a meeting with the auditor and their supervisor to make sure everyone is on the same page in regards to the issues at hand. This will get you a fresh set of eyes and most supervisors have many years of experience in the field and were willing to reign in an auditor that was way off base.

It is legal and normal. And as people said if the market had gone down you would have still gotten the 12/31/2013 balance. The other thing to realize is that is how they treated everyone else. So in past years people got paid out their prior 12/31 balance and your balance got the income/loss on their funds from the 12/31 to payment date. My guess is in the long run it was a wash.

Another issue that comes to mind is this: Since these two took too much cash out of the plan does someone owe the remaining participants lost earnings because there is less cash in the plan that is invested? It would seem like the answer is "yes". You should compute the difference between what the investments made and the interest paid (assuming the interest goes into general earnings and not just back to the people paying it-- ie this is a balance forward plan that treats loans as a general investment). Given how the market has done in the past few years my guess is the investments made a better return then the loans did. I stand by my statement you have an administrative error hear that needs to be corrected. If anyone doubts me on that then ask yourself this questions: If the husband and wife don't pay back the loan how do the rest of the people get their full account balances? Based on the OP there isn't enough cash in the plan to pay everyone what is showing on their participant statements.

How do you take an in-service so your balance is less then the loan? That sounds like an administrative error that needs to be corrected-- ie the plan administrator over paid these people. I guess I am saying I agree with 2 cent.

Assuming he is the only participant and thus the only one who would get a distribution I believe he can take an in-kind distribution. They would have to get the FMV of the stock. They would have to pay taxes on the FMV of the stock. So he would need a source of cash to cover that. If there are employees and they have shares allocated to them that makes it more difficult as he can't just offer the one person the right to an in-kind distribution. Given the amount of dislike the IRS has of ROBS I would run any transaction you do past an ERISA attorney. Never done this in a ROBS situation but I have seen in-kind distributions from PS/401(k) plans.

I think it can be done-- put the asset in an IRA but I would want an attorney look at it because the cost of a PT is high. The other issue is if the farm is income producing has the plan been filing the Unrelated Business Income Tax (UBIT) return? I believe the IRA would have to also file a UBIT tax return. Since they are thinking they could have a farm without paying taxes on the farm income this UBIT will come as a real surprise.