ESOP Guy

Once again I am confused by your comment. To quote the referenced rule: In the case of a transaction between a plan and a disqualified person, value must be determined as of the date of the transaction. If the ESOP is buying shares from a disqualified person the value "must be determined as of the date of the transaction". The fact set you are describing isn't doing that but using an appraisal that is months old. The only way I seem that I could be wrong is if the seller isn't a disqualified person for some reason. I have been assuming the seller is the plan sponsor based on the question. Let me know if that assumption is wrong. Strangely you can use the prior annual valuation when you are doing the standard put option transaction. That transaction goes like this: Step 1: Distribute the shares to the former employee Step 2: Have sponsor buy shares from former employee per the Put Option. You will note there are no disqualified persons as the plan isn't involved. The whole buy/sell is between the company and one of its shareholders. (Even if they are only a shareholder for 1 second.) So if the two agree to the transaction at the prior annual stock price no problem.

Assuming the IRA the distribution went into had no other funds my understanding is there wouldn't be an RMD in 2014. My understanding is that any RMD paid in 2014 from the IRA would be based on the balance in the IRA at 12/31/2013 and that amount was zero.

It isn't' clear it would be wise to purchase a bunch of stock right before a large leveraged ESOP purchase either. Typically the ESOP loan is a reduction of the company's value so the stock price tend to go down by a large amount when the leverage purchase happens. So the plan could be buying shares it knows will go down in value.

How many months apart are the two events? If it isn't basically the same date I think you have to get a new appraisal. Even if it is 5 or 6 months apart I think you have a problem of knowing you are paying FMV. This comes up in distribution processing. It takes a company until Aug to get the certs out. Now the sponsor want to make payments to people and do it by selling the shares from the trust to the sponsor. Every attorney I know will tell you that you can't use the 12/31 value to know there isn't a PT. You would have to get a new appraisal. I see no reason why this is different. (Note the example above is different then if the shares stay in the trust. At which time you can use the prior 12/31 price. I know odd but that is how the PT rules work. The sponsor is a part in interest so you have to pay FMV. The participant I believe is a class exemption to the PT rules.)

At risk of stating the obvious but if you are going outside the ESOP you will need an apprsial for that transaction which is the most likely reason people don't do it very often.

I am not sure I fully understand the question. Is it this? There is allocated cash in the plan. Can they use that cash to purchase share within the plan? Example: If someone is terminated and needs a distribution can they take the share from the terminated person and give them the FMV cash for those shares-- then make the payment? Yes

I might be biased as all I work with any more are ESOPs but owner might want to look into just making that portion of the plan an ESOP. They seem to have better defined rules regarding how to handle all of this. If not interested in that I think I agree with masteff-- some kind of synthetic equity like SARs, phantom stock linked to company performs might be better.

I think one could raise fiduciary issues of having an investment that can't be sold until a buyer shows up. In ESOPs the sponsor has to be the market maker of last resort. I am not sure that rule applies to 401(k) plans.

It has been a few years but that sounds right. If this bothers you we used to run plenty of balance forward plans with common investments except for the loan. You could see if the plan sponsor is interest in that change with new loans. In that case the person get all their loan interest and you treat loan payments the same as deferrals for earnings allocations. It seemed like we gave the deferrals a 50% weight when computing the basis of the earnings allocation and we gave the loan repayments the same 50% weight.

They bought the stock of the sponsor. That means the sponsors still exists. The sponsor has to deal with their plan. If the plan is disqualified the sponsor has a problem. I admit I am not a lawyer but that is my understanding. It is that simple. The sponsor still exists but has new shareholders. Since plan actions are in the end the sponsors responsibility you know who has to do the work and pay for it. (Except for those costs that the plan can pay.)

You give that advice a lot. Should your client's be worried? Nah. The money is coming from the forfeiture account! Well, as long as it isn't real money just forfeiture money then it is ok.

You give that advice a lot. Should your client's be worried?

To me you have two questions here: 1) Can a QDRO give nothing to the Alt Payee 2) the question about the changing the beneficiary. I am going to stick to just #1 as I am confident I know the answer. Yes, a QDRO can give zero benefits to an Alt Payee. I have seen it happen. You might ask why it would happen. It is simple. in the case I saw the wife wanted the house as the kids were going to live with her and her needs were more in the her and now. The husband was willing to give her the house free and clear in exchange for the retirement benefits. For what it is worth it seems Mojo is right if the idea is merely to change beneficiaries why not just have the wife sign a beneficiary change election form?

I have done what Flyboyjohn suggested exactly once and it worked. The IRS did not apply any penalties. I get the impression that part of the IRS is more interested in getting people to file then raising revenue. However, since I have only done it once I don't know if it is a pattern.

i haven't put tons of thought in it but to use a fee allocation method that would shift a fee from the high balances to the low balances seems unwise. That shift seems is the net effect of what you are proposing. It would seem even less wise if the HCEs are the one's with the high balance accounts as it would reduce their fees and increase the NHCE's fees.

I am sorry what is the question if my answer sort of comes across as being a smart alec answer -- which wasn't the intent? If you are making a match the same size as the forf and they reduce that means the employer puts in zero dollars and you get rid of the forf. I don't see a question any more.

I have seen plans that charge the flat fee on balances over a given number-- say $1,000. So if the flat fee tended to work out to $15/person the highest perecentage of 1.5%. For the rest of the fees either the sponsor paid them. Since the HCEs all had large balances no discrimination issues. I had one client that just spread the remaining fees across everyone so the lower balance people paid something. This did mean that the 1,000 and larger balances were paying two sets of fees. This was a very large plan with large balances so the amount of the 2nd layer tended to not be very material. You could obviously play with these numbers setting the cut off line at $500 or $1,500. I also has one client just do the flat fee thing up to 100% of a person's balance. It was rare a single fee allocation would wipe a person out. But as interest rates dropped the people who were in the money market fund always had a neg earnings because of this policy. We talked and wrote many letters warning this client that was very risky. It also hurt the ADP test as lower paid employees quickly learned they couldn't save money in the plan as the fees were taking too large of a bite from their balances.

Make a match equal to the size of the forfitures.

File the form and pay the excise tax. They will get a bill for a late filing and late payment penalty and interest. If you write a letter to the IRS asking them to waive the penalty and give a good reason and it really is the first time they might waive the penalty. They will never waive the interest. I used to work for the IRS back in the '80s and they are firm that you had use of the money so you owe the interest. I have had pretty good lucky with the penalty waivers but it isn't 100%.

Ok, I was hoping someone had something more useful then me. No I have not seen a definiton of "substantially all". In fact what I have always seen is in effect is "all". That is to say what I see is that the only people allowed to shares outside of the plan was employees. This was often, but not always, the founding family still owned shares and those people worked for the company. What i don't recall seeing ever was a set of bylaws that allowed non-employee members of the founding family (for example) and only employees own shares outside the ESOP. This was done with the claim those few founding family members ownership being small enough to mean "substantially all" shares were restricted.

It would suck more if the employer has a cash flow crisis because it was required to make a match. What hapened here is bad as expectations were raised and people made very reasonable plans based on company communications. I get it and understand the emotions and thinking in this case. On the other hand life does happen and kicking the employer while he is down isn't going to make things better either.

Part of the issue here is how David and I am using the term distributable event and I may be using is it in a sloppy manner. You do have to look to the document as to when you pay a person.

If you have a plan and you think you have a Partial Plan termination I STRONGLY recommend you get some professional assistance. A good ERISA attorney or TPA can help you. These rules are hard and they aren't very clear. That is the reason they are subject to a fair amount of litigation. Also, don't look to plan termination rules to guide you on Partial Plan Terminations. So in order 1) Since a partial plan termination is caused by a large number of people being terminated that is the distributable event for those people. For the people who did not get terminated they don't have a distributiable event. 2) The time period that a partial plan termination can cover can be rather long. It really is a facts and circimstances rule. This is where good advice will help you. There are cases where everyone one laid off over a two year period were ruled as being effected by the partial plan termination. You have to look at things like was the termination voluntary or involuntary. You have to look at things like was there a series of related reductions in force. Each case has to be looked at on a case by case setting. 3) I don't think I have ever seen anyone file for a determination letter for a partial plan termination. I am not even sure it can be done. Sorry if this wasn't as detailed as you were hoping. I really do think you need to find an ERISA attorney or good TPA to look at all the facts. I understand one not wanting to spend money if you have been laying off people as that means the company is not doing well. In this case the money spent will very likely save you time, money and grief down the road. Think of it as cheap insurance.

Money is fungible. If your plan allows forfitures to be used to pay expenses and the employer has historically not done so do it now. Whatever amount of earnings they need to fund they do so. They use the forfitues to pay an equal amount of expenses. You have solved the problem and followed the letter of the law. You may not have that fact set but I thought I would throw it out there.

Regarding #2 if there is a treaty the withholding rate can be less then 30%. In fact it can be less then 20% and I have found some banks reluctant to withhold less then 20% just because that is what they see most of the time. More of a practical issue then a legal issue.