ESOP Guy

So PI and his wife go to get some marriage counseling. She said Pi was irrational and keeps going on forever. (author of joke unknown by me)

Before you get your payment you will get some distribution paper work. One of the items in that package has to be a tax notice. Most everyone uses the IRS approved language. It seems like it is 6 or 7 pages long. That tend to cause people to not read it fully and carefully. It actually does a really good job of explaining your options from a tax perspective. It gives you a good idea which options will cause you to pay taxes and which ones won't. For example if you take the full $40,000 as a cash distribution to yourself. You do have 60 days to put it in an IRA. Here is the difficulty. As GMK said the plan would have to withhold 20% so you will have only recieved a check for $32,000 (maybe less if state taxes are withheld). So you would have to find $8,000 within 60 days to roll all of it over into an IRA in addition to the $32,000 check you recieved. Little traps like that are explained in mostly plain English in that IRS notice. So what I am saying is take some time and read through that notice carefully. That is a large enough sum of money it might not hurt to find a good tax person to give you some solid advice. The few hudred spent up front might be worth it on the long run.

Those rules are under the anti-alienation rules-- assuming like QDROphile said you really mean that the participant's benefits are protected from creditors.

There are a lot of reasons but something is going to happen to the stock. If they aren't distributing to everyone that means someone is buying it. Not that is a bad thing per say. I mean somone coming in and buying the stock most often times mean they offered a really good price for it. I would add even though the stock is owned by the employees via the ESOP the board and the trustees have to do what is in the best interest of the stockholders as stockholders. It is hard to justify not selling the company for a good price because the employees fear what might happen after a sale. Most likely they will tell you what is going on in time. But the reasons are so many one can't really speculate as to the specific reasons.

I don't think the 16 years does it. He had a vested balance when he left company A. So IF he worked for company A again he would be vested when he is rehired. The better question i-- iss company B and company A the same company for purposes of this question. That I can't help you with-- sorry.

I am doing this from memory not recent research. I am a CPA and I once worked for a regional CPA firm that had a TPA business and a rather good size plan audit business. We NEVER did TPA services for a plan that was audited EXCEPT prepare the Form 5500 and 8955-SSA. This firm was sticklers about compliance but more then happy to earn more if it could. My understanding was it was an independence issue is why the two didn't overlap more. Not sure if it was AICPA ethics or DOL rules. But it shouldn't matter either one should stop a CPA firm as an AICPA ethics violation often times is by definition a violation of related state law. I don't know how they can both audit distributions which is part of every plan audit I have seen and help process them.

Most likely the answer is "no" there isn't a good way to get the withholdings back. You might try and saber rattle at the custodian as this doesn't appear to be a valid distribution as there was no distributable event. But my guess is they are going to say they were just following the Plan Administrator's direction. But if they are willing to just cancel the checks and put the whole amount back into the plan and get the taxes back from the IRS seems like the best way. I just don't think the custodian is going to play along. Next best advice would be to find the cash some place else and get an equal amount back into the plan. It isn't clear to me you could roll it to an IRA as this wasn't a valid distributions. They would get the money back in 2015 via a huge refund. Sorry, you have a mess.

I can't seem to find anything on this so maybe there is no limit. We are working on a correction to a plan that goes back to 2005. We are going to file for a VCP on the correction. The question came up about the 5500s. I was thinking you couldn't amend them after 3 years like many of tax returns but I can't find that in writing so I am thinking I am just plain wrong. So I guess the questions is can you amend 5500s that old or are those years closed?

Based on the new information I do NOT think this person should get a PS or match contribution. This person would enter the plan for purposes of the PS and match contribution on 1/1/2014. That is the 1st day of the 1st quarter they met all of the eligibility requirements. This person did not meet the requirement of being 21 and working 12 months during which they also worked 1,000 hours until 12/31/2013 so they enter on 1/1/2014. This ASSUMES that the plan changes from anniversary date to measure the 12 months and 1,000 hours to plan year after the 1st year this person employed. If it doesn't make that change then I don't think we still have enough information to know if the person gets a PS and match contribution.

Although your question is a bit vague. You tell us the eligibility conditions for deferrals and the entry date that appears for deferrals. You don't state any where if the PS and match have the same eligibility requirements or not. Assuming they are the same this person entered in 2010 and is just now meeting the allocation requirements. If the PS and match eligibility requirements are different then the 401(k) portion we need more facts.

I agree with austin they would get an allocation every year. To me the question is like he said "are they really terminated"?

You need to read your document more closely regarding retirement. I don't recall ever seeing a plan that says you get a contribution upon reaching Normal Retirement Date (NRD). It ussually says retire or maybe defines NRD as terminating after reaching Normal Retirement Age (NRA). In short I have never seen a plan give a contribution to someone every year after they reach NRD regardless of hours worked and they haven't terminated. What I have seen is this happen: Person works full-time and enters the plan. As they get older (often times when they are in their 60s) they move to part-time and work less then 1,000 hours. Some time after they have reached NRA (often times defined as 65) they quit and that year they worked less then 1,000 hours. During the years they worked less then 1,000 hours but didn't terminate they do NOT get a contribution. They have not retired per the plan's definition. In that last year they terminated they have retired and get a contribution in that year. Once again I suggest re-reading your plan definitions regarding NRD, NRA and contribution allocations. I have never seen mere age cause one to get contributions but one has to retire which is linked to terminating employment. To some degee just the dictionary definition of the word "retire" has in it the idea of leaving employment. By the way there is ussually a way to make the disability plan provision work. Once again it often times describes how the plan administrator is to determine who is and is not disabled. I know I am not giving a direct answer to your question but I really do think you are trying to solve a problem you don't have.

I think you can do it. You can reclassify for a 415 failure. Edit: http://www.mhco.com/BreakingNews/CatchFAQ_122013.html

Ok I admit not a DB guy so here is my question: Are the errors described here subject to self-correction? I mean not following PPA sounds like the best route is to file a VCP to fix. If so, shouldn't you be going to the IRS to "confess" so what difference does it make?

I think I agree with recline46 you don't have a plan. I must admit I didn't fully understand your answer to the ownership question but the one thing that sounds clear is this: If it is true that none of the shareholders of your company own any of the shares of the company you bought the assets and that company is still the sole sponsor of the 401(k) plan then none of your employees can participate in the 401(k) plan. It would be like an Exxon employee trying to participate in the IBM 401(k) plan. I am not trying to spend your money but you might want to get some legal advice from an attorney that specializes in ERISA issues or might want to find a local TPA firm to help you. For one thing if people want to make an 8% match then someone ought to be finding a solution to make that happen instead of some payroll company telling their client how they ought to do things. After all if they are willing to give people 100% vesting like a Safe Harbor plan demands come up with a way to get most if not everyone the 8% match. There are some pretty clever 401(k) people out there (including people on this board and by the way I am not one of them) who should be able to get you a plan that meets your goals and not your service provider's goals. It also sounds like you could use some help from someone who could spend some time with you making sure they have the correct facts and getting the plan set up correctly. Off soap box now regarding a service provider telling a client how it is going to be done.

One practical suggestion if you haven't done this already. If you have the document as a Word or pdf file search on the word forfeit. I have on a number of occasions not found what I was looking for by reading only to find it when I search on the right word. I am amazed at all the odd placed attorneys find to hide provisions. If you have Adobe Acrobat (not just reader) you can scan the document and then you should be able to: scan a paper document then in Acrobat under Documents OCR text recognition Recognize text using OCR It can take a while that allows you to search a scanned document. If I am explaining things you know and have done sorry not trying to insult your intelligence it is just plan documents are large and I have found this helps me find what I am looking for in plan documents. If there is no section dealing with it I would go back to the attorney who drafted the document and have them solve it. It really is their bad. One possible solution is that all documents give the administrator discretion to interpret the document including where silent in a reasonable nondiscriminatory manner. You would think a reallocation or used to pay expenses would be reasonable and nondiscriminatory.

Can we start by clarifying one thing? The title of the thread you mention an asset acquisition. The company you acquired was via an asset purchase and not a stock purchase, correct? Or put another way someone still owns the other company as they are the shareholder(s) or that company, correct? That company might not have any assets but your firm doesn't own the stock, correct? I ask because if you don't own the stock of the company who is sponsoring the 401(k) plan I am not sure you can even use their 401(k) plan. You might need to set up your own plan if you want everyone to have a 401(k) plan. Can you just give us a little more details on the stock ownership relationship between the two companies?

You use the oldest beneficiary's age not the youngest. It has been years since I have done one but I do recall clearly it is the oldest not youngest. Also, there is no recalculation of age with non-spouse beneficary.

While I agree it is normal I also think it is an abuse of the statute of limitation rules. I get it if they didn't have those amendments in place the plan is still disqualified. But that is true of any restatement. I work with ESOPs that have been around since the early '80s. If the TEFRA/DEFRA/REA (I think I got that alphabet soup right) restatement wasn't done the plan is in theory disqualified. Should they be able to ask for 30 year old plan documents? I guess the reply is people should keep their records forever but that is part of the reason one has statute of limitation rules. Things get old and records become less reliable or lost.

Yes there is a 10% excise tax every year that the non-deductable contribution is in the plan. You can't take it out. So the only way to fix the problem would be to stop contribution in future years until you have deducted it all. Don't do it. http://us-code.laws.com/title-26-internal-revenue-code/subtitle-d-miscellaneous-excise-taxes/chapter-43-qualified-pension-etc-plans/4972 You report and pay the tax on a Form 5330 http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&sqi=2&ved=0CCQQFjAA&url=http%3A%2F%2Fwww.irs.gov%2Fpub%2Firs-pdf%2Ff5330.pdf&ei=NVn0UqD1EYLQyAGr44AI&usg=AFQjCNFFmwtKBwSZLEs_AjkB-Nw7GzfYog&bvm=bv.60799247,d.aWc Edit: I can't think of any reason you would have a cross tested one man plan.

My daughter when she was real young did describe records as "those really big CDs people used to use".

Leaving aside all the other issues around the purchase of the building for a moment and just looking at the plan's facts. If I understand it correctly you are saying a 401(k) plan owns a building. If that is correct I am not aware of any rule that says the plan can't take out a loan on one of its own assets. The anti-alienation/assignment rules apply to paying a debt outside of the plan with someone's plan benefits. Simple example: my bank can't go after my 401(k) funds to pay off my credit card debt. They do not apply to a debt held by the plan secured by an asset in the plan. They do need to be aware that they could generate taxes owed on any income from the debt generated income in the plan. But I don't think there is a blanket rule saying a loan can't be taken out on plan owned real estate.

Just saw other reply: I am assuming here the question means the plan bought the building. If the sponsor took money from the plan to buy a building for the sponsor they need to hire an ERISA attorney to sort out the mess they made. (I would also add you might not want to use these CPAs for any services as they do reckless acts without researching them well.) Before you get to your question have you reviewed the building purchase for a Prohibited Transaction (PT)? You need to look at who they bought the build from. Is the firm renting space in the building? One could go on and on about possible PT issues on the purchase. This by the way is why 401(k) plans shouldn't own these kinds of assets the cash flow issues are a pain. But that ship has sailed I guess. As far as I know they can take a loan out on the property as long as it isn't a PT. The issue a loan brings is that it could mean the plan owes taxes on any income the building generates. Do a search on the terms "debt financed income in qualified plans". They could end up with having to pay UBIT. I think it is IRC 514 but I could be wrong. The other issues a loan brings is can the property generate enough income to pay the loan or will they have to make contributions? If they have to make contributions and what if they can't deduct those contributions? Now they have a penalty for non-deductible contributions. Regardless of a loan or not how do they pay out distributions? They have to value the building to know everyone's account balance. What happens if they have a bunch of people leave and they don't have enough cash to support a loan and distributions? They could once again be forced to make a large contribution. I think they can do it. I just think the are going to find it to be more bother then it was worth.

I believe your understanding is incorrect. Since RMDs are not eligible for a rollover there is not rollover. If you deposit and RMD in an IRA what I have always understood happened is this: You took a taxable RMD and then made a contribution to the IRA. The taxable status of the contribution to the IRA is subject to the IRA contribution rules. The other way to see it is an error has been made that needs to be corrected. But I don't believe you can ever correctly say an RMD has been rolled over to an IRA.

Will adding them put them so they now need an audit? If they are going to get an audit either way or not need an audit either way my deep down opinion is stop over thinking it and do what seems reasonable. I just have never seen an IRS or DOL audit of a 5500 focus on the counts when it is clear an audit isn't at stake. If there is an audit handing on the question then it is tougher. If the excess is going to be refunded I would lean towards not counting them but it might be one of the few times I would get a legal opinion on a 5500 count.