ESOP Guy

If I recall in the last post you said you were going to ask TAG. Did they not have an answer or is my memory faulty?

Here is my thinking in the form of an extreme example to make my point obvious. What would the IRS or DOL's reaction be if 100% of the HCEs took out $50k loans to purchase a house and 100% of the NHCE's took out $30k loans but had just the legal limits been put in the plan could have taken out $50k loan paid back over 5 years? I can imagine having an uncomfortable conversation about discrimination. Ok, my fact set is rather fake in how often will 100% of either group be able to do what I said. But how would you know if you didn't restrict people's ability to take out a max loan isn't discriminatory without reviewing at least the loans taken out every year and possibly every loan outstanding? I will admit I have never researched this question so I can't say if it is every loan taken out in any given year or every loan outstanding. But taking out a loan and its limits is clearly a benefit/right/feature of the plan subject to the nondiscrimination rules. So to me the debate is over how you test this b/r/f not if you have to test the b/r/f.

Wouldn't they be different features? NHCEs presumably would have same access to residential loans as HCEs. Though I think from an admin stand point I can't see why they would want to add complexity by having different limits. But BG5150 echo's my sentiments on residential loans longer than 5 years from retirement plans. Participant loans are bad enough without potentially offering 30 year participant loans that I've occasionally seen in some plans. I hadn't thought of it in terms of the type of loan being a different feature. How far can your parse that idea? Is allowing a $1k to $2k loan being only 1 year long and a over $2k loan up to 5 years different features or are they both loans? How different do the features have to be to be a new benefit rights and feature? I could see someone just as rationally saying loans is the feature which is the assumption my first comment was based on. But I see your point-- interesting idea.

The problem with this idea is how do you test the benefits, rights and features? If a HCE takes a max residential loan and a NHCE gets limited to $15k how would you detect that to prove it passes the nondiscrimination test? This just strikes me as a testing mess from a practical point of view. You have to figure out every year which loans have been capped and which ones haven't been capped under the new rules and test that reality.

Yesrod5: You are grasping at straws. No plan is going to risk disqualification by not paying an RMD to a former employee who has terminated from their firm on the basis of your argument. Are you prepared to indemnify the previous employer if the IRS disqualifies the prior employer's plan for failure to make the RMD? If not and I was the prior employer I would laugh at your argument and write the person a check for the RMD. If they in turn roll that RMD to an IRA it isn't my problem as a plan administrator/sponsor. As a former IRS agent I would classify any such rollover as not a qualified rollover to an IRA and let the litigation begin. Is this person really willing to risk a 50% excise tax on the RMD amount if you are wrong? I just don't see the risk/reward as being worth it on a practical level even if the RMD is a rather large amount. Your argument that the intent of the law is not to pay a RMD here is an argument only a person trying to rationalize their position would like.

I think he has to take an RMD as he is terminated from the firm that had the plan. Once he rolls it over to a new plan the RMDs could stop but I don't see how you avoid the first RMD.

It has been a long time. I think the answer is "no". If I recall in order to do a rate group test on all plans you have to be able to do the 410(b) testing on all plans. There is part of the 410(b) regulations that say you can't combine an ESOP with other plans-- if I am recalling correctly.

For what it is worth I have used PBI to find lost participants in DC plans and have had liked the results every time.

You really need a lawyer for this. I am doing this from memory but it can only be done if you distribute in the form of stock. The person sells the stock to the company via their put option. The company can give cash and a note to pay the put option. However, this isn't a very practical option. The note has to meet very strict rules. What you will find is that one of the rules is the note has to be secured. These rules pretty much end up saying that in case of the company can't pay or goes bankrupt the person still gets paid. So company has to get a bank to guarantee the note or the note has to have a lien on assets that this person collects 1st if they are sold. So the few times I have had a client look into this they find that if they don't have the money to pay now they can't meet this requirement. IF YOU TRY THIS GET A LAWYER THAT KNOWS ESOPS.

And as far as I am concerned until the checks are issued the money is on the 5500.

Unless you plan running every participant's SSN you have on file against the Social Security's death database I am not sure how you find this out. This one of the reasons I stress with my clients to not allow "lost" participants linger. As soon as you get mail returned start a search for them or their beneficiary. Even in that case if mailed information didn't get returned nothing would have tipped you off.

If the check isn't issued until 2014 I don't see how constructive receipt happens until 2014. The rule of constructive receipt is the person being paid had to have the ability to control the money. If the check doesn't exist in 2013 i don't see how anyone can make the claim they had control of the money.

Wouldn't have been possible to have written so the plan is effective the 1/1 and no one enters until the day the plan was signed in 2/2013? Strictly speaking then isn't there zero employees on the first day of the plan year? I know I have seen the opposite sneak up on plan sponsors. They sign a plan in December making the plan effective 1/1 and allow anyone hired in the first year to enter 1/1 or their hire date in in that year. They now have over 100 people the first year and have to get an audit. Having said that I am not sure that is actionable as all these ideas are rather discretionary. I will be the first one to admit I don't think about this too much. Most of the plans I work with are so far over 100 or 120 at most you would save the first year audit. After that it would be clear you have to get an audit.

I would be careful here. The IRS can if the decide to try and look beyond mere legal form to economic reality. Learned about that while working for the IRS. If the way you get them to drop to below 5% is in a effect a mandated sell-buy where their ownership is really not at risk of not being owned in the future after the year they are not a 5% owner you might have a fight. I guess what I am trying to say is if this person sells their portion of the business but the sale agreement mandates it has to be sold back to the original owner the next year the IRS could try and fight you. The courts have always said that the IRS can claim shame transactions done for no economic purpose other then tax savings can be undone or ignored for tax purposes. Since you don't give the specific facts not saying that is being done here. But one can get too clever in tax planning and trying to out smart the rules. Although as a rule in order for the IRS to win an economic substance argument they have to go to court as your side will keep saying, "we followed the rules to the letter of the law". Some thing to look into. http://www.irs.gov/Businesses/Codification-of-Economic-Substance-Doctrine-and-Related-Penalties

UPS Stopped making left turns and making 3 rights, saving a lot of money and gas: http://www.pressroom.ups.com/Fact+Sheets/Saving+Fuel%3A+UPS+Saves+Fuel+and+Reduces+Emissions+the+%22Right%22+Way+by+Avoiding+Left+Turns Also subject of a Mythbusters episode: http://dsc.discovery.com/tv-shows/mythbusters/videos/right-turn-only-minimyth.htm

If there is a good amount of assets in this plan so the tax implications are large I would not simply terminate this plan and roll the money to an IRA. If the assets are high it would seem like a VCP to get everything corrected would be cheap insurance. I get the impression that if one can show the plan was run in accordance with the law but the document got out of date a VCP can be pretty forgiving. I would consult a VCP expert before you go off and do this but that is my limited experience on the topic. If the asset amount isn't very high and the tax implication are low it might be safer to just take a taxable distribution.

No one did answer the original question! Maybe the person is still looking for the answer.

Am I understanding your position correctly? In your mind this person can't take a hardship because they aren't "in-service" but what can't take a regular distribution because they aren't terminated either? If I understand your position correctly I would want to know what you think this person's status is? I think you need to see how the plan defines "in-service".

Wouldn't putting in writing that they don't think the stock is a good fit for a retirement plan pretty much be putting in writing they aren't doing their job as fiduciaries by allowing an investment in the plan that doesn't belong there? In all seriousness wouldn't that memo become Exhibit A in a stock drop lawsuit by the plaintiff's attorney?

Since it is a church you may not have money to get some specific legal advice but if the money can be found you might want to do so. I don't hold myself out as a VCP expert but I have been part of VCP filing processes for clients (never 403b clients). Since you have a bad document and that seems to require a VCP filing anyway for the missing amendments you might want to just add a different fix for the operational error. You might ask whoever is helping you the VCP (if anyone) to see if they think they can propose making the document conform with the operation. In other words change the document reto to allow the clergy to defer while fixing for the missed amendments. I have found that VCPs tend to be rather flexible and generous with "out of the box" fixes for things that were basically legal but just not all the paperwork was not done right. That might spare your clergy the loss of his tax deferred retirement account and match. But before you do that I would talk to someone who has more experience with VCPs then me. I would also not suggest this if you weren't planning on doing a VCP anyway- or put another way I would do a VCP just to fix the operational error. The cost of adding the fix of the operational error along with the document error shouldn't be that much additional cost. A VCP for the operational error by itself might not be worth it when I think you are correct you could just refund the money to the clergy with earnings. Just spit balling an idea here.

Why can't the plan sponsor just require the people to sell the stock? I mean if they don' think it is an appropriate invesment for the plan then why can't they remove it from the plan? They remove mutual funds that no longer fit the plan all the time. Ok, most of the time they replace it with a new mutual fund they think is better or the same type but you can force participants out of investments in a plan the last time I checked. The fact it is participant directed doesn't change the fact the trustee is the trustee and has powers of the trustee. It also doesn't change the fact they shouldn't allow people to choose an investment that doesn't belong on a plan.

So in these other people's mind how do you get around that if you don't want to defer when you first enter the plan? Do you have to complete a form that says in effect I want a 0% deferral election just to preserve your right to change your mind later in the year? It has been a while since I worked 401(k) plans and I am stunned at these people's position. As for your DOL question I would start first by talking to the powers to be at the plan sponsor and saber rattle that these people come up with a good documentation for their position or the plan sponsor starts looking for new service providers. I would only bring the DOL into this as a very last resort as that will "shine a light" on the whole plan and employer that you might not want to do.

It can be done. I had a client do it once. There are a number of issues that you need to watch out for including many of the ones you mention. Do they have an ERISA attorney helping them set this up? There is at least one law firm I know of that seems to specialize in doing this for people and they help their clients avoid many of the pit falls of this kind of set up. They tend to call their product ESOT instead of ESOP. To answer you questions: 1) It can be either Treasury stock or purchased stock. What market is the stock traded on? Some markets count as valid markets to use to value the stock and other aren't. 2) It seems like most of the fiduciary concerns are around value of the stock. It seems like there are ways around the concern of too much investments in one stock. 3) It isn't clear what the goal is? If it is to allow the employees to share in the growth of the company via share price growth then maybe a non-qualified plan, phantom stock or stock appreciation rights might do the trick. 4) I am not sure there are any special risks to the TPA here. I would look out for Prohibited Transactions between the plan and the sponsor. The classic example for an ESOP that would seem relevant here would be if the stock was apprasied on 12/31/2012 and they now sell stock to or from the plan to/from sponsor the general understanding in the ESOP world is too much time has passed to use the 12/31/2012 price. You would have to get a new price or you have a PT.

How it gets enforced is if you were to file a 12/31/2012 8955 now the IRS wll send you a bill. We had it happen recently. Yes, one solution would seem to be put all the people on a 2013 8955 and file it now. As you see there is no termination date listed on the 8955.

Yeah I can't think of any reason you can't do it that way. Just have to admit I don't recall ever seeing it that way.