ESOP Guy

Follow up comment regarding 411(d)(6). I have had conversations with ERISA lawyers regarding the following situatuion. (This might be relveant to this conversation) There was a plan that had 3 year installments. It needed to change to 5 year installments because it was having what they thought were short term cash flow problems. The lawyer had no problem with the amendment changing the plan for people who hadn't terminated. But for the people who had already started the 3 year intallments he would not let those change to 5 year installments. The company could only apply the 5 years to people who terminated and started payments after the amendment was in place.

As a general rule amending a plan to change forms of distributions can have problems with the anti-cut back rules. ESOPs have this broadly written exception in the law that the IRS narrows in the regs. See See 411(d)(6) http://www.law.cornell.edu/uscode/text/26/411 which says: © Special rule for ESOPS For purposes of this paragraph, any— (i) tax credit employee stock ownership plan (as defined in section 409 (a)), or (ii) employee stock ownership plan (as defined in section 4975 (e)(7)),shall not be treated as failing to meet the requirements of this paragraph merely because it modifies distribution options in a nondiscriminatory manner. I can't stress enough you have to study the related regulations. The way congress wrote this seems very open ended. The regulations seem to narrow this down. Here is the reg link (search for the word ESOP) http://www.law.cornell.edu/cfr/text/26/1.411%28d%29-4 I didn't mention it before because I have my doubts this will help because this allows you to amend a plan's distirubtion section of the plan document. In your case I am hard pressed to see how one amends the plan document to say they can ignore the forms. But I am happy to be told I am wrong. At this point you have me curious enough that when you come to a resolution please give us an update.

I don't disagree that the plan may have allowed them at one point to delay the payment for up to 5 years. I just don't think the plan document is relevant to this situation. They gave him forms that talked about making a payment as soon as practical and so forth. To me that means the plan administrator made a decision to not delay it. The company's positon makes no sense. We gave you forms to elect a payment as soon as practical but that means when we have enough money in the next five years. If this person goes to the DOL I think the DOL simply isn't going to buy the company's positon. Can I quote law or part of the document? No. The reality is if the company wanted to delay it should not have put the forms out and it should have had its policy and document be clear on that issue of the delay. You keep asking the same question and I just don't see how the answer is going to change. I think the company needs a good lawyer at this point. I realize if they can't pay this guy they don't think they can afford a lawyer but to have the DOL come knocking on their door will get expensive quickly.

I think it is No Yes

Without seeing all the documents including the distribution policy and the plan document it seems like the most likely answer is "as soon as administrativerly feasible". Not trying to be rude here but given the date of the first question if this guy hasn't benn paid that would seem problematic. If you don't mind me asking what is the real issue here? Is it the company doesn't have the money to pay or is it something about this guy that makes them not want to pay? (Belgarath kind of beat me to this last question but I thought I would ask it otherwise becuase there really does seem like we aren't seeing the real issue here. And if it is shared maybe ideas to help solve the real issue can bre made.)

I agree with Lous before you take the money and pay your bills get good advise. But if you look at the distribution forms most allow you to waive the 30 days. The 30 days was suppose to protect you not delay you.

To answer your question they can not file on time a correct 5500. You can try to file and put a pdf note in the auditors attachment place on the efile. I hear that buys you some time but that is still an incomplete return.

I have an ESOP where the families that used to own the stock sold 100% of it to the ESOP. During the sale they took back enough warrants that if they exercised them they all would be >5% owners. I have looked at the HCE definistion and as long as the warrants don't have voting rights it would seem like these people are not HCEs by ownership. I am having a brain breakdown. Do people agree or disagree?

Wouldn't this be a document question? Shouldn't the document tell you the order of the earnings allocation? Seems like most would be BB-dist but it could be different,. Even if this is a PT I don't see why you wouldn't follow the document for allocating earnings.

It is a 5500 issue because you have to mark box 10(b) if it is a PT.

If they deducted the Sept 2013 payment in 2012 why wouldn't you allocate that part of the release at 12/31/2012? Check the document but that seems like the most likely thing it is going to say.

As a former IRS agent allow me to make this suggestion. Have you tried talking to the auditor about the situation and the practical issues you face? You might find they are open to some simplifing assumptions- like you compute each of the account's ROI by quarter or year and apply that rate to all the late deposits for that period. Most auditors are still people and are mostly interested in being fair to the participant but understand how to be reasonable about it.

Why not just change the last day from 10/31 to 9/30? It seems to meet all the client's goals.

You have no legal recourse. The limits are the law. The only thing I can think of to add to the savings if you have a HSA it has a catch up provision so you could max that out also. I beleive the IRA has a $1,000 catch up also. I would always suggest putting in the max 401(k). If you get a refund so be it that way you know at least you have put the max in. If it turns out you stop and you could have put in more you can't go back and fix that.

Yes! You owe a 15% excise tax on the value of the advise given during the record period. However, if you can show that the advice qualifies for one of the 15 narrowly defined class exemptions you may not owe any excise tax. However, you can only know if you qualify for one of the exemptions by first filing for an advice Determination letter with the IRS. They will get back to you as soon as they issue the needed guidance on what "de minimis" means in regards to a 414(s) test. Until then as long as you make good faith attempts to comply to with the comment rules you have will have a chance to amend any previous advice given. Hope that helped.

I would say there is no point to having those choice 99.99% of the time in a PSP for the reasons you outlined.

Yeah if it weren't for those darn clients one could get so much work done. If only we didn't need them to pay the bills.

The owner has to make the plan whole by putting money back into the plan-- end of story. Given the size of the error I am not sure this can be self corrected or if it needs a VCP. But at risk of restating the obvious get the money back into the plan ASAP. This is the type of facts the DOL lives to drop the hammer on someone in my opinion. The reality is if one of the participants goes the DOL the owner doesn't have a good defense.

Thge first thing that comes to mind is if this person is <59.5 point out the cost of the 10% early withdrawal tax. The second thing that came to my mind is why does the employer care if this perosn does this? It isn't like a loan refi that creates all kinds of paperwork.

Except that statement, correct? I think it still works just a little more complex. The prior year method is you take the prior NHCE average and use it to measure the current HCE average. How do you know you have the right prior number? You ran the ADP test in the prior year. In that prior year you had to know the HCE average for that year's test. So in that year I compared ADP test to the covearage test. Yes, such person isn't on the next year's 410(b). But even in the prior year method you still run the test the same way as the current year method. You merely split the averages to different years. So I will grant you have a minor point but I think I stand by my idea that to get good averages for any given year that is a valid check. When you use those averages is another question. And yes it seems like every rule has an exception- except this rule. (And Spock always lies for Star Trek geeks)

It has been a few years but I beleive that one of the ways I used to check myself when I did 401(k) testing was this: In order to be on an ADP test you had be able to defer or actually defer. For the 401(k) source anyone who could defer or did defer benefited under the plan for 410(b) testing. So anyone on the ADP test was someone who benefited under the 401(k) source for 410(b). So if the 410(b) test is the ratio of: Benefited/total testable population Then the numberator of the 410(b) test should = the number of people on the ADP test. As I started to review other's work I was always shocked at how big of a gap that I would find at times and upon additonal review it seems like I always found an error in the other person's work. Maybe I just explained the obvious to people who read this board but like I said this was one of those things I used to find my mistakes and other's mistakes when I reviewed other people's work. And if someone wants to tell my I am all wrong I could live with that reality also.

I don't see how you can exclude Keys from the T.H. test just because they are excluded from contributions.

Have you thought about having the other emplolyees helping you purchase the firm? Maybe they are willing to help put money down? Have you thought about using an ESOP to structure the purcahse? There could be benefits to both the seller and buyer. I wouild add most purchases I see are asset purchases. If you purchase the stock you are buying all future liabilities of the old firm. In that regard the need to engae an attorney is important.

Not trying to point out the obvious but just in case.... If the plan had been a small plan in previous years don't forget the 80/120 rule. If they are right at 100 they might not still need an audit. Edit: I guess I didn't read the orginal question very well. He does say it has been a large plan for filing for years.

Thanks