ESOP Guy

If you use a Third Party Administrator (TPA) to help you run the ESOP talk to them. Most of them work with someone as a paying agent. We use Reliance Trust Company (RTC) that will cut the checks/ACHs/Wires, issue 1099-R, forward federal/state withholding. There is a firm called Penchecks that also does this service. Since the checks are written on their accounts it is their problem when a check gets lost. With RTC they are happy if the participant signs a Lost Check Affidavit where they agree to not cash the lost check if found and will reimburse the bank if it does get cashed. I have a few clients that work with Penchecks but haven't gone through their lost check process but they have to have one. In their case I know they don't just work with ESOPs but there are a good number of the 401(k) TPAs around here who point their clients toward that firm. So Penchecks issues a lot of checks every year (so does RTC). You aren't going to find a fact pattern they haven't seen by now. In short I would stop writing the checks and outsource it. The only thing that might stop you is if you are a small ESOP. I have some small ESOPs who write <10 checks/year they find these services a little pricey. But maybe peace of mind of taking these hassles off your plate will be worth it. The vast majority of our ESOP clients outsource this process to a paying agent.

Yup talk to the prosecuting attorney and any plea deal will include using plan assets to pay the company. To be clear the person has to take a distribution and then use the distribution to pay the company. Years ago I had a bank that had this happen. Literally, the bank wrote a check from the ESOP to the person standing in one of their banks. The lady deposited the check into an account set up just for this transaction. She then signed a form allowing the bank to take all the cash.

Logic? Nope. But it is literally written into the law. (1) Members of family (A) In general An individual shall be considered as owning the stock owned, directly or indirectly, by or for— (i) his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and (ii) his children, grandchildren, and parents. https://www.law.cornell.edu/uscode/text/26/318 So you own your grandchildren's stock but going up the family tree it is only the parent's not the grandparent's stock. In fact back when I trained more people I told people to try and remember this by remember this saying: For attribution it is down 2 an up 1 on the family tree. Just a guess a lot of estate planning has old adults moving stock and other assets to their grandchildren if the generation being skipped can afford not to inherit the assets. So they decided to make it so you can't estate plan and make the current oldest living generation suddenly not HCEs. But that is a guess. Congress doesn't really need logic.

This is most likely not true from a tax perspective. There is a tax doctrine known as the 'Constructive Receipt" doctrine. It says once a person has constructive receipt or control of income it is taxable to them. Think of it this way. You send the check to this person in last 2021 and they don't cash it until 2022. When is it taxable to them? It is 2021. You would send a 1099-R in Jan of 2022. This is because the person had control of the check. They can't say it was still a plan assets until 2022 and they shouldn't get a 1099-R until Jan of 2023. They don't get to pick their tax year. It is simply in their hands. It is their income and their asset to do as they wish at this point. Yes, I know there is debate about what happens if a check isn't cashed when a plan terminates are all the assets gone or not. But that is allowing an odd exception to destroy the rule and I don't think the IRS will have any of it. We would recommend refusing to any of our clients with one exception noted next. The only way you could get our firm to recommend to a client to undo a payment would be if somewhere along the way the participant's election was ignored or handled incorrectly so they did not get what they asked for of no fault of their own. You can then make the case the plan has an obligation to make the person whole and the way the should have been if done right. Once again a narrow exception whose basis can be found in the law.

I would disagree here. In a DC plan the forfeitures are going to be used for one of two things: 1) Reallocated as a contribution. Even a reduce plan it could effect the other participants. A lot of companies decide what they want their cost to be. Less forfeitures to reduce means their cost goes up. In a reduce plan it is possible for the forfeitures simply reduce the cost to the employer but it isn't 100%. 2) Pay expenses. Once again less forfeitures and the expenses are going to be paid by the other participants. In short in a DC plan for a source that is subject to vesting, which is always an ER source, less forfeitures can often times harm the other participants.

1) Yes, asking for an over payment is a legal requirement of the plan. They are required to protect all participants and those funds will most likely benefit the other participants in the plan. 2) If the shares are in an IRA there shouldn't be a taxable event. The harder part is you need to make sure you do NOT get a 1099-R for the money being sent back to the plan. I would ask the plan to write a letter to the IRA company to help convince them they need to send the money back to the plan without a 1099-R being issued. This is most likely going to be the hardest part for you. The IRA company will not like sending money out of an IRA without a 1099-R being issues. But this isn't unheard of so they should have a procedure. The question is does the person helping you know what it is? 3) The money in the IRA is not a qualified rollover so it can't stay in the IRA. Hope that helps.

Just asking but can the plan say the DRO isn't a QDRO because it is asking the plan to pay a larger benefit than the person has? I mean the federal taxes is mandatory after all. So by not making a provision with the mandatory 20% withholding they are asking the plan to pay in excess of what the benefit actually is. Once again, I am asking not saying this position is correct. Otherwise, I would think Peter is got the answer. This person has to figure out how to account for the taxes outside the plan and distribution. A big of enough payment that could really hurt. If that is the case, they need to get a good CPA to help them to make a plan. The IRS is more willing to accept installments the last few years than they used to many years ago. A CPA should be able to guide the person through that process.

Yes, the RMD is always based on the prior 12/31 balance. The asset going down problem is why congress keeps waiving RMD requirements during times of sharp market down turns. The last time was 2020. I am doing this from memory but if the actual balance is below the RMD amount because of loss to the plan, and not a payment, there is a regulation that says you just take 100% of the balance. It has been a VERY long time since I had to look that up but it once happened to a client of mine.

The family rules for 409(p) are way broader than normal family rules. Take your quote a lineal descendant of a brother/sister means nieces and nephews are caught up in that kind of definition.

And get the amendment done going forward. I think you are mostly stuck. This is a problem that tends to happen because ESOPs tend to be written by one attorney and the 4k by another. They don't always play well together. I would recommend going forward when you get a new ESOP client to see if you can get this figured out as part of the conversion process to get things sync. It makes you look good to the new client for one thing. Also make sure you did all you can do to minimize the 415 failure. Things like if the ESOP is leveraged and the plan allows did you use the lower of the loan payment or the FMV of the shares released?

I am getting pretty rusty on 4k plans as I haven't worked on one since 2012.... But do you have missed deferrals strikes me as a better question? If the plan was adopted and people entered the plan they should have been given the ability to defer and it sounds like they haven't been give any such election. Or am I not understanding something?

I 2nd this. We do it for any client that is small or even kind of close to failing this test. This fact pattern is a set up to fail at some point in the future without good planning and even then it might still do it.

They can do all of this. They can distribute the shares and have the company repurchase them. They can in effect put in dividends/S corp earnings distributions. The hard part with a plan with small with both of those ideas is making sure you don't run into 409(p) testing issues. Remember 409(p) testing is an every day of the year test. You have to pass this test every day of the year. So if you distribute shares and months later they contribute some of them back you have to show you passed on the test on the day the shares were distributed and when the new shares were put into the plan. In fact with a plan that small 409(p) tends to be a problem. With only 17 people with balances 409(p) testing has to be a bear with that ESOP. To answer the original question if I understand it correctly "yes" they have a deductability problem. Even though an S Corp ESOP doesn't deduct they have to stay under that limit and not deducting the contribution does NOT solve the issue has been my understanding. So I believe they owe the excise tax on the excess contribution. We never allow your clients go over that limit if they are asking us how much they can put in based on that understanding at the firm I am working at.

Most of your questions seem like general legal questions but the price question. Why would the price be zero vs the appraised value?

Some of it is the people who decide these things aren't the same people who have to live with those provisions. With the clients I work with it is often times a CEO, attorney and maybe some kind of consultant helping set up an ESOP. They don't ask HR or the TPA they are thinking of hiring for their thoughts. So the consultant or lawyer says this provision makes sense for this or that reason and it is legal. The CEO thinks that makes sense. So you end up with a staffing firm that hires hundreds of people a year with a 60 day eligibility you enter on the day those 60 days are up with compensation from entry provision. When I sent a list, that took a long time to create, to HR asking for over 200 people's comp from date of entry which was a different day of the year the head of HR demanded the plan be amended. The CEO looked at how many man hours getting the data was going to take, HR was saying they were going to have to hire some of their own temps to do the work, he agreed to amend the plan. What is legal and smart are often times very different in this business. I feel what you are talking about is what I am saying.

It is the volatile market problem. I used to do nothing but pooled balance forward plans. Back in 2008 we had a hospital that had to amend their plan that allowed for in-service distributions based on the last annual valuation. A doctor figured out in Oct 2008 he could get his Dec 2007 balance by asking for an in service distribution. He told his fellow doctors and started a run on the bank. It was going to stick the people who didn't take a payment in 2008 with all of the 2008 losses. That is not a good/fair way to run a plan. The plan was changed to you can get 70% of the last valuation balance with a true up after the next valuation. They even hired us to do quarterly valuation updates.

This is the answer to the, "what is the harm" question.

I get the recordkeeper tends to want the TPA to "approve" the payment in the sense you think it is complete and accurate.... I would stay out of the approving business in the sense making the go/no go decision. As others have said get someone at the plan sponsor to put in writing to pay or not pay these people. If they can't or won't do that maybe they will final solve the issue of no trustee that is an employee. I am pretty sure my bosses would back me if I told them I am not going on the recordkeeper's website and saying pay these people without written direction from the plan sponsor.

You can use Reliance Trust Company to do it all. If the client really wants to write the checks they should talk to the bank they deposit their payroll withholding or just their bank if they outsource payroll. At this point I think just about everyone is required to electronically pay withholding. That however requires someone to do things like the Form 945, 1099-R with the 1096......

As I understand it once it gets to the IRA it does. That first RMD from the plan doesn't.

Yes, that is how we do it. So someone is saying they need to make their termination date 1/1 to get an allocation under a last day rule it sounds like. If they got comp and hours for 12/31 I don't see how you don't say they weren't employed on 12/31. What were they being paid for if they weren't working that day????

I am not sure I fully understand the question. Is the question: Since he terminated on 12/31 he wasn't active on 12/31 and if he had wanted to be active on 12/31 they should have quit as of the following 1/1 or is it a different question?

Just to be clear this is a DRO and it was a court that approved it? I ask because I see on a regular basis state departments of family services make claims they are the legal right to get plans to pay child support and they make it look a lot like a DRO. Read very carefully it can be found they are not a DRO and in fact if one thinks about the language used is is actually kind of vague on the actual authority the state is claiming they have. This is always about child support. So any more my radar goes off when I hear child support and dispute.

Yeah, I have never found good guidance on how to test this if it was decided it had to be tested. I know way back we basically did a very binary 1/0 test. If the person was getting the better benefit they got a 1. If they got the lessor benefit they got a 0. We averaged the HCEs and the NHCEs and it was within 70%. I know that is the coverage ratio test but we had something that showed the HCEs were well represented in both groups.

The prior thread with a spreadsheet that computes the amount. I assume you would still need to update the monthly interest rate that is based on one of the US Treasury bill/bonds. We have put numbers in this spreadsheet and what is coming off our software and get the same results.