ESOP Guy

This has been true for a while. I have been convinced any plan that wasn't designed to be simple is out of compliance if you look hard enough. Part of why I got into ESOPs was they were more interesting than small 401(k) plans which is how I got into this industry. They have gotten so complex the chances of making an error are huge. And I don't know how some of you folks do small 401(k) plans any more. All the silly notices and disclosures that if you miss a simple deadline can put things out of compliance. The volume of them is beyond sustainability. And they add no value as no one reads or understands them. I am becoming a cynic I think.

It is going to help you retire by aging you prematurely.

There are way too many unanswered questions here in my mind. What kind of plan are we talking about? Was the DRO sent to the plan? Was it accepted by the plan as qualified and thus making it a QDRO? If that happened why didn't the plan separate the funds? What is your relationship to this? Do you work for the plan? Are you the ex-spouse? If you work for the plan does the plan document say anything about this? It might tell you who the Alternate Payee's beneficiary is if they pass before the benefits are paid. I would recommend start by talking to the people in charge of the plan and start getting basic information like this.

Depending on the amounts and if the plan allows forfeitures to pay plan expenses will the cost of filing the back 5500s eat up the funds? That might be a lot easier than finding the people.

I would add a well thought out amendment to the vesting schedule would cover this fact pattern. In the last 5 or so years I have had two clients amend from a 3 year cliff to a 6 year graded schedule. I asked for a change to the amendment before it was signed that makes it clear that we will look to a person original hire date to determine which schedule they will be on if they are rehired. Both of these firms have thousands of employees and they have a lot of rehires. It was decided it would be easiest to track if we looked to original hire date to decide which vesting schedule to use. If the amendment is silent on the topic I would agree with Cusefan that the years of service should apply to the new vesting schedule is the most reasonable way to read things.

This is a classic: What does the plan document say? A question like this is almost always answered by the document. So much so the guy who trained me in this business would throw you out of his office if you asked him this question and you didn't have the document in your hand (started in this business in 1991 so it was all paper) and you couldn't show him what parts of the document you looked at. Since he was 100% vested I think the Rule of Parity needs to be factored in and I think this person will most likely not lose any years of service for vesting. See this conversation.

Have you asked them for their justification of including them? Maybe they have the cite.

Both of the people who answered made it clear the document has to allow a stock distribution. This is qualified plan 101 and it applies to ESOP and other plans- you have to follow the plan document. So if the document requires cash distributions there isn't an NUA possibility.

You can do share distributions of S Corp shares, if the plan allows but most likely prohibits you keeping the shares, and then the shares are bought by the company or plan. You can get NUA treatment at that point. The IRS has ruled this "1 second" ownership of the S Corp shares doesn't blows the S Corp election, creates too many shareholders....... I see it all the time. In fact there are all these rules on how you adjust the cost basis of S Corp stock for the pass through income and how that will effect the NUA calculation. My point being if you have to worry about cost like that it is because you can get NUA treatment if set up right.

The plan document will tell you how the forfeitures will be used.

Most plan documents have a provision saying what to do with lost participant accounts.

If you are the TPA it isn't your job to decide when the DOT is but for the client to do so. I have a number of staffing firm clients and when a person terminates vs just isn't assigned to a client is a constant conversation. But the client decides every time.

You can find prior discussions on this topic if you search the threads. The word "religious" is a good search term.

Another vote for PBI.

I admit I am a DC guy not a DB guy so I normally read this out of curiosity and not say anything. However, I will at least suggest you think about how rehires will be addressed and get that in the amendment. What if a person was hired and left before the date 1/1/23 and only had 2 YOS so wasn't vested in the plan and gets rehired after 1/1/23? I would make it clear how they will be treated in everyone's mind. I work with a number of firms with very high turnover and to keep it simple everyone agreed it was original hire date and that was written in the amendment. Maybe it is obvious in this type of plan how this will work but I am throwing it out there as I have seen this turn into a debate after the fact in DC plans. You can nip this up front if you think it through.

Make sure a beneficiary can name a beneficiary. I just had this come up again recently. For some reason a client's plan says a beneficiary can't name a beneficiary. I don't know why the plan says it but it clearly says it. I have seen this more than once in my time doing this stuff.

I have never seen a transfer like you are talking about happening as shares vs they are sold at one fund on day 1 and the cash is invested on day 2. Nothing they did was unreasonable and is industry norm so I can't imagine a path to legal recourse. But I am a CPA not a lawyer.

Those opinions are at the heart of the debate. I am NOT saying ignore them but here are some of the debates. I will allow the lawyer debate how much authority an advisory opinion has vs the law which seems clear that no action is needed until you have a DRO. Which is the problem. You seem to have a conflict here. It can be noted that these two threads clearly say no one knows of a DRO you facts seem to say they do know. Although this does beg the question of how long to you put thing on hold? I have seen DRO's take years to finally make it to a plan. To me this is where a good QDRO procedure helps. It makes it clear if or when to freeze and tends to say how long if it happens.

What does the plan document say? Does the plan have a QDRO procedure? If so, what does it say? If none of the above questions take you directly to the answer to your question what is the legal justification to say no to a person who is otherwise legally entitled to a distribution? I know I am answering a question with questions but this is the process you need to go through to get to the answer in my mind. If the plan has a document that tells you what to do or if it doesn't I really don't see a legal way to stop the payment. I know there are people who come around this board who disagree with this kind of position. If you search this board you can find many threads were this question is debated.

Check your dates I think you wrote some wrong based on the context. Are the 1st set of dates supposed to be in 2021? I think your plan document ought to be clear on this. It most likely says it switches without any exception so it switches. Double check your document.

No, the problem here is you are getting too hung up on the idea the money is coming back to the plan it came from when thinking about the 1099-R. Where the money is rolled over to is irrelevant to the 1099-R question. If A takes $10k distribution. A gets a check for $8k and $2k is sent to the IRS. If A puts $10k into an IRA within 60 days the the plan prepares a 1099-R that show A got a $10k taxable distribution with $2k in withholding. The plan doesn't care if the money ended up in an IRA in the end. You prepare the 1099-R based on what happened as the money left the plan- period full stop! Assuming A can roll $10k back into the plan and does so the 1099-R still shows a $10k taxable distribution with $2k sent to the IRS. In both cases when the person completes their 1040 they will show the money as rolled into a qualified plan and thus no taxes due. He will get credit for the withholding at that point and his net taxes due or refunded will make him whole. To repeat the 1099-R reflect the transaction as the money leaves the plan AND DOESN'T REFLECT ANYTHING THAT HAPPENS TO THE MONEY BEYOND THAT EVENT.

Look into a one time window for in-service withdrawals for people who have small balances??? It would seem most likely non-discriminatory. If they aren't putting money into the 4k portion they are the type who if given the chance to take the money and run. Obviously not a force out but could get rid of most of the balances by their choice. That is the only idea I can think of doing.

Interesting hobby you have there.

Nope https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-your-business-sponsors-another-qualified-plan It is a waste anyway. The ROBS should allow for 4k deferrals and employer contributions for the "owner" and the employees. There is no need for another plan besides the fact it can't be done.

Has there been any consideration of any possible escrows at the closing of the sale of the company? It isn't uncommon for part of the sales proceeds to be held in escrow pending certain metrics being hit after that sale. So it is very possible the plan will not have 100% of the cash from the sale quickly after the sale. This is mostly an issue of communication as that means there will be a future distribution form the plan. The plan can't be fully terminated until that any such payments are made. This can really slow down the termination of an ESOP. I have had a few make 3 or 4 payments and keep the process going for years. This might be another reason to wait to get the D Letter to start payments. If there is going to be a delay to pay everyone anyway might as well as get the D Letter. Otherwise, I don't find ESOP terminations that different than PSP terminations. Like all things ESOPs they tend to just move slower.