ESOP Guy

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.

I did forget about that! That is embarrassing.

I am feeling neglected. I have never heard of an ESOP Day.

If you end up with 6 month and no hours make sure you have not set the plan up that has to follow the Service Spanning rules. I will leave it up to others if you can have 1,000 hours and 6 months. Like Coleboy1 my memory says long ago it can't be done but of late I thought as long as you have the 1,000 hours in the 12 month fall back it could be done. But I can't cite anything. What I can tell you is if the client has a lot of leave/comeback rehires the Service Spanning rules are a pain. I have a staffing firm client that picked a 6 month elapsed time entry and my land we spend easily 50% of our census time working out all the people Service Spanning applies to.

And while I concede the law has the 50% requirement the whole requirement is senseless in almost all plans. As long as the loan is just a sub-account of the person's total account and not a general asset in a pooled plan (in all my decades of doing balance forward PSP and 4k plans I saw this maybe 3-5 times) the loan is self securing. If the person defaults you don't take the person's other assets to "pay" the loan. You simply write the loan off and 1099-R the person. Simple example: A has $10k in plan. A takes $5k loan. So account now has $5k in cash investment and $5k in loan balance. The next day (I know it can't happen this fast) A defaults on the loan. It isn't like take the $5k in cash assets to pay the loan off leaving the person with a $0 balance. You simply say their balance is $5k which is what the cash investments are worth. The idea you need to secure a plan loan is just plain silly unless you have a balance froward pooled plan where the loans are part of the general investments.

Yes, it makes a difference. In my case the client turned the evidence over to the local prosecutor. So the government had most of the expense as it was a criminal case. The bank employee was looking at jail time. The prosecutor was willing to talk plea deal with a lot less jail time (maybe home arrest even) if part of it was paying the bank back. The plea bargain in a criminal case was the hammer to get the person to sign the money over to the employer.

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?