ESOP Guy

At risk of pointing out the obvious but if you force someone out and it is NOT to an IRA and the amount is greater then $200 you have to withhold taxes also.

I am reviewing a KSOP Form 5500. The 401(k) portion of the plan is invested at John Hancock via their platform. The person who prepared the form used J.H. tool to download the Sch D information into F.T. William our 5500 software. It appears all the funds they are invested in are Pooled Separated Accounts (PSA) and need to be reported on a Sch D. When they do that we get the same EIN for all the funds. Here is the odd part the plan number is 000 for all of them. 1) I really am thinking the 3 digit plan number can't be 000 2) I would expect the 3 digit plan number to be different for each fund Those of you who use J.H. for their clients is the EIN with a plan number 000 sound right? If not, do you have any idea what we could be doing wrong to get this resutl? Thanks.

That is what I would do. Report just the people who still need to be reported on the current year's form. Having said that I don't think one can find any specific guidence saying that is acceptable in the government's mind so I guess there is always a risk they could say that is wrong. I just have never seen an 8955-SSA or SSA subject to an audit.

I would point out the Alt Payee would only pay taxes on the QDRO if she doesn't put the money in an IRA. Also, if she takes the money and pays the taxes if I recall correctly (doing this from memory so feel free to correct me) and the Alt Payee is <59.5 there is no 10% tax. It is simple income tax. I would add everything is negotioable. The participant is willing they can adjust the amount fo the QDRO to make the net payment the amount they want. I don't see that as being fair but if both parties agree then who am I to say differently. Lastly, if you think loans cause people to be taxed twice use the search function and read the many threads on it. I simply disagree that they cause people to be taxed twice but I no longer wish to spend energy discussing why any more. The issue should have been put to rest decades ago.

My understanding is if the plan were disqualified that would taint the recieving plan. In fact I have know a good number of ERISA attornies that recommend against mergers just for this reason. I also used to work for a large consulting company that had a good size due diligence practice. For larger employers where merging is the norm they would hire us to review the plan to see if it might have a problem.

You are unclear in your question. Did the plan exist when he first worked for the company? If so, did he have a vested balance when he left?

While this is NOT a correction-- the correction rules allows one to ignore corrections of distributions that are below a dollar amount. Doing this from memory but $75 is what I am thinking the limit is. I would see if the plan's attorney is comfortable using that limit here even if not a correction. Any large amount and I think you have to find the people and pay them.

12AX7 is right- it is the refinancing rules that greatly cut down on that tactic. Back when I worked on 401(k)s more which was before those rules I had clients who had employees refi their loans every year. As far as I could tell the people were going to never pay the loan off until it became a distribution. But those refi rules ended that abuse.

I realize the owner wants control of his money but here is another idea: Let the investment committee decide the investments in the employee plan and write an investment policy for the owner's plan that says it will invest its assets in the same investments at the same ratio. In effect the committee is deciding the investments both plans. Not sure if it is a good or bad idea kind of just throwing out an ideas to help maybe spur other thoughts.

I use a service called PBI for a number of years. It isn't so much that they have access to information that you don't have as much as they can perform a complete search for so much less then you can and document it well. If you go with their full service package it is typically in the $20/person for low volume of searches. The cost goes down per person as the number of lost people goes up. It starts to get pretty cheap if you are looking for hundreds of people. But what you get from them is one of two things: 1) An address they have sent a confirmation letter to and gotten a response to that letter so you have good reason to believe it is a good address 2) A close out letter explaining the steps used to find the person and that search failed. The steps taken meet the DOL's requirement for a complete search. They put out rules regarding that a few years back. The one exception is the DOL put the rules out back when the IRS still did a forwarding program. One assumes the DOL won't hold you to needing a program that doesn't exist. What I like about this is you now have documentation that you did a good search so whatever you do to the balance of the lost person you have solid evidence of the a good search and they are lost. If I did a search like that for a client I would spend more then $20/person. Solid paper trail of the search for the client's records. I have never had a client's ERISA attorney come back to me and say the search wasn't good enough to justify treating the person as lost after a PBI search process. Just to be clear I don't work for PBI and I an not on commission. I just like their process.

I would be practical about it. if she is losing her job anyway just go so you don't have a hassle in getting the money out and so forth. Why lose one's job early maybe give them grounds to fight unemployment benefits so forth? Some times it really is best to "pick your battles" as they say. And this just doesn't sound like a battle worth fighting.

It is the IRA's responsiblity to compute the IRAs RMD. As an aside I would take the position if this is a brand new IRA-- meaning no balance until the rollover-- the IRA does not have an RMD until 2014. After all a 2013 RMD is based on the IRA's balance as of 12/31/2012 which was zero. But I am not the worlds greatest IRA expert it is just how I have always understood it.

Or is there a payable on the 5500 for the distributions? If so, you could make the case the correction is payment of the payable. To answer the orginal question. I have found the IRS accepts reasonable fixes via VCP. If you can show that everything was done and taxes paid except for the payment of the distribution payables they MIGHT accept that.

To me that just points to a flaw in the regs. After all how does the plan know the person won't retire? So on what grounds are you refusing to let them put the money directly into an IRA if they never quit? To me the best answer is to use what you know when the payment is made and not base how you prepare the payment based on future what ifs. If the person retires it seems like there are two possible corrections: Get the money out of the IRA (or maybe count it as some form of contribution to the IRA) or make an RMD payment at that time. I can see objections to either but I don't see how one does the what if thing.

I am doing this off the top of my head but I am not aware of any requirement for one to calculate the RMD for an in service distribution or if some how the person got to be over 70.5 and just reached 10 YOP and got a diversification payment for example. RMDs are linked to being over 70.5 AND terminated not merely paid.

Congress needed money back in the past so they passed a law requiring a 20% withholding on plan distributions. I know what you are thinking but withholding and the final tax due is not the same. Under Federal budget rules withholding is income the day it is collected and if a refund happens it is an expense when it happens. So to speed up withholding created a one time burst of revenue. Such is the Federal Gov't accounting rules. It is found in the Internal Revenue Code forget which section.

I think so-- They have to pay this person a lump sum. I just don't see how you can change the policy for this person after they have signed the forms.

We use leapfile. It is intergrated with Outlook which we use for e-mails. So I just click a button and it send the attachment secure. There is a way to allow the client to send information back via leapfile. Upsides: Easy to use The e-mail comes with the instructions on how to get the data so it is easy for the person getting the file to use Downsides: I don't like the fact that you can only go out and down load the data once. leapfile deletes the data after that. They say that helps keep it secure by not leaving the information in cyberspace. I do however get a client every few months that looks at the data and forgets to save it on their system. So I end up resending the data as it is gone when they go to look at it a 2nd time. Likewise, while I have a sent copy of the e-mail it doesn keep a copy of the attachment. This is a minor objection.

Is it the rates are so low they don't cover a fee? (Sorry if a dumb question but it has been several years since I had anything to do with a daily 401(k) plan)

I find it odd the forfitures are being held in an account that can lose money.

I think you need more facts before one can say for sure but based on the facts given..... If they did not contribute the correct contribution for 8 years as you seem to assume I don't see how you can use any of the self corrections in EPCRS. If they put in zero for all the missing years there is a chance a VCP might accept they had in effect frozen the plan years ago. I say this all the time but I am constantly amazed at what gets accepted through VCP. But I would get a legal opinion from someone who has a good amount of VCP experience before trying it. As much as they would like to put the money into an IRA the cheapest solution might be to terminate the plan take the money and pay taxes on it. After all what you are describing sounds like a disqualified plan. That is my quick thoughts on this one.

The only down side to the plan merge issues is as follows: It is my understanding that if the prior plan was disqualified for some reason and you merge the two plans that taint can merge into the buyers plan. Not sure how huge of a risk that is and my guess is there might be some lawyers who disagree. I just know on a number of situations like that I have seen lawyers advise leave the old plan to terminate and let the people take distributions from that plan. They saw the risk of the unknown as not worth it.

You took the words out of my mouth. My credit union charges as little as 2% over CD rates which on a 2 year CD is still less then 1%. I think you can make a case for something less then prime+ if you read the rules.

I don't know what you mean by "new way", but when I post, it autocorrects and marks words it thinks are spelled wrong. By new way I mean since the format of this site has changed. For example I do not get any indication I have spelled something "worng". It sounds like it must be a setting on my side of things.

Why wouldn't he need an appraisal? Doesn't the 5500 require FMV reporting of the assets? I actually researched this for a PS plan that had ER stock in it. Yes, the 5500 requires a FMV (in the sense it asks for the value of the assets so I assume they want the correct value) but it doesn't require an independent apprasial to get that FMV. Only ESOPs have a legal requirement for an independent apprasial. So if the trustee can make the case they are using a valid method of coming up with the FMV you are fine for the 5500 and the law in many cases. In the case of this employer they had an apprasial done for the intial purchase of the stock. They saw the method the apprasier used, discounted cash flow. The trustees used that method the following years. We got a letter from the IRS because we had checked the box saying the assests were not appraised by an independent apprasier. We explained the method used and the IRS was happy. Having said that I can see other problems. If there ever is a distribution I would not use that method. Failing to pay FMV at times can cause a PT. Not saying I think this is the BEST solution but if one goes into it with your eyes open regarding the risks it can be A solution. On an unrelasted subject does this new way to comment have a spell checker? I don't see it if it doesn.