ESOP Guy

Caryn22359: Might want to seek the help of a company that specializes in helping you run your plans. It might be possible to terminated the Money Purchase Plan and transfer all the assets (including the insurance) into a PS plan. Since a profit sharing plan can also be a 401(k) plan they could help you add the 401(k) provision to that plan. This would minimize the number of plans, Form 5500s and so forth. What I just described however has alot of techinical stuff associated with it that needs to be done right and I am skipping alot to keep it short. I could be wrong but it sounds like if you spent some time with a firm that specializes in helping companies run qualified plans they could help you meet your objectives better then you currently are do so. It risk of getting some of the investment guys who read this stuff riled up if you have been getting your advise mostly from a brokerage house or investment advisor it might be worth the money to get the specialized advice.

If it were me I would move on. I have never seen anyone who has gotten in trouble for failing to withhold. I suppose there could be a first time. But my impression is the IRS figures if they get the 1099-R they are going to get their money in withholdings or on April 15th.

Cost can be an issue if you have the really small plans (ie <10 lives). Although as you say they can be the biggest messes. For most it was built in to their annual fee. We tried to get them to send authorize the firms to send the statements directly to us. This allow people to work on the accounting as things were slow. Back when i worked the really small clients Nov and Dec seemed like really slow months. I was typically looking for work so I did the first 10 months of the accounting for my 12/31 plans. It was easier per say doing it ourselves (and I don't mean this in a bad way) everyone I worked for thought this was the only way we could turn out the right product. I have never owned my own firm but have been in management positions were I had some responsibilty for billing/realization numbers and I get trying to control labor time. I just think if you aren't finding a way to know the reconcilations are right more times then not you are setting the client up for problems. What we are talking about is part of the reason I went to work for a comapny that wouild let me work on 500+ life plans. I used to do the quarterly balance forward 401(k) plan for a not for profit hospital that had over 5000 employees. There accounting was simplier then a one man doctors office plans I have worked on in my time.

No I am not reassured. Although my thinking is a little more then that. I have been around long enough to have seen that for many people once you put a number on paper it becomes reality to them. I have sent MP Plan distribution forms with estimated annuity payments and when the person asked the client to go price an annuity and it comes in even different by $20/mo they blow up and start to demand why it isn't as large as what was on the form. (They never ask when the actual number is larger of course.) Even if they don't sue the issue is still very time consuming. Now imagine if the number of annuity estimates go from rare to common. Even if no one gets sued I can imagine lots of conversations on why estimates made just back in 2007 aren't coming true now in 2013. They have the projection in writing you know! Then if enough noise is made like I said there will have to be rules about these projections to protect people from making their life plans off of them.

This is why I don't plug unrealized. All I do is balance forward- mostly because I now do just ESOPs but even when I did 4k and PS plans they were balance forward. I once very early in my career I got stuck on a reconcilation and my boss couldn't find it either. So we "just plugged it". We sent the reports out. Within 24 hours we had a mad client asking why we understated his contribution by almost $24k. I have for a little over 20 years since then reconciled the cash for every account. I have a larger sense of materality then "to the penny". If a client puts his foot down and says they are doing the accounting it is well documented they are taking the responsibility for the numbers. The reality is the client should be able to send you copies (or have the borker/bank) send you copies of all statements. For other investments like limited partnerships where they might send the partners cash it is still going to hit the banks accounts. Likewise, if they are buying real estate or limited partnerships the money is going to start from a bank account. So it would seem like you should always be able to reconcile cash. I like Bird have found money transfered out of accounts to unrelated accounts for my clients over the years. In fact I once found a transfer for one of my clients that had money transfered to another client of mine. They used the same bank and had the same banker. He knew I was the TPA for both clients. The banker just got confused which client of mine was which when he made the transfer. Since I got the bank statements at the same time I reconciled them the same day. When I got done with the first one I had an odd transfer. So I put it aside and did the next account and it had an odd transfer for the same amount just sign opposite.

I keep thinking after they make us do these projections they are then going to write rules to help "protect" people who planned their life around these projections and now they aren't coming true.

I too think the "control issue" is the bigger issue. As Bird points out how did this reduction in assets not get noted while preparing the Form 5500? How did this reduction in assets not get noted for a T.H. test? In short I would have thought a reconcilation of the plan assets would have to happen at least once per year. Just to be clear not trying to be mean or harsh but I think the 1099-R issue which appears to be minor isn't where I would point my focus on at this time.

I am far from an expert on auto enroll plans but don't they allow you to opt out of auto enroll and then choose anything? Or put another way you would opt out and then pick a 1% rate. As described this seems to say you HAVE to go from 0 to 3% and you can NEVER do 1% or 2%. That seems to be a big difference if I have it correct.

Start by talking with the company that helped you set up the 401(k) plan. They should have a package of forms for your use. You will want to make sure your plan allows this also. Just because it is legal it has to be allowed in your plan document. Once again talking to the people that helped you set up the plan and the documents would be a good place to start. I obviously don't know why you want to do this but I would get some advice before doing this. There might be issues you are not thinking of that might be important. For example, as a rule money in a 401(k) plan is more secure from your creditors then money in an IRA in case of bankruptcy.

Oh the jokes that come to my mind in a discussion thread with the term "mini-med" and a guy with Austin Powers as his Avatar!!!

For one thing the loan is its own collateral in my mind. If the person didn't pay a cent on the loan and simply defaulted what would a plan do? It would reduce the person's account balance by the value of the loan. It wouldn't take the the cash in his account and pay the loan? Who would it make the payment to with the cash? Also, the regulations are clear you only have to meet the 50% rule on the day the loan is taken. I believe Sal's book has a good discussion of this.

Does anyone know if there is more up to date guidence on this issue? Since 2008 we are getting more and more ESOPs whose employer stock has slumped enough to cause it to be less then 50% of the total assets. It would seem odd to punish an ESOP for having a good amount of cash but it seems like it is a risk. The real issue is if like in Becky's example even short term swings are the problem. After all if you thought this was a long term problem one could either contribute stock or use the cash in the plan to pay distributions and recycle the shares. That ought to move the cash to company stock ratio back to where it needs to be after a few years.

Not only do I agree with the above but based on my understanding if this person took their 401(k) statement to the IRA and said pay my RMD they would look at them funny and say "no". They might give him a withdrawal as it is an IRA but not an RMD. The IRA would compute the RMD on the IRA's balance as of the prior 12/31 which assuming this IRA did not exist before the rollover would be zero. Thus, the IRA does not owe a RMD in the IRA company's mind.

Every firm I have every worked for kept the records for at least 6 years. My understanding was it was more defensive then anything else. We wanted to be able to document what we did or didn't do in case questions came up. To me saying all the records is gone is going to be a poor defense if a DOL or IRS audit blows up for the years your firm worked on the plan. Although most of the people I worked with would have said they thought there was a professional duty to keep some reocrds also. I would add after a few months after the work moved to the new TPA we never were shy about charging full time and expenses to go dig out a record. So if a former client needed a copy of some old report they paid the cost of getting it pulled from storage and the time it took to have some one copy and mail it. It depended on the client but there were even some we got the money up front from them.

Not 100% sure but does a 3 month wait followed by monthly payments blow the level amortization rule?

My first job out of college was with the IRS. I reviwed mostly Sch C tax returns during my time. We had people working there that took hardlines like you and MoJo describe back then also. At some point you are entitled to ask to get a supervisor involved. Also, while I don't have any experience with the qualified plan appeals officers but on the income tax side most of those people saw there job as to find a resolution that was consistant with the law but reasonable. They were always more open to some kind of negotiation. I guess what I am saying there are ways to get in front of other people where you might be able to make a reasonable case and they are more open to it if the current reviewer isn't.

Maine: I have done what you are suggesting. I have woked on ESOPs where we put cash into the plan in year 1. In year 2 100% of that cash was used to make the loan payment. We allocated the shares released when we did that on the ratio of the cash in people's accounts from year 1. If there was a contribution in year 2 that also helped pay for the loan we obviously allocated those shares based on the ratio of the contributon. I can't quote you any regs/rules on the topic. I was always working very closely with the plan's attorney and CPA. To me that is just the way to go when you are pushing the limits like that. Get everyone on the same page as they say. Also, I have never had the time gap be as large as your example. It was always we made a contribution in 2012 for 2011 and the payment was made in 2012. At risk of repeating myself given how expensive these errors can become if done wrong I think the client spending some money to make sure their attorney is on board is cheep insurance. It is clearly cheaper then what will have to be paid to the attorney if he has to come in after the fact and clean up the mess.

odd we seems to have had a version of this question the other day. Not sure if it means anything but it did come to my mind I think the discussion in this thread will answer your questions http://benefitslink.com/boards/index.php?/topic/53371-prepayment-of-loan-reg-544975-7b5-limitations/

I think VCP could work and end with the IRS accepting practice as what the document should say in either of those situations-- error through several drafts or more recent. Give in this situation if was just from the last draft it makes the case that the old method was always intended more strong. Lastly, my call for a VCP was just an option. I view some of the other options stated as valid choices. I just mentioned VCP here because I think many people fear the IRS' reaction in a VCP and over the years the times I have been part of a VCP I have found the IRS accepts the propose correction most every time as long as it is reasonable. The down side is cost.

The other thing one could do but might cost more is a VCP filing. My (limited) experience is when a plan has done something that is legal but not in plan document the IRS will often times allow the VCP solution to be simply change the document and move on. This is tends to be true if everyone was really treated the same way. This solution however would be best if one uses a lawyer that has experience with VCPs so there are those costs and the VCP filing costs.

That is interesting. The guy who trained me in this business used to say 99% of all questions can be answered by reading the document.

My guess is they are still participants becasue they still had a balance on 1/1/2012 since the transfer didn't happen until after 1/1/2012. On that day they still had all the legal rights of a participant. Can I point to a rule saying that? No but to me that is how I would do it.

First off if the plan forf the money she was still due the benefit when the plan was termianted. If you read that part of the plan document and the related rules forf the money doesn't change the fact she was due the money. If the employer still existed they would owe her the money. Since the employer doesn't exist she might be out of luck. Although I do agree for such a small amount what is legal/right vs practical is worth thinking about. My guess is she isn't going to lawyer up for $217 either so not sure how much saber rattling is going to happen here.

Was she due the benefit when the plan terminated?

Yesrod5: As a practical matter does it matter much? If the plan in question has turnover you could use the cash in the plan to fund the distributions and use 100% of the allowed contribution to pay/pre-pay the loan. I suppose it could turn out the plan has so much cash at this point that it exceeds the distrbution payments and the deductable limit but that is a less common set of facts. Most ESOPs with loan tend to short on cash not over running with them. Just trying to help think of way to reach what seems to be the objective of paying down the loan with the existing rules. This observation may have been obvious and wasn't trying to explain the obvious.