ESOP Guy

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.

I live in St. Louis but didn't grow up here. After almost 17 years here I still can't relate to the whole "what high school did you go to?" thing. I remeber once a company I worked for sent around a bio of the new regional head. This guy was almost 60 years old had a long a sucessful career. Towards the bottom it listed attended Country Day High School. I will never get it. That tells you more about his parents then it would about him. I guess I will never go native.

I am currently working on an ESOP that some how ended up with a large number of very small balances. The sum of our fee and the banks fee exceeds many of these account balances. We are forfiting the balances. I have a hard time with the idea of collecting a fee for a distribution we never processed.

R. Butler: 1) Yes I would treat it as a gain 2) I don't think anyone can point to a rule that covers this. I think the method you use to allocate the gain needs to be reasonable and non-discriminitory. Every plan document has a section in it that give the administrator the ability to operate the plan in a reasonable and non-discriminitory manner when the plan document is silent and/or ambiguious regarding a fact set. So my guess allocating it as an accrued income for 2012 or as cash income in 2013 meets that criteria. The only thing I would look at is who would it effect? Is there an HCE who quit in 2012 that wouldn't share if you accrued it? If so, I would double check on the idea accruing it isn't discrimintory. But if the population who is going to share is most likely similiar either way my guess it is safe either way.

First I think they need to decide do they want a pooled account or participant directed account plan. This mix and match style is going to keep causing these kinds of problems in my mind. Most plan documents have a provision in them that gives the Plan Administrator the ability to make reasonable, non-discriminatory decisions on how the plan is run when the document is unclear or silent on the issue. So I think the administrator can decide what they like as long as it is reasonable and non-discriminatory. For what it is worth I think paying this person or reallocating across all remaining accounts would be reasonable and most likely non-discriminatory. I would advise documenting the decision as you have set a precedent and I would follow it in the future. Lastly, I would figure out now how to handle the loss because it will happen.

They can fund the 2011 contribution. The part you need to watch is 415. It has been a few years since I last had this happen. If I recall correctly (and I am rather sure I am recalling this correctly) these will be annual additons in the year of funding and not 2011. You will want to review the 415 regulations carefully. What can make this really hard then is if one of the people doesn't have any comp in the year of funding then 100% of comp 415 limit is zero. That is what I remember was the problem the last time I saw this. It wasn't just 3 people but a company of 40 some odd people and a few had quit so we couldn't give them their match because of the 415 limit. The must is a harder question in my mind. I have opinions on this but can't point to any rule to back my opinion.

If this retirement home is going to be your primary residence you may want to ask about a hardship distribution. You may qualify if your plan allows them. Just explain your situation to the people at your company and ask them if there are any solutions that allow you to get your money before you leave employment.

I was thinking the whole thing can be sent to an IRA any more but I am doing this from memory. (I am assuming by after-tax you do NOT mean Roth 401(k) but old fashion after-tax) The best place to look for your answer in my opinion is the IRS safe harbor distribution notice you are suppose to give to everyone getting a distriubtion form. A little wordy but in 7-8 pages it answers the most common questions about taxes, distribuitons and rollovers. I believe you will find your question covered.

I beleive you have it right. I must admit I have never seen a 409(p) failure. Everyone just agrees failure isn't an option because it costs too much. Although I have a much higher view of S Corp ESOPs, but then again I make my living working with them so I could be accused of being biased. In the end I have seen the extra cash flow from not having to pay taxes at the corporate level really benefit the employees many times. In fact there are times I think to myself I really need to find a way to get hired by one of these companies they are making their employees very rich.

If I understand the question correctly what is happening is as follows: 1) the participant's accounts are being credited with cash from a contribution per the terms of the document 2) The cash is being taken from their accounts and shares are being put into their accounts-- it is being done via a purchase transaction it sounds like-- to effect for the loan payment that happened in the plan 3) the shares are then being valued at the correct price If that is what is happening that is fine. The net effect is the shares are being released and allocated on the same ratio as the contribution. My guess they are doing it that way to get the 415 test done correctly by allocating the loan payments as contributions on their system. If the document does not allow you to use the FMV of the shares release you woud in fact have to at least know how much contribution is going into everyone's accounts for the 415 test. This all assume my points above accurately describe what you were seeing. If I don't understand the facts correctly obviously my answer could be wrong.