ESOP Guy

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.

The NCEO had within the last few weeks a one hour webanair about GAAP accounting and ESOPs. If you are an NCEO member you can get the handouts for free. The handouts give examples of the journal entries one would make on the company's side. I think members can listen to the recorded version for free also. They might have publications on GAAP accounting for ESOP companies also. This might give you a starting place but I doubt all your answers. A one hour seminar on a topic this complex is by definition a pretty high overview.

I can live with being told I am wrong.

Doesn't that depend on if it is a publically traded or not? There are plenty of traded REITs whose FMV is very determinable.

Start by going to either an ESOP Association or an NCEO conference. They have large national conferences and regional conferences. The ESOP Association conferences are larger then the NCEO's conferences. Either one will have breakout sessions from basic to advanced topics are presented. I would add if you join the NCEO just about every week in the spring and fall they have one hour webinars that are free to members. It also counts as CPE if you have people that need CPE. Both groups also sell a good number of publications. Those are your best bet to get pointed in the right direction.

Marcu is correct S corp distributions (as S corps don't really have dividends) are not subject to 415 or 404 limits. In fact I have seen plans that from day one it was projected they would need dividends in order to pay the loan off. The orginal question is unclear on this point so a word of warning. I would advice against just putting a bunch of money into an ESOP and then after the fact deciding which is a contribution and which is a dividend. To me the sponsor should declare what it is as the money goes into the plan. I have been to ESOP conferences where the IRS has struck me as hostile to the way ESOP use dividend to put so much money into plans. To decide what the money is after you start testing invites a challenge is was all contribuoins. This obviously takes some planning to estimate how much contribution can go in and how much dividend is needed but declaring up front seems safer to me. Also, at risk of pionting out the obvious contributions and dividend are allocated on a different basis and that creates its own issues in an ESOP.

Maybe this would fall under participant needs to ask for it but there is a promisory note out there I assume that defines when the payments start, how much they are, and so forth. So besides pension law how can a recordkeeper just change a valid contract like a promisory note without the consent of the parties to the contract?

It might depend on how what percentage the ESOP owns of the company. Also depends on how much of the companies taxable income currently is paid as contribuitons and dividends. But if those two are most of the taxable earnings you can get a dedcution for the contributions and done right for the dividends. A good ESOP TPA could help you with this kind of anlysis. I normally don't plug myself on this board but in this case e-mail me if interested. ESOPs are pretty much all the firm I work for does. As others say need to look to 409(p) carefully if you have a few large owners and/or synthetic equity. If you are leveraged and currently have large loan payments with a C corp your interest most likely doesn't count towards many of the limits. That is not true for S corps. So to get large amounts of cash into the plan you will be more dependent on dividens (S corp distributons). Those are the quick thoughts.

I agree with masteff on both points.

To answer your questions: they could have written the amendment to read something like "all intern hired after 10/1/2012 can not enter the plan...."

If his RMD is for $872, he should have $872 in taxable income. (unless there was some basis distributed, and since it wasn't mentioned, I'll assume there was none). Yup, I am going with the 1099-R has to show the full $872 as taxable. That is the point of the RMDs as pointed out by others.

Give GMK a drum hit for the irrational comment!!!

Ok, let me be clear. I didn't suggest termination becasue the orginal questions seemed to reject the idea. I think a strong case for termination can be made I simply gave what I thought was the best answer if termination was rejected.

How much does it cost to allow people to defer in terms of recordkeeping? That issue aside I think the best way to do what they want is to amend the plan into a Profit Sharing plan with no 401(k) provisions. You make the PS contribution discresionary and if they never decide to put one in for a few years that is fine. However, one of the requirements for a plan is some kind of "on going" requirement. (Forget the legal term) If you go too many years and don't make a contribution and it starts to look like you are never going to one again I seem to recall that can be an issue. It has been a few years since I have had that issue come up in a plan. I would not make the plan such that the rank and file can not become eligible to enter the plan and only the owners are allowed to enter the plan. Beside making it a Profit Sharing plan with no 401(k) allows them to change their mind at a later date. If after a few years they decide the employees are going to be around for a while they can add the 401(k) provision back or start making PS contributions.

Does anyone have any experience of paying out someone from an US ESOP that is Canadian and living in Canada? They are asking me about a T4 form and as I read the descriptions of when you use it on Canadian tax authority websites it sounds like it applies more to stock options, stock purchase plans and so forth then an ESOP. Any help guidence would be appreciated.

From a tax perspective even if it did get deposited directly into the plan they would have to show the money as a gross receipt to them and then take the deduction. To show it any other way would make it a contribution from some place other then the plan sponsor which can't happen. I can think of other cynical reasons to do this but I would obviusly just be speculating.

I am not 100% sure I understand the question so I am going to answer with a question. Is the plan an indvidually directed daily valued plan or are the assets being held in common on a balance forward basis?