ESOP Guy

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?

Is anyone aware of an update to this issue? I have an ESOP that has a 17% turnover ratio if you don't include the people let go because of cause. It isn't much higher with the "with cause" people added. So it appears they don't meet the 20% threshold for a presumption of a partial termination. I seem to recall the last time I looked up case law some cases people who were let go because of cause didn't factor in the count or needed to be 100% vested in a number of cases. It seems odd if you have to make people terminated for cause 100% vested. It would seem if the government is taking that position all terminations for cause of in fact backdoor layoffs.

As one of my old bosses used to say, "if it were easy we wouldn't have a job".

Unless this just doesn't work for the people couldn't you make change the plan to make the son not eligible for a contribution, or put him in a class that gives him a very low contribution? This idea might only help going forward. I never did a ton of these types of PS plans but I do seem to recall writing prototypes that allowed the HCEs to be put into classes. For example we would classify all HCEs who are HCEs by family attribution into a class and give that class a zero or very small contribution.

Lou: I was hoping someone else would answer and I am not going to be a deep well of knowledge here. Of all your questions I have only seen one of them before and this is how we decided it. We had a person in this situation and oddly also had 4 children. We split the RMD 4 ways. Your other situations never crossed our mind- for example give one of the kids the whole RMD or if their distribution was large enough and wasn't rolled over did that cover it. I guess what I am saying is in our minds on the day of the participents death we started treated it as if we really had 4 seperate accounts that had to have the death RMD rules applied to them all. The following year the plan allowed for 100% payment to the children so it stoppped being our problem. I can't quote you anything it seems like you haven't read like the 401(a)(9) regulations.

The rest of the conversation is interesting but if I read the highlighed portion correctly there has to be a true up. This says the alloation is based on Plan Comp for the Plan Year. If they are depositing the money that is just the sponsor putting profit sharing money into the plan as the year goes on before it is allocated. Unlike 4k money PS money can be put in and not allocated as put into the plan. The allocation appear to happen once a year NOT on a by payroll basis. The fact they deposit it on a payroll basis doesn't control the plan does and to me that is an annual calc. My GUESS is the prototype does NOT say anything about a by payroll allocation of the PS. So the "how deposited" is irrelevant to the calc. Just my take on this one.

I don't think one is assuming the plan is in compliance. The rules are clear that unless a major change has happened to the plan then 93-42 says once every three years meets the rules. I am always conservative on making sure a major change hasn't happened. Or maybe a better way of thinking it is- if I have any reason to believe a major change happened such I can not rely on 93-42 I recommend a test. Then the client decided if they want to pay us for the test or risk it.

I don't believe 93-42 has been superceded.

I have only had one experience like that and it was like Mojo's but maybe with a happier ending. An ESOP I worked with was sponsored by a bank. They caught a teller stealing. The bank's attorney convinced the DA to agree to make as part fo the plea bargin for a reduced serntence repayment. They way it worked was the teller had to agree to request an ESOP distribution to be deposited into an account at the bank. She then has to agree to turn over the bank account to the bank. That is the only "carrot" the sponsor has- some kind of deal to support a reduced sentence in exchange for turning over the proceeds of a distribuiton to the sponsor. Edit: You added you new comment while I was writing my reply. Obviously my reply isn't relevant.

I think you would be shocked what gets approved via VCP. In this case the most rational answer is to keep the money in the plan. To me the worse case would be the IRS makes you take the money out of the plan. Best case is they allow it to stay. I think the VCP filing with a reto amendment is a good thing to try with the right attorney.

Justatester: See sections 1 and 5 of this rev proc 93-42 I am having a hard time finding a link to a copy of the rev proc but if you read it I think it is relevant. I am happy to be told I am wrong on this issue but I think I am right.

I THINK the answer is yes. I had one client in this situation in all my years and their attorney signed off on the idea of doing the test once every 3 years as long as the situation from year to year was rather consisitant. That is the rules in the regs they are clear if something material changes to the company/census during the normally non-test years you would test again. You can do both a 414(s) and a general test once evey three years is my understanding. It has been a few years since I have done that with any of my employeers For one thing my current firm has great testing software that makes doing an annual 414(s) or general test so easy we just assume do it annually. Having said that I would advise on something as agressive as this to get the ERISA attorney who is going to have to defend the plan before the IRS or DOL to agree to this. An ERISA attoney gets paid more per hour then a TPA firm for a reason and one of those reasons is they get to make these kinds of risk calls. Higher reward = higher risk that is how the market works. (I will stop my editoral now.) Edits: Fixed a few typos to make what I was saying more clear

WCC: If I understand it correctly the policy violation happened 4 years ago- that is when this person terminated and has been making payments since then. Can you really enforce the loan policy 4 years later? At some point doesn't the sponors actions of ignoring the policy become an "implied amendment" to the policy? If I understand the facts correctly I think you are standing on thin ice. I think the best answer (not easy answer) is to change the policy to say anyone who terminates as of today has to pay the loan in full. Get the Promisory Note to reflect that on new loans and so forth. But for this existing loan precedence of the last 4 years has to be honored. I will admit that is my opinion. I don't think this is black and white here is the rule in the regs I can point to kind of issue. But to change after 4 years seems arbitrary to me. I guess I am saying I am with Kevin C on this one.

While it sounds like you have your answer allow me to add one thing. Back when I did 401(k) plans not only did the policy say repayment was via payroll most of the time but the promisory note said the note was due upon termination. That was done so it was a matter of contract law (as opposed to pension law) that the note was due. Edit: You replied while I was writing my comment. I sounds like the promisory note doesn't require the note to be paid.

The witholding rules are the same with an ESOP and 401(k)s except: 1) As you say the dividends aren't distribution so the rules don't apply 2) If they take a distrbution of SHARES you only have to withhold up to the amount of cash also being distributed. example: A is taking a distribution of 100 shares of stock worth $9,000 and is getting $1,000 in cash for a total of $10,000. Normally you would withhold $2,000. In this case you would withhold the $1,000. Or put another way you don't have to sell shares to cover withholding. But if the shares are staying in the plan and they are taking only cash from the ESOP withhold 20%. So how the distribution is being done is very important.

The distribution made in error is most likely not a PT. You may have other issues so refer to the recently issued guidence about self corrections in a plan. I have always done the detail even when there are a large number of late deposits. I have on the form said see attached and then used a spreadsheet to list all the late payments. I used the same lables and basic format as the form. The IRS has never sent an objection back to me. I have only done it a few times and it was a couple of years ago as I now work with only ESOPs. (I was hoping someone who is a little more current with 410(k)s would have answers) I am unaware of any guidence regarding our use of the attachment. In the end my guess is the IRS wants the money more then any thing else.

They are not recommending the employee resign. They are suggesting you and your firm resign from whatever relationship you have with this client. These people are more trouble then the revenue they bring you is the point. Firing a client is always hard because they are hard to get but some time it is the best idea.

All these questions point to why you keep this stuff out of the plan. You may know this already but just in case. The plan will have to issue a 1099-R every year for the PS52 costs of the insurance. The insurance company can get you the PS52 costs. This creates an after-tax basis in the plan if I remember correctly. Adjust your fees for the new forms you have to do! Don't forget to track those PS54 costs will increase fees. Don't forget to change your fees to reflect the fact you will have a Sch A in the plan. What happens in a year the person doesn't have $18,000 in his 401(k) account? May not be a problem as they might have so much money now it will never get that low. But if it could happen does the plan sell stock to fund the payment? Could that require the sponsor to have to put money in the ESOP portion of the plan to keep it liquide just to this person can have life insurance in the plan? Maybe these kinds of questions will help convince the plan sponsor to keep it out of the plan. Unless of coursse the plan sponsor is pretty much the same person (ie business owner) as the person who wants to put the insurance in the plan. Can anyone tell I am not a fan of life insurance in qualified plans?

We might need more details. I know there have been discussion about child support levies I found this thread quickly. http://benefitslink.com/boards/index.php?/topic/50232-child-support-levy/

I have seen it done. I don't think it is a very good method. It raises a number of issues. 1) Fiduciary: Is this really the best use of the assets? Is it for the benefit for the participants or the sponsor? (After all it is often times used to stop the sponsor from having a cash crunch if the big balance guy dies- the sponsor seems to be mainly benefiting here.) 2) It is a plan assets so every year you allocate the increase in CSV simple enough. How do you allocate the death benefit? Based on cash value before death? Compensation? 3) Do you really want to reallocate all the shares the benefit is used to pay all in one year? Kind of a lucky windfall for the people in the plan that year, including terms who might share if you allocate the death benefit on CSV. More common is for the sponsor to hold a policy outside of the plan and use the death benefit to make a contribution/loan to the plan/buy the stock and put into treasury. If the balance is very large the loan allow one to spread the allocation over a good number year and stops the windfall issue. That would happen also if you buy the stock to treasury and contribute the stock back over the years. The increase in the CSV grows tax free, the death benefit is tax free. You go to a NCEO conference or an ESOP conference and there are a number of insurance people there who will gladly sell you the insurance and set it all up for thier nice commission.

I'm being dense, sorry. If qualified plans are not wages, and FICA is taxes on wages, then Why e.g. is a 401k subject to FICA taxation ? -- Eric Because you are defering part of your wages into the 401(k) plan. Also, Congress needed the revnue.

Tom is correct. To add although in regards to 4 it is possible to do what you ask even with the added concept that Tom mentions. So it is possible for you to compute the proper 25% deduction limit and for someone to get more then 25%. The 25% limit is a GROUP limit the 415 limit is an individual limit. If you are going to do this much my I suggest taking some of the Sunguard Relience basic 401(k) classes. In a matter of a few days their classes that cover the basics of 401(k) plans can get one a fair knowledge of the basics. But as Tom mentioned do not blow these limits the down side is very expensive for the plan or sponsor.

It has been a few years since I wrote one of those letter to the IRS. But so far my experience has been they waive the penalty. It helps if you can make a case that this really was a one time event and it was fixed quickly. Then bill your client for all your time for the letter writing and so forth. That added cost is often enough to help them remember to get it done on time.

For what it is worth when I am having this problem with the client I find the following helps. Use the word eligible/eligiblity and so forth when talking to them about the eligiblity requirements Use the word share/don't share when talking about the allocation conditions. Part of the problem is we often times say a person is elibible for an allocation. The word eligible gets used but in many plans it also has a very specific meaning in the context of the eligibility requirement. So for exampale I will tell a client it takes 12 months and 1,000 hours to be come eligible to be a participant in the plan. Then one has to work 1,000 hours to share in the employer contribution. I have found not repeating the words "eligible for" (or even "particpate in") the employer contribution, but use instead the words "share in" helps often times.

Extremely concerned: Your suggestion that the motive has to do with asset investment and planning doesn't ring true. Take for example when you made that cliam on a union plan. Most of the union DB plans I have worked with (mostly on the 5500 side of things) have hundreds of millions of dollars in assets. A QDRO here or there just isn't material to the overall size of the assets.