ESOP Guy

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?

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.