ESOP Guy

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.

I have seen it done in a Profit Sharing plan. I have never seen it done in a 401(k) plan. You might want to check with an attorney that knows security law. The few times I have had conversations with attorneys regarding using 401(k) deferrals to buy stock in an ESOP there has always been concerns regarding securities law. You are in effect making a market for the stock so you need to make sure you don't accidently run afoul of those laws. You don't want to find yourself in a position of having had to put out a prospectus. The key in those attorney's mind was there is a big difference using employer money contributed on behalf of someone and money coming from their pay check. I don't know the detials but I have had the point made to me several times over about a 10 year span that you need to watch out for this. There are also possible PT issues. There is a law firm out there that advertises helping one set up profit sharing plans that hold closely held stock. Lastly, remember only ESOPs get the nice benefit of not owing taxes on the pass through income of an S corp. So if the company is an S corp you are going to want an ESOP.

I hope they aren't still looking for new software after nearly 13 years of searching! But I am sure they will take your recommendation under advisement.

This is full of humor... Andy would like the government to play by the same rules as it requires the private sector!! That is a funny joke.

I would add if this plan has to file a Form 5500 and it checks the box that says the stock isn't appraised annually expect a letter from the IRS asking questions about the plan. I had a PS plan that didn't value its stock with an appraiser every year and we wrote many letters to the IRS about the plan. As far as I can tell if done right they are legal. They are just a mine field waiting to blow up in your face because the IRS has decided they don't like them. Here is more information about them from the IRS in case you haven't seen this stuff: http://www.irs.gov/Retirement-Plans/Retire...pliance-Project This is older but it still spells out much of the IRS' thinking as far as I can tell: http://www.irs.gov/pub/irs-tege/robs_guidelines.pdf I for one like the idea of ROBs almost used one once to get myself in business after being laid off. But the reality is you better make sure it is all done right as it is clear the IRS doesn't like them.

First off is there a distributable event or does the plan have an in-service provision? If not, then under what authority is the person taking a payment in excess of the RMD? On the amount over the RMD there is clearly 20% withholding. Those funds can be rolled over so you have to withhold 20%. I get a lot of people telling me that an RMD you can withhold 0% which MIGHT be true if a person elects to do so, but the old 10% withholding in my mind is standard. But in no case can the amount in excess of the RMD can the withholding be 0% in my mind. Edit: I seem to recall a rather long thread not that long ago where it was debated if the RMD was a minimum or a maximum. If memory recalls correctly some plans seem to be written to allow the RMD to truly be a minimum and other you have to pay out just the RMD. But the point is unless the plan has an in-service withdrawal provision I would not assume an active owner can just take out more then the RMD.

I don't see any reason to terminate the plan. But given the late date in the year it seems like it would be cleaner to make the change effective 1/1/2013. You would still have to track the MPP money and for those benefits do the J&S distribution requirements even after you change to a PS plan. One can think of it as having a MPP source in the PS plan and you have to treat that money as MPP money as if that plan still existed. It is only future money that can be treated as PS money. Sorry if you knew all the stuff I added towards the end of my comment.

The only thing to watch is if this happened this month and the next month is when the next deposit is due you have crossed years. If I recall correctly they can't deduct 401(k) deferrals until they are earned. This isn't something that can't be fixed but one just needs to be careful. If this had happened in July and the fix happens in Aug it would be a non-issue. But most tax returns are done on a 12/31 year end. But I would just leave the money in the plan also and just decrease future deposits.

Where is that "like" button again!

ESOP Guy asked about those other things because they are indicative of whether the employee is being treated as still employed. COBRA eligiblity can be a biggie for demonstrating that a termination occurred. Your plan text is all the citation you need. The situation is almost entirely definitional and will be governed by the plan. What is employment? What is eligibility? What is eligible compensation? Does the plan refer to hours of service or hours worked and what hours are counted? Does the plan refer to leaves of absence and what does it consider to be a leave? Thanks Masteff. I have been on the road but you hit on the head. My point is as you say can we tell if the person is still an employee or not. If the person is still employee it seem more likely they can defer, if terminated this pay is some kind of severance pay and you will follow those rules.

I don't have the number with my on the road but there is an EFAST2 toll free number. They will talk to you about these issues look up the filing and give you an exact answer on what you need to do. I have found this to be one of the most useful government helplines. But most likely the answer is "yes".