ESOP Guy

Next MONTH there will be an 11/12/13?????????

The question is-- was this person termed or not. If termed RMD is needed if not no RMD. While what I am about to say isn't 100% this is how I try and help my clients with these kinds of issues. The problem is retirement law doesn't do a very good job of defining when someone is retired for these issues. On the other hand many other aspects of employment law do define it well. For example when he left and went on call did the company issue a COBRA notice about his health insurance because they thought he was terminated for that purpose? It seems to me it is hard to argue he is termed for COBRA but not for the plan for example. ( I seem to recall COBRA notices can happen besides termination so one needs to be clear on this one) Since he is in upper management is he in a non-equalized plan that only pays when he terminates and got paid? Once again it is hard to argue he is termed for one but not the other. I think you get the idea. Look and see how the company treated him outside of the retirement plan. Did they treat him as terminated and the coming back is a rehire, or did they treat him as an on call employee. If the company is consistent on this issue I think they have a much stronger case whichever way they go. Like I said not 100% but some times retirement people just look to our rules and that strikes me as too narrow of a way to look at the problem.

pmacduff: Not trying to state the obvious and not saying this is a good answer but..... If push comes to shove remember the rule is the assets merely have to be segregated not invested per the participant's investment elections. So the trustee could open a checking account in the trust's name and put the funds there until they can be deposited. Although if the gap between deposit and allocation to accounts gets long enough one could have someone raise the issue if the fiduciary is doing their duty right/well. Also, the 7 day safe harbor rule is just that a safe harbor. I forget the exact language in those rules but it does say something to the effect that the deposit has to be done in a reasonable time. The language to me at least opens the possibility one could go beyond the 7 day period and not have to put lost earnings in and not be in violation of the rule if there is a good cause. My fear back when I worked on 401(k)s was getting in a fight with the government over was what we thought was a good cause and if it was a good cause in their mind. Once again I am not saying anything about the new provider or saying these idea are great just offering ideas how to solve your client's practical problem of what do do with the 401(k) money until they can deposit it.

Your question is confusing to me. Did they not file the years AND there were people who are suppose to be reported, or did they not file because there was no one who needed to be reported? The 2nd part of your question makes it sound like there wasn't anyone who needed to be reported for the years in question. IF THAT IS TRUE there was no missed filing. You don't have to file an 8955-SSA if there is no one to report. If there were people who were suppose to be reported and got missed that is different. I suspect the "correct" answer is go back and file the right year's form and so forth. As a practical matter I would just put the people on this year's form and move on. I have never seen anyone get in trouble by doing that. But I repeat I suspect that is NOT the strictly correct answer.

I have told clients that the rules say any RMD regardless of size needs to be sent. I had one that sent the $1.50 RMD and I have one that refused to send the $0.75 RMD. I have always thought the solution is to amend the plan to allow the person to take their whole balance in those situations.

You could also just exclude people who are HCE's by family attribution from that part of the match formula. No one cares if you discriminate against HCEs.

QDRO I am more then happy to be told I am wrong. So are you saying all employees are party in interest, but since the question is about ex -employees they are no longer a party in interest? (which is clearly is what Mary22 is saying so are you agreeing with her would be another way to put the question.)

Mary22: Could not find anything quick that had a good cite and I have a full morning. But I did find an ASPA Q&A that seems to say what I am saying just doesn't tell you where they get it. Here it is: http://www.asppa.org/Main-Menu/confswebcas...11/docs/qa.aspx Look at the 2nd question down. This area this Q&A is talking about is why I have always understood participant as part in interests. There is a class exemption in the PT rules for participant loans. My understanding is the reason you needed the exemption is the general rule would lead you to conclude you can't make the typical 401(k) loan. Sorry, I can't help more maybe it will give you the clue to find more or more likely one of the people on the board that is really good at quoting the rules will help out.

Yes the owners account gets lost earnings.

I don't see any reason you have to test each deposit. It seems to me you could just test the sum of the contributions at the end of the year.

Maybe I don't understand the use of your term terminated participant. If you are talking about someone who has terminated with the sponsor but still has a balance in the plan why don't you think they are NOT a party in interest. On the other hand if you make a distribution of shares to these people (and they have no remaining balance in the plan) then they are no longer participants and then they would seem like they would not be a party in interest.

I think this is what you are looking for. They never start with a 9 for one thing. http://www.ssa.gov/kc/SSAFactSheet--IssuingSSNs.pdf

PBI will want to invoice you. It has been a few years since I used them for a large number of people. For the full service to do 1 or 2 people I am thinking it is in the $20-$25 range. That is for the full service were they send the confirm letter and send you the close out letter. If you have more people the price goes down on a per person basis. If I recall correctly if you have a few hundred people your cost per person will be less then your cost for a person's time plus the IRS search and so forth. I forgot to mention they have a cheaper service that does NOT meet the full DOL rules and they do publish those prices. The full service is MORE then this. http://pbinfo.com/PBISales/Address%20Searc...tro%20Sheet.pdf But once again if you want to have a service that at the end meets the DOL's rules for a search you have to use the more expensive service. Since your interested I used them in the early 2000s for a plan that had hundreds of lost people. They would just send us a spreadsheet every month with confirmed found addresses, we used the spreadsheets to mail merge the new address into the distribution forms. Well worth the money in my opinion.

I like to use this service http://pbinfo.com/address-location-service/ PBI for one price will use commercial search services. If that finds the person great, but if it doesn't they will do the SSA (used to do the IRS) for you. For the commercial services they send a letter confirming the find. When they get done they will send you a letter summarizing the search and the steps. The steps outline in their letter meets the requirement for the DOL's requirements for a search. So you either find the person or have documentation you hve met the rules. One has to like that result. No, I do not work for them or get paid by them. I just like not having to deal with the problem of lost ees.

I have never seen this exact situation so here is my mere opinion: 1) You can only fix the open years. This isn't like they didn't file. So you can only go back 3 years at best. 2) Have they been using the MP code on the 5500? If so, that means the IRS/DOL has known it is a MP plan and they saw they were not completing the section of the Sch R. (I am assuming that is the part that refers to min. funding you are talking about) And so far they haven't done anything about it. 3) What is the worse that can happen here? The IRS/DOL sends a letter and you fix the error. Nothing you said leads one to believe they didn't actually fund the plan. No law has been broken a form has been filed wrong. As such I would be inclined to just fix it going forward, but if one is worried fix the open years after that move on.

I have never read or heard anyone make the case that voting rights would change this. The stock in the trust just doesn't count for the 5% rule and being an HCE.

Your question is a little vague. Are they doing a limited scope audit because of 29 CFR 2520.103-8 and/or 103-12(d)? On the Sch H in part III they would be checking box 3(b). What that means is the trust is mostly (maybe exclusively) held by a bank, mutual fund family so forth and the auditors are relying in that companies auditors to certify the assets are what they say they are. So they can't express an opinion on the assets. Edit: If they are checking box 3(b) and that is the reason for a limited audit that isn't a problem.

There needs to be an appraisal done just for the sale. That appraisal should take in to account all the factors of the sale like if there is a discount for minority interest or not. Just about every new ESOP of any size gets a DOL and they will always make one justify the sale price.

rhkesop: Allow me to add to Marcus' employer perspective. The idea of a prefunding an ESOP is very common in ESOPs of small companies. The reason for this is there is a limit to how much money that can be contributed to any type of qualified plan. That limit is tied to compensation eligible for a contribution. Many small companies simply don't have a large enough payroll to support a contribution that can make the loan payment. So they in effect prefund a "down payment" for the purchase. I suspect this was the plan until the economy took a dive. I would add most likely the owner doesn't want to sell 30% of the company. That will greatly reduce the amount he will receive for his stock. When they appraise stocks for these kinds of sales there are a number reasons they will apply a discount to the first number they determine as fair market value (FMV). One of them is the discount for minority ownership. If the ESOP will end up as a minority owner it has less say over the direction of the company then the majority owner. So its position is in fact worth less then if it were to buy a majority position on a ratable relatinship. Or put another way a 70% owner still controls 100% of the board of directors for example so a in many situations a 30% ownership is the same as a 0% ownership. Obviously, that isn't true in all cases. The 30% owner still gets 30% of the dividends (if any). But hopefully you can see how a 30% ownership is worth less then 30% of the full FMV. So most likely the owner wants to sell all or at least 50.1% of the company to the ESOP so he doesn't take a hit for the discount on the sale price. I would tend to disagree with the idea that the owner has a fiduciary duty to sell while the share price is low. The fiduciary has an obligation to pay no more then FMV. But FMV is the price of a willing buyer and seller. At this point there is no willing seller so one can't determine FMV. The owner can solve the conflict of interest problem by hiring an outside trustee to represent the plan when he is ready to sell. So I will go back to my first recommendation. Talk (nicely!) to the owner and see if you can either come to understand his position or if he is willing to be more accommodating regarding how the plan assets are invested. At this point in my opinion all you are out is the investments income and expenses haven't been as good as they could have been. Even after setting up the ESOP the stock is his to keep or sell. A business owner is never obligated to sell his business to the ESOP. You situation is unfortunate as if you had been able to direct the Safe Harbor contribution it sounds like you would have a larger balance. But life not going according to plan and an action to get the DOL in someone's life aren't the same thing.

Like pmacduff the few times this issue has come up we recommended the plan be amended to allow a partial estimated distribution of some % of the prior val balance with a true up after one valuation. You can often times get the bulk of the money out which make the person happy, but people can't avoid taking their fair share of loss (or gain-- but no one seems to worry as much about gains). Like stated by others I would check your document. Most give you the ability to do interim valuation if the trustee deems it needed.

Can I suggest talking to the owner before you get the government involved? I mean really the only real problem to you here is the cash is invested poorly. And even there it was free money to you. I mean even if it isn't an ESOP in fact it would simply become a profit sharing plan. Maybe you can get him to amend the plan to rename and brand it as a profit sharing plan and get a better mix of investments. And if at some time in the future he decides to do the ESOP he can add that component back to the plan.

Still doing it. It is the law even if not well defined.

Don't forget this could end up paying Unrelated Business Income Tax (UBIT).

Belgartha: I have done this also and I don't see how the money coming into the plan isn't a contribution or a dividend. There is no special rule that money deposited into a plan because of floor price protection is not a contribution or a dividend. If they are saying it isn't a contribution I would check to see if they are calling it a dividend, or in this case an S corp distribution. But no you don't get some kind of free pass to pour money into the plan.

There is a cost issue. I doubt you priced in running a "call center" for your clients in the billing. I would add I have found over the years if you work with the client on how to find the information in the SPD after a while they do learn to answer many of the basic questions themselves.