ESOP Guy

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.

Although every price protection I have ever seen WAS IN the document. The parameters of the protection, how many years, how to compute the protection and so forth was added by an amendment when the transaction that caused the desire for the protection was done. So even if it is legit the fact it isn't in the document seems like a problem. I would strongly urge you to urge your client to find an ERISA attorney who has experience in ESOPs. Another reason they are controversial is could you be discriminating in favor of HCEs, are you operating the in a way that doesn't reflect the stock's FMV. On the other hand the reason they are mostly done is could the fiduciaries get hit if they allow a transaction to happen that causes their investment to drop. There is no good answer so one needs to be careful with this stuff.

I think his best case is he has both. And I suspect he needs to give people more for 2011-- namely those people who got a cont for 2010 but not for 2011 that met the requirements. More likely is he simply isn't following the terms of the document. I doubt an document just allows them to pick any day in the year and say that is the allocation day. Deep down I think he needs an ERISA attorney. I am not a big fan of recommending people to walk away from business, but unless the client is willing to get the needed legal help to fix this you might want to think about walking away from this one. It is quickly sounding like this client is going to be more trouble then you can recoup in billing. I think they need a VCP to fix this.

What compensation did he use for the allocation? Just 2010, 2010 plus a little 2011? Or did he give $500 per person without reference to comp?

Don't under estimate the practical problems. You have to be able to document the value you use for gain/loss every year. If you don't get it appraised you have to mark a box on the 5500 saying so. If you value it too high or too low when putting it in or when a distribution is made you have a problem. When it is time to terminate the plan you will have issues getting it out if one can't sell it. I am not an expert on small plans and the audit exception. But I seem to recall if you have too much of certain types of assets in the plan you can end up needing an increase bonding or an audit. What happens if the sponsor says it is worth X and the DOL say Y where X <Y and you don't have enough bond to cover the DOL value. You could be required to get an audit for that year. That would be expensive. In short I agree it is legal. The reason you don't see it happen is it is a pain in the rear to have in the plan.

I will admit I am getting more and more rusty on 401(k)s as I do just ESOPs any more. But I used to work on 401(k)s alot. My first thought is to have you check your prototype document under the definition of Compensation. It will tell you if you compensation is measure for the whole plan year or from date of entry into the plan in the year someone enters the plan. If it is from date of entry into the plan I think you will have a much stronger case. I won't say if it is full year comp your position is wrong, but I think this is an important plan provision. I think the really good 401(k) people on this board will want to know the answer to my question to feel comfortable answering you questions.

B(i) talks about the right of the person who MAY elect a diversification B(ii) refers to only those people who so elect-- you have to distribute or give 3 investment choices. In your case I would look into the idea of giving people the right to take a distribution if they elect to diversify. If they never elect to take a diversification that is their choice the plan has done its job by simply offering them the option to take a diversification distribution. And case it isn't obvious the person taking the distribution can either take it as a taxable distribution or put it into an IRA.

They can just do separate accounting. Although is the balance forward 401(k) portion investment trustee directed or participant directed? I ask because the rules say the person needs to be given three investment choices and with most 401(k) plans being daily and participant directed that isn't hard to do for them. On the other hand I am not sure I have ever seen a diversification put into a trustee directed 401(k) plan and am UNSURE that would meet the rules. I would have you note I am unsure, not saying it is wrong. EDIT: The longer I think about it the more I would say if the 401(k) portion of the plan is trustee directed investments you don't have a valid place to put the diversification amounts. They would have to either allow investment choice, or pay the amounts out of the plan. But at this point I don't have a hard cite other then the rules always talk about 3 investment choices.

I am not 100% sure I understand your question so I am going to ask a couple questions? 1) So this is a KSOP? ie it is one plan with both ESOP and 401(k) provisions not two different plans 2) Is the 401(k) portion daily valued or a balance forward? Most of your question points towards daily, but parts make it almost sound balance forward 3) By separate account do you mean at a whole new account name and number, or just listing another source within whatever account the 401(k) money is in? I hope I am not being dim witted in reading your question and asking silly questions, but I for one don't feel like I can answer your question until I know more.

I am with BG5150 unless you think there is some major issue report on the next 8955-SSA.