ESOP Guy

Once again not the strongest answer, but I am not aware of any reason you can't do it. Although like last time I am hard pressed to see the advantage. Most ESOPs need or want the cash for benefit payments and once in the 401(k) plan I have never seen it go back without consent. If you don't mind me asking why do you want to move the cash to the 401(k)?

QDRO is correct there has to be a distributable event.

Consent is not an issue in segregation as no benefit payment is being made. This isn't the strongest answer you are going to get. I am unaware of anything stopping you from putting the money into the 401(k) plan. (and given the new disclosure rules if you give the part investment control in the ESOP it is a pain) This however does raise one of my most common questions regarding segregation. Why are you doing it? If the sponsor is willing and able to put cash into the plan to buy out a person's shares why not just cut the person a check? Why go through the motions of putting it in the 401(k) plan? The reason most ESOPs delay payment is because they need to save the cash for loan payments. But in this case the cash exists, it is in a plan-- but one is just unwilling to give it to the former employee.

I work with ESOPs not these ROBs as the IRS likes to call them. However, you might want to look into the PT exception that allows a disqualified person to do actions that would normally be a PT if it is done because they are receiving a benefit as a participant. Or put into English, I THINK you could distribute the shares at FMV in-kind to the participant. Once they are in their hand there are no more PT issues. I know ESOPs have an exemption that allows them to sell shares back to the employer at FMV, but have never looked into if a ROB can do that also. I am mostly sure you can do an in-kind distribution of a person's benefits without a PT. Note the plan document needs to allow for in-kind distributions which isn't a common feature in a plan document. But it could be amended. Warning: PT failures are very expensive. I would only use this forum or any forum to start the research. If the value of this stock is large ($10K) more it would pay to get good legal advice as failure will cost more.

(This might be the long version of Frizzy's comments) I would add the more lump sums being taken now is caused by the the increase in DC plans. They are not required to offer an annuity so they don't. To be honest even those that do offer it no one takes them. I can count over my 20 years in this business the number of times someone took an annuity out of a DC plan on one hand. Everyone understands a lump sum of money. An annuity takes more thought to understand. As long as I am on my soap box.... This is one of the least talked about reasons DB plans died in my opinion. I worked for 14 years for a company that had a DB plan. I can't tell you how many times I had a co-worker tell me they are leaving for a "higher paying job" and when you asked them they went for a job that paid a few grand more a year, but had no DB plan and the 401(k) plan with no match. I doubt they were making more money on a total compensation basis. But a promise of an life annuity when you are 65 vs a couple grand today most people take the couple grand today. They know what the couple of grand is worth they have no idea what a life annuity at 65 is worth, so it is for all practical purposes worthless to them. Off soap box.

If you want to learn the fundamentals and build from there I would see if your employer will send you to one of the fundamentals classes these guys offer. They are about as good as it gets. Also, once you attend you can get signed up for their e-mail updates. Maybe you can get them without attending. But their one and two day fundamental courses would be a good place to start. They tend to do a good job of documenting where in the code or regs they are getting what they are saying so you can base your research off of that. http://www.relius.net/products/seminarspension.aspx And "yes" just about every plan allows a non 5% owner who is working to not take an RMD. You will always find RMD language in the document as it will not get approved by the IRS without it.

In regards to a RMD the point of that law is to make you take money out of the tax deferred bucket and pay taxes on it. The fear congress had was the very rich could retire and have enough money to never take their money out of their IRAs and 401(k)s etc. And thus they would never pay taxes on that money in their life time. And since you can pass IRAs and 401(k) money on to say very young grandkids it could be a very long time before the gov't gets what it sees as their money. So they force a ®equired (M)inimum (D)istribution that one has to pay taxes on it.

I guess I don't understand. If the check was for the gross - withholding why wouldn't the gross, taxable, and withholding all be the same? example: first time dist was gross 10,000, withholding 2,000 net 8,000 1099-R was gross 10,000 taxable 10,000 withholding 2,000 now dist is gross 2,000, withholding 2,000 net 0 1099-R is gross 2,000 taxable is 2,000 withholding 2,000 By the way I am not taking the position that you should even be doing a new 1099-R. I think a case can be made if they guy had the check and could have cashed it he had constructive receipt of the money and it was taxable in the year he got the check. If he gets a new check it is now not taxable it is just a replacement check. I will let others debate that idea if interested. edit minor typos

MEGK: I still don't know what it is your client wants or expects. You have never answered the question what harm or what the client wants. You just keep going on and on about how this information or that notice/form wasn't timely delivered. At this point if your client could wave a magic wand what would be the perfect end result for him? Because like I said so far all I hear you saying and asking is how much trouble can you make sure the plan get into. Is the point to create trouble or get something constructive done?

I am a little unsure what your goal is. If you have one stock price for the whole year for the payments what difference does it make if you pay twice or five times a year? Is the problem you want to stop writing checks so many times a year or is your problem cash flow? I think it might help if you clarify what is causing your to reduce the number of times you make payments in a year.

Before you go down the road of terminating your 401(k) plan have you put the various services out to bid? I don't know what you find expensive, but you might want to look for some local Third Party Administration firms (TPAs), or check with your CPA if he knows of any TPAs. Not trying to insult your intelligence maybe you already did that, but with limited facts given in a forum like this I just didn't want to assume. You might find a TPA that can work with a broker or an insurance company to give you a solid package of record keeping and administrative services for a price you like.

Andy's post wasn't there when I started mine. I included a comment on that reasoning and I find it powerful reasoning. I am one of the people I know who favors D rehires, but the instructions in my mind are clear that isn't the case.

http://www.irs.gov/pub/irs-pdf/i8955ssa.pdf See page 6 of the instructions. A D is for someone who is no longer entitled to the benefit. So the literal reading is when paid out. I would add if you read a little more it is when they start to be paid out if installments. Having said that I know plenty of people who D a person when rehired because they think it is easier. It also stops them from getting an IRS letter if they are working still when they apply for Social Security benefits.

TPApril: Yes pay the tax with the form but not the penalty. Try and get it waived. If you can't get it waived they will keep sending you a bill. The fact it was multiple years will make a waiver harder. But write your best letter and try and make it sound like it is really one mistake and now there is a procedure to stop it from happening in the future. You might get a waiver. Like I said interest is a lost cause.

As a practical matter you will never get the IRS to waive the interest. They are of the opinion the sponsor had use of the money interest is due. If you can show this was a one time event and procedures are in place to not let it happen they will give up the penalty most of the time. The reality is the penalty is the expensive part. The interest is chump change. My understanding is while there are mistake of fact rules out there they just give false hope. Everyone I know who has tried to study this issue comes to the same conclusion, as a general rule there is no such thing as a mistake of fact. In some very limited way there might be one, but they just don't happen very often. By the way if you file the form 5330 the IRS will just send your client a bill for the penalty and I often times warn the client that is what is going to happen. Then I write the letter asking for the penalty to be waived. The letter demanding the penalty be paid will give instructions on how to ask for the penalty waiver. Like I said don't even bother with the interest it will have to be paid.

Your client is going to want to get specific legal advice on some of these questions. But as a general rule the independent trustee is more important only if the trustee is going to act as both buyer and seller. The classic example is if the owner of the company wanted to sell his shares to the 401(k) plan and he is trustee for the 401(k) plan. He would be acting as both buyer and seller in that case. There is an obvious conflict of interest in this type of situation. In fact what I have found is when an owner sells to an ESOP and he is the trustee of the ESOP the DOL basically seems to assume the ESOP paid too much for the stock. They start with a rather hostile assumption and one has to prove otherwise. If the plan is selling to someone with no relationship to anyone in management and the shares are traded on a market with enough volume to set a market price that is rather different in my mind. To use an obvious example if the IBM 401(k) plan sold IBM shares to someone at that day's closing price it would be hard to argue the deal wasn't for FMV. BUT without full knowledge of all the details it is hard to say for sure. As for voting rights I am less sure about 401(k) plans but for ESOPs the document has to spell out when one gets pass through rights and when one doesn't.

A little more complex but might be worth looking into as I suspect it will be more productive then fighting with the old trustee. Here are the steps 1) Take out a personal loan to fund IRA rollover 2) Roll IRA to new employer plan 3) Take out new loan with new employer's plan 4) Repay personal loan I am making a number of assumptions that you need to determine if true. 1) He can take out a personal loan for a large enough amount 2) There is a new employer and he can roll the money in the IRA to their plan 3) The new employer allows loans 4) Since you can only take a loan for 50% of your balance he would have to roll the money in the "old" 403(b) plan to the new one also to get the rollover balance large enought to take a full loan. This is a SHORT summary of a plan it will require some footwork on your part to see if it can be done. It is alot of work, but honestly I think your fight with the old employer is a waste of time on a practical level. You could even be right, but I think the fight isn't worth it. I suspect others on this board will add comments on the soundness of this plan or lack there of. I am sort of spit balling at this point. edit a few minor typos.

I THINK you would not have coverage issues because the only way an person can be an HCE their first year of employment is if they are an owner. I guess you could also exclude anyone who is an owner by direct ownership or by family attribution, if you wanted to make sure. Or just exclude HCEs the first year. Wouldn't it be easier to just set up an auto enroll plan? Auto enroll plans aren't something I ever work with so I could be wrong, but that seems more reasonable. The average worker really doesn't strike me as so dumb as to fall for the one year match "trick".

For what is worth Austin I agree with you. The lack of guidance is bad. The idea you have to list each and every stock and bond the plan owns is so silly it is hard to believe that is the intent of the rule. But what Bird is saying strikes me as the safest route. We sometimes when the amount of paper gets large and the client objects we give a simple list of the assets broken down in the 5500 categories, ie $xxxx in corporate stocks, $xxxx corporate bonds…… My GUESS is if we ever get rules on this it will look something like that, not we have 100 shares of IBM, 100 shares of Google….. But for now most of clients get a list that say the plan has 100 shares of IBM, 100 shares of Google. As I have said before to keep the work to a minimum we often times make copies of the 12/31 brokerage statements list of holdings.

Here we give a list of the assets. We have a Trustee directed MPP that is an audited plan. Each part gets a copy of the auditors attachment that lists the assets. For other clients everyone gets a photo copy of the 12/31 brokerage statement for the plan. For a client that has many brokerage accounts they get a better part of an inch of paper each year. it is goofy but appears to be the safest way to know you meet the rules.

I am with K2 on this one. Even if one can show it doesn't make any difference at this point there is a legal requirement to know the value of the assets as a fiduciary. Although if the IRS agent has proposed options and you are sure the value won't make a difference why not just use one of his methods and move on?

RDY I am not sure what your question is. The way I would do this test is clear my method with the plan attorney. The method I would use is do a rate group test on everyone using their cont for the whole year and their compensation for the whole year. If each rate group had at least the 70% ratio you are good to go. I have never worked on a plan required more then rate group testing to pass.

It has been a few years since I did 401(a)(4) testing for an ESOP, but if I recall you can do a General test. I BELIEVE you can NOT use any version of the test that converts the contribution into a benefit. So simply put you can use rate groups but only on the current year's contribution. ( I am either right about that or I have a couple more years to worry about a former client's statue of limits running out!!)

Recline46: Maybe I have been lucky but the last few years I have had more and more people tell me your same comment. But I have never had to do that either. I just write a letter to the person on behalf of our clients saying our records show they are not due a benefit. I have never had anyone come back and demand proof I am right. Even if they did why do you have to produce much? The document controls this and I have never read that I have to prove to someone they are not a part under the plan. Like I said I might have been lucky and no one has called my bluff so far so good.

Belarath: Very good point that did throw me for a while when we last had this thread. But yes the 415 amendment is very clear on Relius you use EPCRS. We need a "like" button.