Dawn Hafner

Does anyone have any S Corp ESOPs that will not meet the broad ownership test in the new bill? If so, what are your plans with any action to take on the plan. If the S corp is considered owned 50% by disqualified perons, then not only are future allocations in the ESOP to disqualified persons taxed at a rate of 50%, but in the first year effective (1/1/2005 for existing calendar year S corp ESOPs) the "allocated stock" (i.e. exisitng account balances?) of disqualified persons are also taxed at a rate of 50%, even if no new allocations are made. Will these S corp ESOPs be forced to terminate prior to 1/1/2005. Will that solve the problem, or will the IRS apply the same type of logic to an S corp ESOP that terminates? Per NCEO article "The conference report directed the IRS to develop regulations to define exisiting plans as subject to this legislation, regardles of when they were established, if their purpose is "in substance, and avoidance or evasion of the prohibited allocation rule". This situation is a company that had their ESOP for many years as a C corp, and when the S corps were allowed to sponsor ESOPs they converted. They have a few large shareholders, and this will be a problem for them. Any problems with terminating the plan? I realize this is a fiduciary decision, that must be made in teh interest of the participants, but if the employer has to pay a tax bill of $xxx, the long term prospects for the company itself may be effected. I also realize that this is the type of situation that this legislation is designed to prevent, but what to do about those already in place. They were simply taking advantage of the fact that converting to S corp made sense for them at the time. Any insight?

I re-read them, and you are correct. The FSO exception only applies to the A org rules. Thanks!

Where are you reading that a different FSO definition applies for the A org test vs. the B org test? I am not seeing that. I do agree that Insurance is listed in 1.414(m)-2, and is considered a "service organization", but I don't see that Insurance would meet the definition of a "FSO". See 1.414(m)-1©, which reads "c) Aggregation not required. Pursuant to the authority contained in section 414(m)(1), a corporation, other than a professional service corporation, shall not be treated as a First Service Organization (see §1.414(m)-2) for purposes of section 414(m)(2)(A)." [both the A org test and the B org test are subsections of 414(m)(2)(A)] (reg cont.)"Also, a special rule is provided in §1.414(m)-2©(4) for determining ownership under section 414(m)(2)(B). For purposes of this paragraph, a professional service corporation is a corporation that is organized under state law for the principal purpose of providing professional services and has at least one shareholder who is licensed or otherwise legally authorized to render the type of services for which the corporation is organized. "Professional services" means the services performed by certified or other public accountants, actuaries, architects, attorneys, chiropodists, chiropractors, medical doctors, dentists, professional engineers, optometrists, osteopaths, podiatrists, psychologists, and veterinarians. The Commissioner may expand the list of services in the preceding sentence. However, no such expansion will be effective with respect to any organization until the first day of the first plan year beginning at least 180 days after the publication of such change. [Reg. §1.414(m)-1.] Am I missing some other definition of a FSO for B orgs that is different than this? I am not seeing insurance in this lising, so if I don't have an FSO, I can't have met either the A org or B org test. Isn't this game fun! Who writes this stuff?

I have two entities that provide services to another entity and am trying to figure out of an ASG exists. I know that all three are service organizations, but it does not appear that I have an FSO. The regs state that if the FSO is a corporation, it must be a professional service corporation. Treas. Reg 1.414(m)-1© defines professional service corporation to be "a corporation organized under state law for the principal purpose of providing professional services...." "Professional services means services preformed by certified or other public accountants, actuaries, architects, attorneys, chiropodists, chiropractors, medical doctors, dentist, professional engineers, optometrists, osteopaths, podiatrits, psychologists, and veternarians." Insurance is not listed. Does this mean that unless my "FSO" is an entity form other than a corporation, that I really do not have an "FSO"? If I do not have an FSO then I do not have an ASG, outside of the Management Organization Test, which does not apply to this situation. Here are my facts: Entity 1 - owned 100% by Owner A, sole prop Entity 2 - owned 100% by Owner B, corporation Entity 3 - owned 50% by Owner A, 50% by Owner B, corporation All three entiteis in business of insurance. Entity 1 and Entity 2 provide services to Entity 3. The service receipts for these services to Entity 3 exceed 10% of the total service receipts for both Entity 1 and Entity 2. I am looking at the B-org test. I don't think the A-org test applies here since none of the entities are shareholders of the other entities directly. If Entity 3 is not an FSO due to being a corporation, and insurance not being listed in the regs, I don't see how we can have an ASG. Any other analysis? Thanks.

I have two entities that provide services to another entity and am trying to figure out of an ASG exists. I know that all three are service organizations, but it does not appear that I have an FSO. The regs state that if the FSO is a corporation, it must be a professional service corporation. Treas. Reg 1.414(m)-1© defines professional service corporation to be "a corporation organized under state law for the principal purpose of providing professional services...." "Professional services means services preformed by certified or other public accountants, actuaries, architects, attorneys, chiropodists, chiropractors, medical doctors, dentist, professional engineers, optometrists, osteopaths, podiatrits, psychologists, and veternarians." Insurance is not listed. Does this mean that unless my "FSO" is an entity form other than a corporation, that I really do not have an "FSO"? If I do not have an FSO then I do not have an ASG, outside of the Management Organization Test, which does not apply to this situation. Here are my facts: Entity 1 - owned 100% by Owner A, sole prop Entity 2 - owned 100% by Owner B, corporation Entity 3 - owned 50% by Owner A, 50% by Owner B, corporation All three entiteis in business of insurance. Entity 1 and Entity 2 provide services to Entity 3. The service receipts for these services to Entity 3 exceed 10% of the total service receipts for both Entity 1 and Entity 2. I am looking at the B-org test. I don't think the A-org test applies here since none of the entities are shareholders of the other entities directly. If Entity 3 is not an FSO due to being a corporation, and insurance not being listed in the regs, I don't see how we can have an ASG. Any other analysis? Thanks.

Compensation to use for SE income: Issues the CPA is bringing up - The document elects not to have 401(k) deferrals reduce compensation. We think 401(k) deferrals still reduce SE comp, but the CPA is thinking because of the document it does not. What about IRC 179 depreciation? If we just pick up the SE number from Form K-1, does any adjustment need to be made for IRC 179 to get to the SE comp? Thanks.

I agree MWeddell about testing under all methods to pass 410(B). I just think some administrators are not even aware of how limited their choices are when they select the fail safe language in the adoption agreement. For plans that will want to use ABP an addendum to the adoption agreement is often necessary.

A doctor is leaving his LLP group. He will receive a buyout over time for his equity interest in the partnership. In addition, he will be receiving his net realizable value of the receivables over the next 24 months. This is for work that he did while with the group and it will be taxed as ordinary income. CPA thought that he could set up a SEP for this income. I do not think this would constitute earned income for self employment purposes as there is no trade or business being carried on by him. He has already performed the service while a partner with his former LLP. I don't see how he could set up a separate plan for this. I also don't see how he could continue to participate in his LLPs plan as his service has ended. Comments?

You also need to be careful here depending on how your document was drafted. Many prototype documents provide that if you apply the "fail safe language" for applying accrual requirements (1000 hours, EOY requirement) that if the plan fails the PERCENTAGE test that you start pulling ineligible participants in based on the order listed in the document. In other words, if you selected the fail safe coverage language the plan may not permit you to use the ABP test or the raio test, but you are stuck with the percentage test.

Has anyone been receiving DOL notices on 1999 5500s regarding the fact that the plan did not fill out Schedule R information regading minimum funding when the plan is clearly not subject to minimum funding? We have received these on 3 of our ESOP clients so far. We called the DOL and they said that any 5500 that did not indicate a code 2E for profit sharing will be expected to be subject to minimum funding and they will be looking for that information on Schedule R. So now, to avoid a notice, we are supposed to include a profit shairng code of 2E for our ESOPS! Doesn't make a lot of sense to me. Anyone else?

Where exactly in 2000-27 does it refer to the fact that a protype that adopts contribution allocation language that is cross tested for non discrim is considered an individually drafted plan? I know that it is, but another firm is telling the client it is a proto and $125 filing fee, and we need a cite. Thanks.

HELP! - Does anyone know how this same type of situation might be applied to a Money Purchase Plan? I have a MPP terminating, business closed in 2000, and the owner now does not want to make his money purchase contribution for 2000 for himself. Can this accrued benefit be waived? If so, under what authority? I read this PLR (actually 9146005). It appears that the IRS does not even allow this type of waiver in DBs either, which suprises me because I know of DBs that have received favorable D letters on termination that have used this approach. Any insights on if the IRS position has changed since this PLR? Even if it is OK with PBGC, it doesn't do us much good if it is a plan qualification issue. Thanks.

DOL audit of ESOP determined ESOP loan note contained impermissible provisions. Loan note was fixed. DOL letter states that the Secretary of Labor is required to transmit to the IRS information indicating that a PT has occurred. The 15% excise tax is substantial. Obviously they will be involving an ESOP attorney. What are suggestions - 1) file the 5330 and pay the tax now 2) wait for IRS notice 3) contact IRS to negotiate settlement. The note provided for a call of the entire balance immediately, but in operation, nothing like that happened, it was just a documentation issue of the loan note. Also, it gets more interesting. This is an S corp, using distributions on allocated shares to service debt. The DOL interestingly enough, did not make any comment in regards to this issue. Since the loan notes were already bad, is there anything to fix in regards to the use of distributions on allocated shares? Once the loan became nonexempt, don't these issues go out the door? Now that the loans are clean again, they should ensure they are not using impermissible distributions going forward. Do you think there is any correction to make relating to this issue? Isn't it interesting that the DOL, with responsibility for enforcement relating to PTs, made no issue relating to this matter, despite the IRS's interpretation in a PLR that this is a PT? Any comments or insights appreciated.

Employer restricts stock ownership only to employees and the ESOP. Prior 1042 transaction was done with the ESOP. When participants are terminating, the employer is purchasing the shares that were in their account back from the ESOP, and using those shares to 1) give stock to management 2) recontribute to the plan. Issues: 1) 1042 taint is gone when the stock leaves the plan, so recontributed stock is clean as far as 1042 is concerned 2) Because of the stock ownership restrictions, stock is never really distributed from the plan. The purchase of stock is actually a transaction between the ESOP and the employer, not the participant and the employer, so Put Option requirements have no application. Because this is a transaction between the ESOP and the employer (related parties), the stock must be valued as of the date of the purchase. 3) Also a consideration should be the fact that the ESOP trustees are making a fiduciary decision regarding whether it is in the participant's best interest to sell the stock back. I have a hard time justifying the fact that the employer is buying the stock and recontributing it to the plan to get rid of 1042. How can this be supported as a fiduciary decision when the purpose is clearly to benefit 25%+ shareholders? Comments? Suggestions? Also, does anyone have the exact cite that requires valuation as of the transaction date for #2 above? Thanks.

An IRA owner will be purchasing a farm in their IRA. The farm will be rented for cash rent only. What circumstances would be necessary to make it permissible for the IRA owner's son to rent the farm from the IRA? Would appointing an independent discretionary trustee for the IRA make this transaction permissible? Does having an independent trustee choose the son in an arms length transaction remove the PT issues? Any other possibilities? Thanks. Dawn

Does anyone have a definite answer to this issue? Did 2000-20 do away with the annual notification under 89-13 effective now, so that the usual January 31, 2001 notices do not need to be sent out? Thanks.

Does anyone know where to find information regarding what the average retiremetn age is in pension plans? I also need to find the percentage of plans that provide early retirement benefits that are subsidized, and at what age/service. Thanks.

Just to answer some of the earlier questions regarding this situation: The only reason there is limited stock is the unwillingness of existing shareholders to sell. The sponsor buys back stock every chance they get to get more stock to the plan, but they feel stongly that this should be an employee benefit. This is an S corporation ESOP, so the employees are paid out in cash only, no right to take shares. This ESOP also has a 401(k) provision. The nonESOP portion of the plan is invested in a menu of mutual funds, over which the employees have investment direction on a daily basis. When a participant is disinvested in stock they are invested in their selection of mutual funds and continue to have complete control over those funds, except for the ability to invest in employer stock. I would view the ability to invest in employer stock as a benefit right or feature, that as long as coverage passes would be permissible. It is easier if the employer would just apply this to terminated employees, but if not covering these casual employees under this plan feature would pass coverage I think it would be a permissible plan design.

RLL, Assuming this disinvestment is permissible, do you think this disinvestment could be applied on some other basis than full termination of the employee? Then I assume we get into discrimination issues. Would this be a benefit, right or feature that would have to be nondiscriminatory? If all HCEs are covered then we would just have to cover the safe harbor ratio based on the ABP test. All of these employees that work on a casual basis would be nonhighly compensated. The percentage of employees in this category is very small, probably less than 2% of their workforce. These employees are basically quitting, but are willing to work one or two days a month for closing the books. This client has very limited amounts of stock in the ESOP and is concerned with providing the stock to motivate current employees to perform. Any thoughts are appreciated.

An employer decides to change all of their insurance carriers (health, life, dental, etc). They provide for an open enrollment period mid year, which does not coincide with their open enrollment for cafeteria plan. Is this a problem, or is this considered a change for which employees can make a corresponding change in the cafe plan? This is a premium only plan. Thanks.

Could this restriction be applied to employees that have gone on a casual basis employment. I have only heard of it applied to terminated employees. I have a client that has several employees that are not working in their normal capacity, but may be called back on as as needed basis for casual employment (one to two days per month). They would like to include this group of employees as terminated and restrict their investments under the plan to only non employer stock investments. Could the plan specify terminated employees and casual employees and then define casual employees by the number of days or hours worked per month? Comments, suggestions?

Does anyone have an updated worksheet on this topic? I am looking for a worksheet that employees could complete to calculate whether the credit or the cafeteria plan is better for their situation. Thanks.

An employer has two plans. One for union ees, and one for nonunion ees. Key employees only participate in the nonunion plan. Can these two plans be aggregated however for top heavy calculations? Treas. Reg. 1.416-1, T-7 An employer may elect to treat a plan not required to be aggreagated as part of the aggregation group in order to remove the top heavy classification, but only if the aggreagated group continues to meet coverage and nondiscrimination. Here since all union employees would be considered excludable employees for coverage and nondiscrimination, aggregating the two together will still pass coverage and nondiscrimination if the nonunion plan passes coverage and nondiscrimiantion on its own. So, it appears to be permissible to aggreate for top heavy without any other plan issues. Comments?

I agree. Those employees that worked 501 hours already did what they had to to get the contribution. This can not be taken from them once earned.

For those clients that I know will owe an excise tax on 5330 I am filing by 7/31. If we discover a problem that we didn't know about after 7/31 we will file late with penalties & interest.