Belgarath

Don't think I've ever seen this come up. The K-1 shows different percentages in Part II, Box J - one percentage for profit and loss, and 1 percentage for capital. Trying to determine which to use! 1.404(e)1A(f)(1) refers you to IRC 702(a)(8) and 704. And 704 basically refers you to the partnership agreement. Logically, to me at least, one would use the profit percentage on the Schedule K, rather than the capital percentage. Any thoughts on this?

Let's assume not.

Suppose "normal" plan entry date would occur on July 1. On June 21st, employee goes out on approved maternity leave, or short term disability. Returns to work July 15th. Is the entry date July 1st, or July 15th? Plan doesn't really address this - refers to if the individual is "employed" - so are they "employed" if they are on approved leave? Or are they considered "re-employed" when they return from leave? My inclination is that they would enter the plan on July 15th.

Nice, concise little blurb Tax Consequences of Plan Disqualification When an Internal Revenue Code section 401(a) retirement plan is disqualified, the plan’s trust loses its tax-exempt status and becomes a nonexempt trust. Plan disqualification affects three groups: 1. Employees 2. Employer 3. The plan’s trust Example: Pat is a participant in the XYZ Profit-Sharing Plan. The plan has immediate vesting of all employer contributions. In calendar year 1, the employer makes a $3,000 contribution to the trust under the plan for Pat’s benefit. In calendar year 2, the employer contributes $4,000 to the trust for Pat’s benefit. In calendar year 2, the IRS disqualifies the plan retroactively to the beginning of calendar year 1. Consequence 1: General Rule - Employees Include Contributions in Gross Income Generally, an employee would include in income any employer contributions made to the trust for his or her benefit in the calendar years the plan is disqualified to the extent the employee is vested in those contributions. In our example, Pat would have to include $3,000 in her income in calendar year 1 and $4,000 in her income in calendar year 2 to reflect the employer contributions paid to the trust for her benefit in each of those calendar years. If Pat was only 20% vested in her employer contributions in calendar year 1, then she would only include $600 in her calendar year 1 income. Exceptions: There are exceptions to the general rule (see IRC section 402(b)(4)): • If one of the reasons the plan is disqualified is for failure to meet either the additional participation or minimum coverage requirements (see IRC sections 401(a)(26) and 410(b)) and Pat is a highly compensated employee (see IRC section 414(q)), then Pat would include all of her vested account balance (any amount that wasn’t already taxed) in her income. A non-highly compensated employee would only include employer contributions made to his or her account in the years that the plan is not qualified to the extent the employee is vested in those contributions. • If the sole reason the plan is disqualified is that it fails either the additional participation or minimum coverage requirements, and Pat is a highly compensated employee, then Pat still would include any previously untaxed amount of her entire vested account balance in her income. Non-highly compensated employees, however, don’t include in income any employer contributions made to their accounts in the disqualified years in that case until the amounts are paid to them. Note: Any failure to satisfy the nondiscrimination requirements (see IRC section 401(a)(4)) is considered a failure to meet the minimum coverage requirements. Consequence 2: Employer Deductions are Limited Once the plan is disqualified, different rules apply to the timing and amount of the employer’s deduction for amounts it contributes to the trust. Unlike the rules for contributions to a trust under a qualified plan, if an employer contributes to a nonexempt employees’ trust, it cannot deduct the contribution until the contribution is includible in the employee’s gross income. • If both the employer and employee are calendar year taxpayers, the employer’s deduction is delayed until the calendar year in which the contribution amount is includible in the employee’s gross income. • If the employer has a different taxable year than the employee (a non-calendar fiscal year), the employer cannot take a deduction for its contribution until its first taxable year that ends after the last day of the employee’s taxable year in which the amount is includible in the employee’s income. For example, if the employer’s taxable year ends September 30 and a contribution amount is includible in an employee’s gross income for the employee’s taxable year that ends on December 31 of year 1, the employer cannot take a deduction for its contribution until its taxable year that ends on September 30 of year 2. 9 For example, if the employer’s taxable year ends September 30 and a contribution amount is includible in an employee’s For example, if the employer’s taxable year ends September 30 and a contribution amount is includible in an employee’s gross income for the employee’s taxable year that ends on December 31 of year 1, the employer cannot take a deduction for its contribution until its taxable year that ends on September 30 of year 2. Also, the amount of the employer’s deduction is limited to the amount of the contribution that is includible in the employee’s income and whether a deduction is allowed depends on whether the contribution amount is otherwise deductible by the employer. Finally, if the plan covers more than one employee and it does not maintain separate accounts for each employee (as may be the case with a defined benefit plan), then the employer is not able to deduct any contributions. In our example, assuming both the employer and Pat are calendar year taxpayers, the employer’s $3,000 deduction in calendar year 1 and $4,000 in calendar year 2 would be unchanged because that is when Pat would include these amounts in her income. However, if Pat were only 20% vested, then the employer would only be able to deduct $600 in calendar year 1 (the vested part of her employer contribution) which is the amount Pat would include in her calendar year 1 income. Consequence 3: Plan Trust Owes Income Taxes on the Trust Earnings The XYZ Profit-Sharing plan’s tax-exempt trust is a separate legal entity. When a retirement plan is disqualified, the plan’s trust loses its tax-exempt status and must file Form 1041, U.S. Income Tax Return for Estates and Trusts (instructions), and pay income tax on trust earnings. Revenue Ruling 74-299 as amplified by Revenue Ruling 2007-48 provides guidance on the taxation of a nonexempt trust. Consequence 4: Rollovers are Disallowed A distribution from a plan that has been disqualified is not an eligible rollover distribution and can’t be rolled over to either another eligible retirement plan or to an IRA rollover account. When a disqualified plan distributes benefits, they are subject to taxation. Consequence 5: Contributions Subject to Social Security, Medicare and Federal Unemployment (FUTA) Taxes When an employer contributes to a nonexempt employees’ trust on behalf of an employee, the FICA and FUTA taxation of these contributions depends on whether the employee’s interest in the contribution is vested at the time of contribution. If the contribution is vested at the time it is made, then the amount of the contribution is subject to FICA and FUTA taxes at the time of contribution. The employer is liable for the payment of FICA and FUTA taxes on them. If the contribution is not vested at the time it is made, then the amount of the contribution and its earnings are subject to FICA and FUTA taxation at the time of vesting. For contributions and their earnings that become vested after the date of contribution, the nonexempt employees’ trust is considered the employer under IRC section 3401(d)(1) who is responsible for withholding from contributions as they become vested. Calculating Specific Plan Disqualification Consequences Calculating the tax consequences of plan disqualification depends on the type of retirement plan. For example, the tax consequences for a 401(k) plan differ from the consequences for a SEP or SIMPLE IRA plan. How to Regain Your Plan’s Tax-Exempt Status Generally, if a plan loses its tax-exempt status, the error that caused it to become disqualified must be corrected before the IRS will re-qualify the plan. You may correct plan errors through the IRS Voluntary Correction Program. However, if your plan is under examination by the IRS, you must correct the errors through the Audit Closing Agreement Program. Note: This is a general overview of what happens when a plan becomes disqualified for failure to meet qualification requirements (see IRC section 401(a)). These examples provide general information and you should not rely on them as legal authority as they do not apply to every situation. For more information, see Rev. Rul. 74-299 and Rev. Rul. 2007-48 (and the law and regulations discussed in those rulings).

While unusual, certainly not unheard of. Often the land is the primary consideration, and if in an area of growth, for example, it can appreciate DRAMATICALLY. So it is very possible that it was a legitimate arms-length transaction. Also very possible it wasn't...

We'll have to agree to disagree on this one. I'd certainly argue that if you have an agreement with document provider "A" that says, "once you sever services with us you may no longer use this document" - therefore requires you to adopt someone else's document - and that fee is then a reasonable and necessary cost of administering a plan. On the other hand, the decision to sever services with "A" and any expenses involved in making that is a different matter. And I'm sure there are several shades of gray on all of this. Maybe we can collaborate on a racy novel of ERISA greed, intrigue, lust, and corruption and name it "Many Shades of Gray" or something like that. Anyway, I appreciate your input.

I completely agree with Kevin. FWIW, from my own perspective, I think you are far less likely to have problems during a plan audit if you have used a "pre-approved" method - and if the dollar amounts are small, I personally wouldn't mess with going outside an already pre-approved method.

I'd look at it this way. The expenses involved in making the decision to restate (consultant fees, attorney fees, etc.) are a settlor function and may not be charged to the Plan. Once the decision has been made that restatement is either beneficial (for many possible reasons) or "required" due to the expiration of "licensing" of the document, or whatever you want to call it when the client severs the relationship with current provider, then the restatement fee itself may be paid by the plan.

Thanks for the tip. I'll have to see where this would be input on our software system (FT William) - probably easy to find, but if not, their "help desk" is really excellent.

Both were accepted. Neither was filed as an amended return.

This is a strange one, at least nothing that I've ever seen. Welfare benefit plan (disability) always had two components - one union, one non-union. Different benefits for each component. Union benefits self-funded by employer general assets, non-union funded by insurance. All filed as, say, plan number 501. At some point in the past, the client split this into separate plans, but apparently never told their TPA. They hired a new TPA to handle the union plan, and for 2012 the new TPA filed the union plan as 501, apparently correctly. The other TPA, who apparently was never informed of this, filed the non-union plan for 2012, also as plan 501. So two 5500 forms were filed for plan 501. Now we enter the picture. To correct this, it seems logical to file an amended 2012 filing for the non-union plan, using new plan number 502. My question is this: I've never seen a return amended for a wrong plan number. Will the e-fast system correctly accept it as an "amended" filing form if the plan number is changing? Or can you only "amend" a filing for the same plan number? I've got to think this can't be the first time a plan has been filed using an incorrect plan number, and that an amended filing is ok, but I'd feel better if someone who has actually seen or done it could confirm that. Thanks!

Excellent. Thanks again!!

Not certain what you mean by "out of the money?" But for example - ESOP is set up with initial stock price of $50.00 per share. There are also 5,000 SAR's granted to the critical personnel, at a strike price of, (pick a number, say $65 per share). If so, then the people granted these rights would, in essence, receive a cash bonus/award of $15.00 for each SAR they hold if the share price rises to $65. So currently, for determining synthetic equity, these SAR's wouldn't confer any synthetic equity, and wouldn't until the strike price is reached? Is that what you are saying? Thanks so much!

Seems like every time I look into an ESOP question, I wish I hadn't. Suppose there is a SAR for a few critical employees. Suppose it basically operates as a cash bonus if the stock (all owned by a 100% leveraged S-corp ESOP) hits a certain strike price. How do you take this into account for purposes of determining synthetic equity? Since a future stock value is a complete unknown, then is it safe to assume that there would be NO synthetic equity until the strike price is reached? Or is that an unwarranted assumption?

I'm assuming no deferrals/contributions have been or will be, or are required to be made to the 401(k) for 2014? In other words, ONLY the rollover is contemplated? Assuming all that good stuff, and assuming that you are past the 2-year period, etc., etc., then the rollover to the 401(k), in and of itself, would not cause a violation. See the following from IRS Notice 98-4. Q. B-3: Can an employer make contributions under a SIMPLE IRA Plan for a calendar year if it maintains another qualified plan? A. B-3: Generally, an employer cannot make contributions under a SIMPLE IRA Plan for a calendar year if the employer, or a predecessor employer, maintains a qualified plan (other than the SIMPLE IRA Plan) under which any of its employees receives an allocation of contributions (in the case of a defined contribution plan) or has an increase in a benefit accrued or treated as an accrued benefit under §411(d)(6) (in the case of a defined benefit plan) for any plan year beginning or ending in that calendar year. In applying these rules, transfers, rollovers or forfeitures are disregarded, except to the extent forfeitures replace otherwise required contributions. For purposes of this Q&A B-3, "qualified plan" means a plan, contract, pension or trust described in §219(g)(5) and includes a plan qualified under §401(a), a qualified annuity plan described in §403(a), an annuity contract described in §403(b), a plan established for employees of a State, a political subdivision or by an agency or instrumentality of any State or political subdivision (other than an eligible deferred compensation plan described in §457(b)), a simplified employee pension ("SEP") described in §408(k), a trust described in §501©(18) and a SIMPLE IRA Plan described in §408(p).

No takers? I'm sure my hypothetical numbers are ridiculous, but I just want to see if I've got the basic concept. Plus, is there another more "reasonable" method for a first year situation than using the first year valuation method? 'Cause you technically don't usually know how the first year valuation will turn out until after the fact... Thanks.

Assuming you aren't a TPA for any non-U.S. retirement plans, there shouldn't be any concern for a "regular" non-investment institution TPA about FATCA compliance, right?

Suppose plan currently uses prior year testing. If they amend the plan this year (2014) to utilize the top 20% election, are those people who will no longer be HCE's due to the election still counted as HCE's for 2014 plan year testing, because they were HCE's for 2013? So that the amendment would have no real effect until you do 2015 plan year testing? Or, can you count those people as NHC's for 2013, since you are doing "2014" testing? I'm inclined toward the former...

Not sure I'd allow it for rollovers INTO the plan. But I have no problem with generally allowing for distributions, although I can foresee situations where it might be difficult if they have whacko/hard to value investments, etc... (you didn't really expect a straight answer, did you? I can hardly remember the last time I said "yes" or "no" in this business)

I was blessed to have an exceptional unofficial mentor in my younger days at a former employer. A fine ERISA attorney, he was unstinting with his patience and time, going far above and beyond the call of duty, and never once showed any frustration with my many stupid questions. I was lucky, and I knew it! It's tough now, because so many employers have such specialized job requirements that they won't or can't do much in the way of on-the-job training, and they don't want the "expert" taking their time to "mentor" a younger employee. So it seems to me that these mentoring relationships are going the way of hard-copy newspapers. Plus, seems like the dang young whippersnappers think they know everything...

I wish I'd read this earlier! I was having the same problem, couldn't paste anything into a new discussion or a reply, couldn't figure it out. Just had a discussion with Dave, and he suggested this very fix, which worked just fine. He asked me to post it, so I went into this forum, and discovered (too late) that Masteff had been kind enough to post the solution. So thanks, even if I read it too late!!

I have a hypothetical question, but based upon a potential real-life situation where client currently has C-corp with a 401(k) plan, and is now suddenly interested in converting to an S-corp with an ESOP, for reasons unknown. I'm just trying to consider some background. Numbers are hypothetical and rounded for simplicity. For purposes of the example, assume 1,000 total shares, all to be owned by the ESOP, with no synthetic equity and no family members. So, in first year, since there is no prior valuation to use to calculate "deemed owned" shares, you must use a "reasonable " method." I'd assume that the actual first year allocation/share release would typically be a "reasonable" method? So, let's say 140 shares allocated/released, and of those, 60 are allocated to Mr. Big. This represents 43% of the total share release for 2014. So for his deemed ownership, you start with the 60 shares, then you take 43% of the remaining 840 shares, or 360 shares, for a total of 420 shares - app. 42% of the total. First, have I got that right? If so, that's pushing the 50% in the first year. So, say you then amend the plan to exclude Mr. Big from receiving further allocations. You still aren't necessarily off the hook, because an "impermissible accrual" includes ACCUMLATED allocations from prior years (although I can't offhand see how he'd reach 50% if he is ineligible to ever receive an allocation, barring some new family issue or synthetic equity situation?) I'd think perhaps the client's legal/tax counsel would perhaps advise Mr. Big against participating even in year one? I've seen very few ESOP's, and the ones I've seen are mostly small S-corps where the Head Honchos are excluded from day one cause they can't pass 409(p). Appreciate any thoughts.

I agree with Masteff. This was my precise thought process as well (which probably isn't comforting to Masteff!)

Thanks to all for your responses. First, I'd like to say that all of this is in fact a hypothetical question, not a "real life" situation. We were having a discussion about this issue, and weren't sure, so I thought I'd get some opinions here and as always, the discourse has been very helpful. Shot, FWIW, I wasn't envisioning a situation where there is any formal agreement in the loan note, seller agreement/stock purchase agreement. Merely a situation that would be purely discretionary - using cash in the plan to prepay the loan and release shares. GMK and ESOP - yes, that's precisely the situation we were discussing here. Again, this has been very helpful, and I thank you. Observations from experienced people like you who have actually been in the trenches are far more valuable to me than textbook discussions generally are. I find ESOP's to be a somewhat daunting subject, and all the ERPA and QPA, etc. coursework pretty much glosses over them, so I'm trying to learn more about them from other sources. The regs and all the legal/compliance information is fine, (although tough sledding at times) but that stuff doesn't address these types of common, real life questions. I'm not sure there is any substitute for actual experience!

Thanks ESOP. Well, maybe I'm reading that section wrong. I agree that it says that for transactions between the plan and a disqualified person, value must be determined as of the date of the transaction. But, the proposed transaction isn't between the plan and a disqualified person. The plan already owns the shares, and the cash already in the plan participants' accounts that represents the 2013 contribution is proposed to be used to prepay some of the loan, and shares will be released accordingly to the participants. So the quoted regulation goes on to say that for all other purposes under this subparagraph (5), value must be determined as of the most recent valuation date under the plan. Maybe my initial terminology was incorrect. Maybe it should be a "release" of shares rather than a "purchase" of shares?