Belgarath

"If the company purchases/redeems shares from ESOP distributees, there is no ERISA party in interest transaction (as the ESOP is not a party to that transaction). The fact that the company pays more than current appraised fair market value does not make the redemption a transaction subject to ERISA's prohibited transaction rules. The company and the ESOP trustee have agreed (in advance) that the company will pay the higher redemption price at the time the ESOP distributes shares." Hi Shot - thanks for the information. the problem here is that the document PROHIBITS distribution of ESOP stock to the participant, because they are an S-corporation. If no such prohibition existed, I wouldn't have a problem with this. Given that the stock must be purchased from the ESOP, then I believe paying more than FMV is a prohibited transaction? Yes, I'll do some searches on this.

Yeah, but it just seems very odd - why go through the whole Trust thing if you don't have to? Oh well, presumably Schwab's legal department had a good reason for it. I've just never seen anyone else do it.

The brief was informative, but contains no citations whatsoever. With regard to the price protection distribution, they have this (among other things) to say: "In most situations, this is accomplished by having the company redeem shares from those participants eligible at rthe greater of (1) the price-protected value or (2) the ESOP fair market value. The company then either recontributes those shares to the ESOP (at the current ESOP apparaised price) or retires them as treasury stock. The proceeds from thjis redemption would be eligible for a tax-deferred rollover to an IRA..." I ask, how is the company purchasing shares for more than their fair market value not a prohibited transaction? What am I missing? The people writing this brief are obviously bright and experienced in ESOP's, but it sure would be comforting to see some citations supporting all of these assertions and techniques...of course a client must seek legal counsel, but for my own edification, I'd love to feel like I actually understood this!

Resurrecting this old post - just saw something I haven't seen before - Schwab, for a 403(b) plan, has the employer execute a Trust agreement wherein Schwab is named as the Trustee (a directed trustee) and the 403(b) custodial accountis within the Trust. Very strange...

Hi ESOP - yeah, this is how I would have envisioned it. So whatever they dump in must be allocated to ALL participants as per the terms of the document. Therefore if 3 participants have terminated, and are "entitled" to an additional $10,000 each under the price protection agreement (which is not part of the plan) dumping $30,000 into the plan wouldn't then do it anyway, becasue a lot of it would get allocated to other participants, right? And even if you make the leap that you can dump it in, how is it an eligible rollover distribution? Unless, I suppose, you make a further leap that whatever was dumped in and allocated to only those three participants represents the distribution that they are "entitled" to under the plan - in which case, I suppose it would qualify as an ERD. Question - have you seen an IRS-approved document that permits such a "dump-in" specifically allocated only to those people eligible for price protection - assuming such price protection is also in the document? So that perhaps all of this is in fact permissible if your DOCUMENT so specifies? So that maybe what they have is an incorrectly drafted document? I'll be fascinated to see how the brief I ordered addresses all of this, if indeed it does. I appreciate all of this discussion - it helps to weed out extraneous issues and brings focus to the real questions.

Ok, a little more information. (P.S. - ordered the brief mentioned by Shot, so if they provide actual citations I'll let you know) So the ESOP has the funds held in a stock ownership trust by ABC Trust Services, Inc. The sponsoring S-corporation, via a letter/legal agreement signed/agreed to by a Trust Officer of ABC Trust Services, Inc., provides, in relevant part for these "protected distributions" that: "The Price Protected Distributions shall be purchased or funded, as applicable, at a price equal to the greater of (i) the then current fair market value of such sahres as determined under the Trust and in accordance with applicable law, or (ii) the fair market value of such shares (determined underthe Trust an in accordance with applicable law) determined without taking into consideration the impact of then outstanding financing incurred to effectuate the Redemption Transaction." This is just the formal language for what was discussed already. I don't see that it changes the issues or answers given/discussed previously? Shot - since you have actually administered such plans, is it your position that the sponsoring S-corp can dump in this extra money to the Plan, not count it as a plan contribution and therefore not allocate to all participants, and turn around and pay it out entirely as an eligible rollover distribution? Do you have any citations for such a position? Thanks again.

An IRS auditor might (I've seen it happen) accept a corporate resolution that was properly and timely executed, plus corporate minutes, for example, of evidence of the timely adoption of the amendment/document. Problem is that there's no way to know in advance whether an auditor is going to be reasonable or obnoxious. The submission fee under VCP depends upon the number of participants - less than 20 would be $750, for example. Check Revenue Procedure 2008-50 - I think it may be Section 12, but I'm not certain, going from memory!

Thanks for the information. I think I'll order the brief to see what they have to say. Do you know if this organization's briefs provide appropraite citations, or is it just "opinion" not backed up by anything?

Everything about this seems wrong to me, but the "trust company" says they do it all the time... S-corporation sponsors a leveraged ESOP. When the last batch of stock was sold to the ESOP, there was a "price protection" agreement put into place (outside of the ESOP plan document) that said for any participant who terminated employment and received a distribution within 3 years of the sale, that the distribution would be based upon the higher of current FMV at the time of the distribution/liquidation of the shares by the ESOP, or the price per share as of the date the stock was first sold to the ESOP. The purpose, apparently, was to protect retirees in the short term if the stock dropped. Is this a common thing? Beyond that, the PLAN DOCUMENT makes no provision for this higher "price protection" distribution. The trust company is asserting that: 1. The Employer can dump into the plan the difference between the current FMV. This will NOT be treated as an "employer contribution" and hence not allocated to all participants. Whether the Employer intends to deduct it or not I couldn't say. 2. The ESOP can then distribute the full "price protection" amount and it will ALL be an "eligible rollover distribution." They further assert that they have worked with "many top ERISA experts" and have "never had a comment against it." I'm completely baffled as to how they arrive at their conclusions. But since I'll be the first to admit I'm no ESOP expert, I thought I'd check to see if in fact these are common and accepted practices, and if so, what citation or citations might support it?

Thanks. Yes, this will be pointed out to the reviewer, but I just wanted to first make sure I wasn't out in left field.

A reviewer has made a request that I think is 100% wrong, but since I've made a mistake or two in my time, I just would like to see if folks agree. First, this is a profit sharing plan, with no prior pension money. The plan has a normal retirement age of 60. This was submitted for a d-letter in 2009, and it just got the initial review in July! The reviewer is asserting that the plan must be amended to have a NRA of 62, as per 1.401(a)-1(b). Well, I don't agree. This is a profit sharing plan as defined under 1.401-1(b)(1)(ii). The cited reg doesn't apply. Furthermore, IRS Notice 2007-69, as well as even the IRS LRM language, both make it clear that her amendment request would apply only to a pension plan. Any other opinions?

Perhaps choose based upon length of service with employer, for example?

Contributions to a PENSION plan have to be in cash - can't contribute property. I think I recall this was Keystone but you wouldn't want to quote me on that. As MJ says, contributions of unencumbered property to a PS plan are generally ok, subject to all the other requirements...and of course, the plan document must permit it!

See IRC 414(p)(11) and (12). P.S. Here's the citation: (11) Application of rules to certain other plans For purposes of this title, a distribution or payment from a governmental plan (as defined in subsection (d)) or a church plan (as described in subsection (e)) or an eligible deferred compensation plan (within the meaning of section 457(b)) shall be treated as made pursuant to a qualified domestic relations order if it is made pursuant to a domestic relations order which meets the requirement of clause (i) of paragraph (1)(A). (12) Tax treatment of payments from a section 457 plan If a distribution or payment from an eligible deferred compensation plan described in section 457(b) is made pursuant to a qualified domestic relations order, rules similar to the rules of section 402(e)(1)(A) shall apply to such distribution or payment.

Well, perhaps you can amend and restate into the VS now, instead of waiting? But as to "minor modifications" - I posted a question on this a while back - see below - no replies. I hope someone brings this up at the ASPPA conference or some similar forum - I'd love to hear what the IRS reps think about this. In the past, it seemed that the IRS was fairly reasonable about allowing MINOR modifications to a VS without requiring a determination letter filing. However, under Revenue Procedure 2011-49, a literal reading of the Revenue Procedure doesn’t provide any wiggle room on this subject. In fact, they specifically removed a provision from prior Revenue Procedures that, reasonably, allowed correction of “obvious and unambiguous” typographical errors and/or cross-references. Now, if you lose reliance over fixing a typo, or a reference to the top-heavy provisions in article “x” – when in fact article “x” is for minimum distributions and article “b” is the top-heavy article, then more substantive modifications seem risky. Anyone had any conversations with the IRS on this whole issue, or heard anything at conferences, etc.? Whether the IRS truly intends to enforce this I can’t say. But it looks like you could file minor modifications on a 5307, as per the following. See following excerpt from Revenue Procedure 2012-6. Modifications to Revenue Procedure 2011-49 .02 Rev. Proc. 2011-49 is hereby modified as follows with respect to determination letter applications filed on or after May 1, 2012: 1. An adopting employer of an M&P plan (whether standardized or nonstandardized) may not apply for a determination letter for the plan on Form 5307. 2. An adopting employer of a VS plan may not apply for a determination letter for the plan on Form 5307 unless the employer has modified the terms of the approved plan and the modifications are not so extensive as to cause the plan to be treated as an individually designed plan.

I knew I should have stayed in bed this morning! Very strange question here... Employer has DB plan with 7/1-6/30 plan and limitation year. Employer also apparently has an ERISA 403(b) plan with a calendar year limitation year. I have no idea, at this point, what the 403(b) plan language says about limitation years if more than one plan is maintained by the employer. The DB plan has some fairly standard (or at least it used to be) language that all plans of the employer must have the same limitation year. This isn't really a document error - nothing wrong with the document language. It's more of an operational error than anything else, but what is the operational error to correct? There's no actual 415 violation involved! Would you just amend that language out of the plan and be done with it? Amend and submit for a determination letter? Ignore it until next go-round with updating documents?

401(k) portion is trustee directed. If the plan allows the employee the option to take as a distribution, would this satisfy the diversification requirement? Or must such distribution be mandatory? It appears that 401(a)(28)(B)(ii), it is mandatory. Which doesn't make a lot of sense to me, but as I said, I don't really deal with ESOP's. Thank you for your comments, they have been very helpful in clarifying the issue.

1. Correct - one plan with both ESOP and 401(k) provisions - not two separate plans. 2. Actually a balance forward. 3. "By separate account do you mean at a whole new account name and number" - yes. And this seems crazy to me, so I'm guessing that they can just do separate accounting. Thanks for your assistance!

I have a similar question. Employer has a plan with ESOP and 401(k) provisions. It isn't publicly traded stock, so it only has the 401(a)(28) diversification provisions. The plan document is a little odd, (at least to my untutored eye, as I don't really deal with ESOP's) and doesn't really address the question of where this money is deposited. The plan apparently currently has only deferral accounts, match accounts, and Stock accounts, but no ESOP "cash" account. Is it really just an accounting function, so that they deposit this into whatever account holds the match/deferrals, but "tag" it somehow for separate accounting? Or MUST they physically open a separate account?

Your prototype, under the definition of "leased" employee, will almost certainly answer some of your questions. I'd start there. It is likely (almost a certainty...) that the plan of the leasing company will not satisfy the requirements for them to not be consider "leased" employees. So, you would have to count them as non-excludable. However, your definition probably also specifies that contributions or benefits provided a leased employee by the leasing organization that are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. So depending upon the level of benefits and coverage, you may be fine anyway.

Hi Bird - actually, in the situation I was talking about, they weren't talking about 408b2. Actually understood the difference, and supposedly knew what to do and were doing it before the end of August. But that is the rare exception!

Wow, this just made my day! Even though it isn't our responsibility, I've been calling brokers on the plans we administer (because everything ALWAYS falls back on the TPA anyway, as y'all know!) to let them know about the fee disclosure requirements, and Q&A-30, and it has been a struggle. I've been frankly shocked about how many brokers knew NOTHING about the fee disclosure requirements. What is also interesting is the response of different brokers for the SAME company. For example, I might have talked to 4 different brokers from (pick a company - Morgan Stanley for instance) and three brokers have heard nothing about any of this, and the 4th says, "Oh yes, we are well aware of it, MS has made us well aware of it, and we are all set on the disclosures - we don't need any assistance from you, etc.

Thank you.

I have a question on this. In a participant directed plan which has a brokerage window, assuming there is no specifically designated investment manager, who has the voting rights on stock purchased through that window? The Trustee because it is still a plan asset? Or the participant because the Trustee does not exercise "full management responsibilities?" I incline toward the former, particularly based upon DOL interpretive bulletin 08-02, but I'm not certain. A "standard" plan provision below: To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property. However, the Trustee shall not vote proxies relating to securities for which it has not been assigned full investment management responsibilities. In those cases where another party has such investment authority or discretion, the Trustee will deliver all proxies to said party who will then have full responsibility for voting those proxies

MB - can you please elaborate on answer # 1, as it goes against what I thought I understood. Suppose a participant in an ERISa plan gets mad at his ex-wife's new boyfriend, so he burns down his house, and is convicted of arson and ordered to pay restitution. Can the judge really validly order involuntary attachment of his benefits? And how can the Trustee comply of the plan doesn't permit such attachment? I was under the impression that other than the existing specific statutory exceptions, such involuntary alienation wasn't allowed. Slayer's statutes seem a little different, as the participant is dead already. Sal has a reference to USA v. Jackson, 229 F.3d 1223. Is there established case law that deals with this, other than slayer's statute stuff? Thanks for your insights on this subject!