Luke Bailey

M Norton, after discussing Larry's suggestion above with another practitioner, I am reminded that there may be a difference of opinion regarding whether 11(g) amendments (i.e., amendments under 1.401(a)(4)-11(g) of the regulations that are effective for a prior year outside the rules of 401(b)) can be used to correct something other than a 401(a)(4) or 410(b) failure, which the erroneous match was not. My recollection is that that issue has previously been litigated in these message boards without any definitive resolution. But assuming for sake of argument that one does not think 11(g) amendments can be used except to correct 401(a)(4) or 410(b) failures, I have some additional suggestions for you. First, as I think may have already been state above, if you have a plan with very loose contribution allocation language, you may be able to treat the excess match as a nonelective allocation for the prior year without any amendment at all. Second, if your plan language prevents such an interpretation for the prior year, and if you are conservative regarding the application of 11(g), I have another suggestion. Scrape the money back from the account for the prior year (i.e., the most straightforward "conform the operations of the plan to its written terms" EPCRS self-correction, already suggested above), and then amend the plan to allocate the dollar amount that you scraped away (together with earnings) to the same individual for the current year. As an allocation for the current year, the amendment, if done by 12/31/2019, would be timely as a discretionary amendment, and the 11(g) amendment timing rule would not be required. This latter approach should work perfectly for anyone who is still a participant in the current year. For those who have left during the correction year and already taken a distribution, it's arguable whether this approach will correct the error. And for anyone who left before the beginning of the current year, it won't work at all because they will have not 415(c) comp.

cpc0506, if it's a 501(c)(3) as reflected on its For 990, it can have a 403(b)

khn, the controversy as to the validity of the IRS's position, touched on above, has been discussed elsewhere, at somewhat greater length, in this forum. You should search the "partial termination" subject on this forum if you want to explore in greater depth.

I need help, I think you've probably reached the limit of the help you can get without someone getting full access to documents and financial statements (which may require legal action) and doing a very detailed analysis. Even then, there could be a difference of opinion. ESOP valuations in sales are a frequent issue in litigation. Outcomes of cases depend on facts.

M Norton, I think either BG5150's or Larry Starr's proposed fixes will work. You will need to be the judge of which is simpler.

sdix401k, obviously if the guy has enough prior service to be 100% under the 2/20 schedule, there is no discrimination issue and Larry's point wins the day.

My first thought, sdix401k, is that Roz is correct, because such a change would not appear to violate 411(a)(10). However, take a look at 1.401(a)(4)-5). It's facts and circumstances, but certainly seems possible that the IRS could allege that 401(a)(4) is violated by what you describe. I can't recall seeing much in the way of guidance or case law on 1.401(a)(4)-5, but you should probably check.

As a short-hand analysis of the UBIT issue, consider whether the real estate income, if the real estate were owned by your client as an individual, would produce capital gain or ordinary income, which may not always be crystal clear. Of course, if the property is leveraged, then you have to consider the UDFI rules and the potentially applicable 514(c)(9) exception thereto.

Phillip, sounds reasonable. Of course, I don't have any real facts and am speaking hypothetically of the legal principles and regulatory history that is in play in your question.

sdix401k, you're looking at the wrong reg. Not BRF, but discriminatory amendments and terminations (just turn the page to 1.401(a)(4)-5). It's facts and circumstances, but certainly seems possible that the IRS could allege that 401(a)(4) is violated by what you describe. Although audits are infrequent, the agents I have dealt with could pick this up and sing their teeth into it.

I need help, in your question you state that not all the cash may be included in the valuation. You also state that the officers of the company may be hiding the cash. If your suspicions on those points are correct (and I have no way of evaluating them, of course), then certainly the valuation will be wrong, as not even the most ethical and skillful appraiser can appraise correctly based on inaccurate data. My recollection is that the valuation report is not, at least in those circuits where this has been litigated, a plan "instrument" that is subject to your ERISA document demand right. However, you would certainly get a copy in discovery in any litigation, and the DOL has subpoena powers if it gets involved.

Phillip, my guess is that most practitioners would require some sort of supervisory function to be considered management. These CPAs seem to be involved in the CPA firm's day to day business activities. For example, if they worked for the CPA firm as senior employees or members, then assuming the firm is of any size and has some degree of centralized management, you would probably not view these individuals as part of the firm's "management." But certainly, if the firm is small and is run by all the members, and these individuals are treated as members in making business decisions, they could be "management." Anyway, this is probably something on which reasonable minds could differ. Again, the withdrawn proposed regs just flat out converted line services of professionals into "management" to get around the issue and prevent this sort of structure as a way around the 414(m) rules. One could infer from that a view at Treasury that the proposed regs had overreached, perhaps specifically on that point. Of course, what really got them withdrawn was lobbying, however.

kmhaab, without being able to review the documents (stock purchase agreement, resolutions, etc.), I can only guess, but my guess is that you are analyzing the situation correctly.

Allocation of the burden and risk of terminations should have been included in the stock purchase agreement. If it was not, then default would be that would be obligation and risk of surviving company, A, but there might be other protective verbiage for A in the stock purchase agreement even if did not get a specific allocation of duty to terminate ESOP to B's shareholders.

I don't know the answer, but if the checks are uncashed, the money is still in a bank account, right? Historically, I have put in plan documents, or resolutions for plan termination, that uncashed checks would at some point revert to employer and be held by it on behalf of the participant, and if at some point the participant reemerged and asked for his/her funds, employer would pay it without interest. Idea was that plan would no longer have an account within, say, 6 months of termination. But as long as there is a bank account in the plan's name, how can you say there are no plan assets?

SSRRS, RatherBeGolfing is raising a good point, i.e. that the option has to be something that is realistic and credible as something of value, not a sham.

Probably wouldn't hurt to ask local HR. A careful review of the SPD (e.g., the identity of the "Administrator," or "Plan Administrator," and how to contact) should reveal what you need.

Almost certainly the case. Seems to me would be a 4975(c)(1)(D) use of plan assets for benefit of DQ'ed person.

The paperwork and sequence of events causing the error need to be reviewed, as does the 5498 reporting. If the custodian can get to a place where it sees this as a mistake of fact, they may be comfortable with fixing.

There has to be some ownership. This sort of situation would have been covered under 414(m) and (s) (to form an ASG) under the management group and shared employee provisions of the proposed regs, but the proposed regs were withdrawn 10 or 20 years ago. Those proposed regs classified professional services provided to or in conjunction with another entity of the same type as that entity provided to customers as "management." But since they were withdrawn, you are left with plain language definition of "management," and what you describe is probably not management. Probably the real answer is that in an ideal world (for tax purists, anyway) the PA's could be disregarded (effective, pierced for tax purposes) and then the individual CPAs could be classified as employees of the accounting firm, but those issues are a forbidding legal wilderness, at least for now, for the IRS, and I doubt they would ever try to go there.

Depending on your state, the company's bylaws, and other facts and circumstances, granting a 5% option may require shareholder or board approval. If you're talking about the simple situation where A owns 100% and is going to give B an option (or cause the corporation to give B an option) you would probably not need approvals. My guess is that the approval issue aside, an employee in possession of a clearly written letter granting the option would be able to enforce it, and if that is the case, the IRS should buy it, but you are creating uncertainty and could get pushback from IRS in exam. Also, anyone who is thinking about causing a corporation to give an employee an option for 5% without creating an option agreement covering inspection rights, call option after termination from service, duration of option, yadda, yadda, yadda, is asking for trouble. Also, for 409A you need the option price to be no less than FMV at date of grant, so do something substantial there, e.g. an appraisal or see if you can come within the illiquid start-up safe harbor. If you're talking a corporation with some value, that may be growing and may have a liquidity event down the road, I can tell you that seat of the pants equity comp arrangements are a frequent source of trouble in transactions and often lead to litigation and alleged malpractice claims after the parties part ways.

chc93, you are reading it as if it said "you may only" and the others (including me) are reading it as "you may or may not." Outside of a particular context, "may" is inherently ambiguous. Your superior tells you, "You may go now." That's a command. A child finally convinces his or her parent to let him or her stay out late at a concert, and the parent says, "OK, you may go," and probably the child is correct in concluding that it's OK also not to go.The Merriam-Webster on my iPhone does offer, "SHALL, MUST" as "used in law," but it is the fourth definition given and applies where the "sense, purpose or policy requires this interpretation." Given that EPCRS generally allows retroactive changes in plan operations to conform them to the plan's written terms, and allowing retroactive amendment is more sparingly applied, I don't think that the "sense, purpose or policy" requires the "shall, must" interpretation here.

ratherbereading (so would I, btw), anticipating that you may still get some pushback notwithstanding that this was done by plan amendment, I would point out that there is some tension in the nonqualified CODA rules surrounding what exactly constitutes an "election." Although every situation is unique and this is to a great extent a facts and circumstances issue, putting aside the timing of the amendment (e.g., how late in the year it was, whether the participant had already satisfied the allocation conditions, whether the contributions in question were completely discretionary, all of which are important), every negotiation ends in an agreement of some sort, which means both parties "agree." Whether the participant's agreement to something at the end of a negotiation constitutes an "election" by the participant can be of a gray area, to be sure.

Right. I mean, with "taxable fringe benefits" the distinction between that and pay can be pretty subtle. On the one hand you have something that won't be paid unless it is incurred, e.g. an employer that will reimburse moving expenses. At the other extreme you have an employer that has an office in an expensive area and pays everyone working in that office a $10,000 "living expenses" bonus vs. what it pays in other offices. There are probably things in between as well. It all goes in Box 1 of the W-2, so if for some crazy reason an employer wants to depart from the simplicity of the W-2 safe harbor for 414(s) and say that comp does not include "taxable fringe benefits," it really needs to go through all its payroll codes and specify which codes are fringe benefits, which not.

This does not make sense to me either. It may be an honest misunderstanding of how the plan and the law work. I would ask the employer to point out what written document (plan, trust, loan policy, SPD) they are attempting to enforce. They will likely find nothing. If that fails, call the Employee Benefits Security Administration division of the U.S. Dept. of Labor and ask for its assistance.