Degrand

Segregation is common only when the stock is replaced with cash. The cash will need to be prudently invested. If you question is whether a company can keep a terminated employee invested in shares and freeze their value to a set price, there is no legal way to accomplishing that result. Stock held in an ESOP is required to be valued at least annually.

I would run 409p testing prior to making any distributions in either cash or stock. You may have to convert to a C-corporation prior to distribution in order to pass testing. I have worked a few ESOP companies that have failed to run the test and failed 409p.

This is likely a gray area and may hinge on state law. Given the consequences of failing 409p, I would treat the warrants as synthetic equity.

My issue is the discretion of the administer and whether they comply with the definitely determinable rule.

Just like a 401(k) plan if the ESOP has assets other than stock, it needs to be titled in the ESOP's name. Since the ESOP distributions of stock to participants can purchased by the company using the put option or the ESOP holding only stock, it is common for the ESOP to not have an checking or investment account. Just to confirm you are talking about an ESOP holding stock and other investments. In that case, the checking or investment account needs to be in the trusts name.

I would suggest not participating.

I agree. The entire distribution from the ESOP should have been reported on the 1099R. I would fix the reporting filing since the distribution is from the ESOP and not the company.

@Cardscrazy, the consent and the 180 days is only applicable to the start of the distribution. Consent is not required for each of the installments. Just like a retirement plan does not need a participant's consent to each pension payment.

ESOP companies usually use option 1 and the company may contribute the shares back into the ESOP. Option 2 doesn't work for two reasons. The investments in the ESOP are not participant directed. The investment in the stock doesn't meet an exception under the securities laws. While 409p may be an HCE issue, it isn't always the case. I have seen the IRS during an audit accept an in-service distribution of UBIT shares without questioning 401(a)(4) issue. However, it might have been because the stock usually went up 10-15% each year. The distribution of the stock wasn't looked at a favorable outcome to the participant.

the participant can take a 100K covid distribution.

Your bigger issue is that an employees with 19.25 hours a week would have 1000 hours during a plan year. They would participate in the Plan. Also, would an employee become a participant if he/she works 21 hours during one of the week?

Due to the profit sharing contribution being discretionary under the current plan terms, the employer can choose whatever rule they want to make the contribution.

I agree with the ESOP Guy, it sounds like you are receiving a diversification and not a distribution due to your termination. If it is a distribution due to your termination, you would only not be eligible for a distribution if Company is prohibited to honor the put option due to state law.

They will have to use the VCP for 415 failures.

The ESOP plan document and amendments are required by law to be available to you. Otherwise, I agree with the ESOP guy. Compensation is usually a reasonable approach to allocation of unallocated shares.

The failures are the cause of the disqualification. The IRS can find a plan to be disqualified even during closed plan years. I have seen the IRS take this position with plan document failures.

Unallocated shares can be allocated based on current compensation, as earnings on the shares, or any other method that is non-discriminatory. You should request the termination amendment which would include language regarding the allocation of the unallocated shares due to a sale. It would have the language that you are seeking.

Amendment needs to be done within the remedial amendment period. Otherwise, you need to file a VCP application with the IRS. SCP method are not available for non-amender.

Assuming the beneficiaries aren't in jail for killing the participant, it doesn't matter that the beneficiaries are in jail. The plan should move forward with the distributions.

The cost of negotiating an administration contract that results in lower fees for the plan holding the forfeitures would be an administrative cost and maybe offset.

You do not consider the $50 processing fee when determining the mandatory cash out.

Can they past testing if they were not a safe harbor plan?

Nondiscrimination rules still apply and would likely result in the amendment being applicable to more than this one participant.

Make-whole contribution: The plan sponsor or another responsible entity contributes the amount of the overpayment (with appropriate interest) to the plan in lieu of recouping the amount from plan participants and beneficiaries. However, the beneficiaries will have to be notified that 60% of their benefit is not an eligible rollover and will be taxable.

It seems the focus of the participant's concern is whether the SIA (which is likely being invested in a similar ways the OIA) is prudent. ESOP are entitled to segregate account balance out of stock and into other investments. See https://www.irs.gov/pub/irs-tege/esop_tar4_022310.pdf. However, ESOP would still have to prudently invest such funds. Another is issue is that the SOL may have run out on your client's claim since the underlining fact occurred over a decade ago.