Cardscrazy

My TPA had us do a blended cost basis per share so no admin headache dealing with multiple cost basis. Are you an S Corp? If so, don’t forget about the S Corp basis adjustment!

Maybe adding to tell HR that you want it all returned -a mistake of fact, that you didn’t want to participate in the first place. I think a refund can be done. If they refuse then tell them you want this to be considered formally as a claim for benefits which according to your summary plan description forces the plan sponsor to do certain things like formally document the reasons, showing you where in the plan it says they can’t do what you ask. And that response is the final word; they are the final authority, unless you want to sue over this. But you at least got it documented. good luck!

sorry, and thank you. Yes this is a calendar year plan year with it's federal tax return extended to October 15. It's the testing that bothers me. Our TPA said that any contribution made late would require another round of testing. I'm going to offer the company payday matching, eliminating the last day rule, or quarterly matching with last day of quarter requirement. I don't believe paying late in the year, even if allowed, is really a good option. Thank you for your responses!

Hello, I typically do the annual match calculation and lump sum contribution for my company in late January in the year following the plan year, but the company has a lot of expenditures in Q1. They have asked if the match could be paid later in the year like, for example June 30. I offered April 1, but they declined that date as it's too close to Q1. They countered with April 30 or later, like June 30. I believe a match paid after April 15 would mess up compliance testing, am I right? Especially 415 testing, which is an issue for my company as we do after-tax voluntary contributions/Roth conversions. I will offer to do quarterly matches with a last day of the quarter requirement. Right now we have a last day of the year rule. By going quarterly it will increase costs, but spread out the payments like they want. What does the community think? Is a match payment after April 15 not a feasible idea? Besides 415 testing, what other tests are impacted so I can defend my position? Thank you!

Dobber, I'm kind of with Dare Johnson on this one (except that ESOP stock has no holding period requirement to get LTCG) and I was not aware you could split NUA as it was my thought that every share of stock had a cost basis that was inexorably linked to each share. If you could please share your PLR references, that would be helpful. As to your specific question rollover vs. transfer which should happen first, I'd say it would not matter what goes first if you can split the NUA like you say.

Well it's natural to have expenses associated with the ESOP portion in the 401(k) plan e.g., independent audit fees, trustee fees, third party administrators, and maybe investment advisor fees. There's probably a requirement that all expenses are ratably allocated based on assets, resulting in the need to sell ESOP shares to pay them. Since everyone is 100% vested there are no forfeitures to use sell to pay expenses. Since the ESOP is within the 401(k) it must be that your company refuses to pay those expenses themselves, which they could. There should be information in your summary plan description. There should be some transparency, including an annual fee notice that provides fee information. Find out who is on the company benefits committee and ask them.

If you second anyone to a related entity 1) pursuant to a secondment agreement with such foreign entity and 2) pursuant to a secondment letter/expat agreement with your employee, you can keep the individual on the US payroll, while the related foreign entity reimburses the US entity for employment costs. While on US payroll they can continue 401(k) benefits and deferrals as they have US source income. I would suppose this applies to a non-resident who is on US payroll but I've only had US or dual citizenship employees go to the UK. Secondment keeps the employee off the foreign payroll for the country they work and reside in, which would normally be required of anyone working and residing there. You should seek out a US tax law firm to assist you. There is no requirement I'm aware of that they have to come back and work a day in the US to maintain their US source income status. Coming back would seem counter to the secondment agreement terms. Like what was said, a US DC plan typically excludes non-residents with no US source income, but here the employee would remain on the US payroll while seconded. If your secondment fails a challenge then all bets are off.

The employees of the PEO are terminating employment there and are experiencing a distributable event as a result. Ask employees of Company B to rollover into Company A's plan.

I give them a copy of the determination letter. I didn't bother to explain why the determination letter is so old since then I'd have to explain that the IRS doesn't give out determination letters anymore. They didn't ask about that, so maybe like Bird said, they're just checking a box. I've attached a redacted copy of my standard letter. Anybody want to help me write a better letter? Expl ESOP to 401k Verification Letter_Redacted.pdf

I don't know if reference to IRC 163 does anything because a participant loan is not allowed for a "substantial improvement" so why would IRC 163 support or not support a participant loan for a construction. The loan rules stand on their own I think. Therefore, with those rules being vague, the acquisition of and construction of a primary residence (both resulting in primary home acquisitions and mortgages) are rather similar with the end result being a dwelling to live in that they didn't have before so I'd believe you should be able to make an administrative interpretation and document it as such and allow the loan for the construction, as long as you confirm that they did ultimately live in the house.

well, isn't their choice either default/payoff/rollover. How much time do they need to think? Everyone always rolls over if they can. It's done as fast as the TPA can do it and I've seen it done pretty fast, like in time for next payroll. I think that the amount of time before a default occurs under the old plan following termination, say 60-days, is sufficient to bring the old loans over and gives you legal leeway on timing. I'm a plan sponsor (not in payroll), so TPAs typically mostly handle this for me.

The old loan plan has to allow a rollout of a loan (usually after amendment at termination to allow a loan to be rolled out for a business event, like a merger, or sale) and the new plan has to allow a roll-in of loans (also typically for a business event). The former employee of one plan becomes an employee in the new company immediately (even if not allowed to participate in the new 401(k) plan) and the loan can be transferred almost immediately from trustee to trustee even before employee's first contribution to the new plan. Once the loan is moved over loan payments can resume via payroll even if not contributing normally. I think that if the two 401(k) plans will eventually merge then new payroll keeper can withhold and submit loan payments to the old 401(k) which it assumes control of if such old 401(k) is not terminated at closing. That's a high level view, I admit.

Ha! Well you could consider hiring your own ERISA lawyer. They'll be more diplomatic than me. Generally, your participant is afraid of being what, double taxed? The plan is required to issue a 1099-R. My gut tells me the plan should never have filed the 1042. Retirement plans probably do not have to issue 1042 forms. As far as the threat, well what's the damage? What's the legal fix? What's the alternative? What is your participant concerned about? There is nothing to fear that an amended 1099-R or canceled 1042 or a letter from the plan sponsor can't fix and so there is no legal action here to worry about until something happens. If the IRS has any issue, they'll write a letter. Then you'll take action to help. Promise to help if it comes to that. Meanwhile, you can take this back and forth with this participant as a formal request for benefits and take it through the plan's claims process which will give you a 90 to 180 day cooling off period. Just reply in a letter that you are taking his concerns to be a request for benefits under the plan. The timing starts from when this participant first approached you with his concern. Any corrections will be done according to the terms of the plan. Locate the portion of the plan that relates to claims for benefits and plagiarize from that. Send him a copy of the SPD with reference to the page where claims begins. You do not have to feel bullied!

I have not had this experience. But I generally don’t let participants tell me tax law. Especially related to ESOPS or 1099-Rs. I would say to this participant that i filed according to the way I read the rules. I may be in error, but if you can bring in the assessment letter from the IRS that double taxes you or causes any other issue for you we would be happy to amend the 1099-R. You will never hear from this person again.

Thank you CuseFan!

The 415 test we just performed for plan year 2020 included the sum of the 2020 401(k) deferrals, the lump sum 2020 401(k) match determined and deposited in 2021, [there were no 401(k) forfeiture allocations made in 2020 or in 2021], the 12/31/20 ESOP contribution allocation, and the 12/31/2020 ESOP forfeitures allocation. Under this test let's say there is 415(c) room to do a Mega Backdoor Roth Contribution and for the sake of argument let's say the room is $20,000. I assume that this after-tax $20,000 should have been contributed in 2020, with an immediate Roth 401(k) conversion after each payroll contribution if that's how we do it. What happens if the participant over-contributes, for example, we allowed an after-tax contribution of $22,000 in 2020 vs the finally determined $20,000 that the max should have been. I assume the $2,000 plus earnings could have been returned by April 15, 2021 to avoid double taxes? Is that how a Mega Backdoor Roth is administered? Generally speaking, it always involves a return of excess before April 15? The earnings are taxable in the year of distribution, so no 2020 W-2 needs to be changed, right? Your advice would be appreciated. Thank you!

I'd advise against it. ESOP's are not for mom & pops usually so I'm surprised there was no trustee who oversaw the sale; no board in place or the new owners that feel this may be an overreach by the old owners. Who hired the valuation firm? If there was a discretionary trustee for the sale, that's the likely trustee who should be hired as the directed trustee. The sale is already suspicious if no trustee oversaw the sale, then to let the old owner act as trustee, you're asking for a lawsuit! Just negotiate a fee with a bona fide ESOP trustee, one who knows the ESOP community and the ESOP rules and can advise the board. The former seller (only if they have an installment note) should be on the board, chairman is okay, but that's it. You need formality formality and formality now or the DOL will be calling on you. In fact, the DOL will know when you don't have an outside trustee and will be calling. Be prepared for a real ESOP Trustee to walk away from taking you on if this was a suspicious sale. Then go to your banker and see if they'll do it. Good Luck!

I'm sorry I have to disagree with @ESOP Guy and @Degrand, distribution elections are only good for 180 days and become stale after that. That's from my personal experience with ERISA lawyers. Also, if your ESOP is amended to allow it and your 401(k) also via an addendum to the K plan that sets the terms for the ESOP to 401(k) transfer, you can force out the non electing ESOP participants into your company 401(k), otherwise you must set up a QDIA-like investment within the ESOP for the liquidated and segregated accounts of your former ESOP participants who fail to make a distribution election. Force outs to the K plan also have the problem of forcing you to essentially fund with an ESOP cash contribution and do recycling within the ESOP which many companies don't have appetite for. Also force out to K plan requires plan sponsor to fund entire vested and non-vested ESOP balance and transfer the whole account to the K plan where the K plan must assume responsibility for maintaining the vesting percentage and not allow the K participant to withdraw too much from their former ESOP funds. Takes a mighty K plan TPA to manage that! The forfeitures of the former ESOP accounts stay in the K plan and become K forfeitures which the company can use to offset the annual cash match to the K plan, if they do a match in cash to the K plan, which many S Corp ESOPs don't cause they do matches in stock to the ESOP. Anyway, thought I'd give a different perspective.

I'll just pipe in here, better late than never. First of all I believe there is some leeway to wait on distributions depending on business circumstances; however, I agree with @ESOP Guy that you can't go back and forth between lump sum and installments. Our outside ERISA counsel said the same thing and made us adopt a firm lump sum distribution policy in the year following termination when we asked about having a optional lump sum/installment distribution policy. We were told that we can amend the plan (but NOT every year) to go from lump sum to installments and back to lump sum if we choose. We're okay being lump sum right now. But here's how we wrote it for the ESOP SPD with a shorter disclaimer in the ESOP statement's disclaimer, for the purpose of putting everyone on notice that we can amend the ESOP pretty much at any time to allow for installments: We also did this on the ESOP Statements themselves.

One word of caution. Some K plans will also have a definition for "Normal Retirement Date" that is the 1st of the month following the date a participant reaches NRA. I just amended my K plan at the end of 2020 to change Normal Retirement Date from the 1st of the next month to be the actual date the participant reaches NRA. The sad possibility of having someone quit their job on their 65th birthday only to realize that they didn't actually "retire" was enough for me to get that definition amended, plus, also wanted K plan to mirror Retirement Date definition in my ESOP plan and to let HR have uniformity in definitions.

Hi ABeach, if "compensation" or "pay" in your 401(k) plan has no exclusion for disability pay or for this gross-up you're talking about then it probably is not excluded from 401(k) withholding requirements. You can possibly send what's known as a 45-day letter to absolve yourself basically if you are within 45 days of their return to work (still required to give a match on what was not deferred). I've attached an example 45 day letter that gives you an idea of what I'm talking about. If you are beyond 45 days after their return from work, then you may owe them a corrective QNEC contribution. I'm a company plan administrator, not a lawyer, so I'm showing you what my legal counsel said to do. I've also given you a QNEC sample letter. Corrective QNEC contributions might be 25% or 50% depending on how long it's been since the error was made. You can always be more generous than what the IRS demands. Hope this helps. Example 45-day Letter no QNEC.docx Example QNEC letter.docx

In the case of a 2020 regular taxable ESOP distribution with NUA reported in box 6 of Form 1099-R, if you self-certify for COVID relief from taxation, Form 8915-E does not allow you to claim beneficial capital gains tax treatment on your COVID distribution. Capital gains on an ESOP distribution with NUA are normally reported on Form 4972, line 6, and the instructions for Form 8915-E (page 2, left column at the very bottom in the "Note") specifically mentions no capital gains from Form 4972 are allowed. The link to IRS Form 4972 and its instructions are here: Form 4972 and Instructions. Form 8915-E and instructions can be found here: Form 8915-E Instructions; Form 8915-E Accordingly, from what I can tell, COVID impacted recipients of 2020 ESOP distributions with NUA will have a choice to make with respect to claiming COVID relief on Form 8915-E: 1) file Form 8915-E and forego capital gain treatment, but pick up the waiver of the 10% early withdrawal excise tax (plus get 3-year ordinary income tax spread & ability to rollover); or 2) don’t file Form 8915-E for COVID relief and keep capital gain treatment, but pay the 10% excise tax if applicable (and lose the 3-year tax spread & ability to rollover). In my opinion, if the CARES Act is going to allow taxes to be spread over three years, then spread the taxes normally due over three years. I doubt the CARES Act contemplated the IRS recharacterizing capital gains into ordinary income as a consequence of getting COVID relief. If any income tax preparers out there can think of a workaround like attaching a Form 8275 statement or similar, please let me know. I’ve complained to the ESOP community and LinkedIn. I’m not sure if anything will happen, but the IRS makes mistakes now and then, and ESOPs are complicated, even for the IRS. Alternatively, the CARES Act didn't address this issue and it would take an act of Congress to fix. Any thoughts?

Any update M Norton?

I wonder if an asset sale is likely to put the participants out of work so they get to vote and give cover to the trustee and management. In a stock sale they should mostly retain their jobs so no need for a vote that management hates to hand over to the whim of the working class.

To shut down the ESOP would have required an amendment to the plan and such amendment should discuss responsibilities of the parties. So see if you can get a copy of that plan amendment.