suspense account considered for top heavy purposes?

[Belgarath]

So say an S-corp has a leveraged ESOP. Total value of shares is 1 million. $200,000 has been allocated to participants, the remaining $800,000 is in the suspense account.

When determining if the plan is top heavy, do you include the suspense account when determining the 60% figure? Or, is determined solely on the assets that have been allocated, and the suspense account is ignored?

[ESOP Guy]

You ignore the suspense account.  TH is asking in this case do the Key EEs control 60% of the allocated assets in the plan.   

You ignore the ESOP loan also.  So you aren't using net assets on your trust accounting as the denominator but allocated balances.  

[austin3515]

I don;t do any ESOPs (something about you tells me you do), but do you mean you DO use net assets (i.e., assets net of liabilities).  You don;t use total assets.  I just want to be precise about the definition of net asssets because to me net assets is total assets less liabilities.

Again, I may definitely not be thinking about this correctly given my lack of ESOP work...

[ESOP Guy]

2 hours ago, austin3515 said:

I don;t do any ESOPs (something about you tells me you do), but do you mean you DO use net assets (i.e., assets net of liabilities).  You don;t use total assets.  I just want to be precise about the definition of net asssets because to me net assets is total assets less liabilities.

Again, I may definitely not be thinking about this correctly given my lack of ESOP work...

ESOPs are odd in they are the one retirement plan that can borrow money to buy investments- in this case the company stock.  

So in an ESOP it is possible to have the following showing on the balance sheet, 5500 Sch H....etc

Assets of $5,000,000 (and to keep it simple assume the only assets is the company stock).

Liabilities of $6,000,000 and it is the acquisition loan on the stock and you stock price has gone down since the loan was taken out.   This is very common. 

So you obviously have a ($1,000,000) net asset amount. 

If you come out of the 401(k) world the first time you see a negative net asset number on a 5500 you really do stop and take a double take.  

Now let's say  you have only allocated $100,000 of that stock and the rest is in suspense.  This is another unique feature of ESOPs.  In a 401(k) plan it is almost unheard of having assets in the plan that aren't in someone's account.  A large suspense account where most of the assets aren't in anyone's account can easily happen.  So in this case if you add up all the participant accounts and they would equal $100,000.   The other $4,900,000 in stock in not in anyone's account and the $6,000,000 isn't reflected in anyone's account.  Like I said if you come from the 4k world this looks very odd.  I used to do 4k plans and the idea there would be such a huge gap between the sum of the participant accounts and the net assets of the plan is unheard of.   The stock could be worth more than the loan and still most of the assets aren't in the participant's accounts. 

So for TH do you use:

The 100,000 as your denominator?

The $5,000,000 in total stock value? But most of it isn't in anyone's account.

or the ($1,000,000) which make getting to the 60% an interesting math problem.  And once again most of it isn't in anyone's account. 

You almost have to use the $100,000 number as you can see.  That number is what is allocated so do the Keys control 60% of that number.  

The reason the question gets asked there is an  ESOP test where you have to do a hypothetical allocation of all the stock in suspense and do the test.  

Sorry, if that was more answer than you wanted. 

[austin3515]

You just proved I have been right all along!  Steer clear of ESOP’s!

theyre fascinating animals but I just ran out of patience to expand my expertise....  thanks  for all the info though!  It was helpful.  I had never conceived of N upside down plan like that.