1. law, govt and politics

OEOC Annual Conference
ESOP Administration Land Mines and How to
Avoid Them
April 19, 2013
© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
Presenter
Kristy N. Britsch, Esq.
Columbus ^ 614.628.6883
[email protected]
© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
Plan Qualification
Employer deduction for contributions when
made
Tax deferred retirement savings
Trust doesn’t generally pay tax on income
Benefits eligible for rollover
Benefits of S corporation ESOP structure
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
Plan Disqualification
 Employer loses deduction for nonvested contributions
Generally, deduction taken by employer when
amounts become vested
 Employees recognize current income as amounts vest
 Trust recognizes taxable income on earnings (interest,
dividends, capital gains)
 Distribution made during nonqualified years
Not eligible for rollover
Excise tax may apply for any amounts rolled over that
exceed eligible IRA contribution amount
Tax deferred retirement savings
 Termination of S corporation status and related benefits
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
Plan Disqualification
Termination of S corporation status and related
benefits
Company reverts to C corporation
C corporation taxes due
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
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How to Achieve Plan Qualification
Plan Document Compliance
Operational Compliance
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Plan Document Compliance
Timely amendments
Process for receiving Determination Letter
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
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Plan Operational Compliance
Follow the terms of your plan document
Make sure SPD matches plan
Compliance with IRS rules and regulations
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
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Correction of Administrative Errors: EPCRS
Overview
 Correction of operational and document through the IRS
Employee Plans Compliance Resolution System
(“EPCRS”):
Self-Correction Program
Voluntary Correction Program
Audit CAP
 Revenue Procedure 2008-50
 Revenue Procedure 2013-12: Effective April 1, 2013
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
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EPCRS Correction Principles
Full Correction: All taxable years, whether or not
closed
Restoration: Method should restore plan and
participants to the position they would have
been in had the failure not occurred
Implementation of correction saves plan
qualification
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
EPCRS: General Features
 SCP/VCP: Available so long as the plan is not be under examination
 Audit CAP: Correction for errors discovered in IRS examination; pay
sanction
 SCP: Correct errors without notification of IRS or payment of fee
 May correct ‘Insignificant’ errors or ‘Significant’ errors with SCP,
but may only correct Significant errors if ‘fix’ occurs by close of
second plan year following the plan year of the failure.
 Insignificant vs. Significant is subjective and based on
percentage of plan assets involved, number of years involved
and percentage of participants involved
 VCP: Correction of all errors that are not eligible for SCP
 Submit application and application fee
 Less than 20 = $750; 21-50 = $1,000; 51-100 = $2,500; 101-500 = $5,000;
501-1,000 = $8,000; 1,001-5,000 = $15,000; 5,001-10,000 = $20,000; over
10,000 = $25,0000
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
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Compensation Errors
 SCP or VCP
 Overcontribution:
 reduction of account balance and reallocation to other
participants (SCP or VCP)
 Amend the plan retroactively to change definition of comp
(VCP only)
 Undercontribution:
 Reallocation of all account balances (SCP or VCP)
 Excess Employer Contributions
 Distribute EDs, plus earnings and
 Forfeit discretionary contributions (reallocated forfeitures or hold
forfeitures in an unallocated account)
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
Rehires - Corrections
 Re-entry: Eligible for either SCP or VCP
 Vesting/Restoration of Forfeitures:
 Incorrect vesting: correct by either restoration of account balance
or reallocation, or, request for return of benefits (SCP or VCP)
 Restoration of Forfeitures: Not an error if performed timely;
simply an administrative procedure
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
Excess Annual Additions - Correction
Place excess amount in unallocated
account (employer contributions)
Reduces future employer contributions or is
reallocated to participants within same plan
year
Return deferrals and forfeit match
(employee deferrals)
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
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Improper Vesting - Correction
 Contribution or Reallocation Method
 Contribution Method: Employer makes a corrective
contribution on behalf of the affected employee, adjusted
for earnings. No reduction in other employee’s
accounts.
 Reallocation Method: Account balance of the affected
employee is increased by an amount equal to the
amount of the improper forfeiture, adjusted for Earnings.
The account balance of each employee who shared in
the allocation of the improper forfeiture is reduced by the
amount of the improper forfeiture that was allocated to
that employee's account.
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© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com
Questions?
Kristy N. Britsch, Esq.
Columbus ^ 614.628.6883
[email protected]
© 2012 DINSMORE & SHOHL | LEGAL COUNSEL
| www.dinsmore.com