Blog Posts

8 Culture Best Practices

Aaron Juckett — Fri, 25 May 2012 13:31:00 GMT

8 Rules For Creating A Passionate Work Culture shares 8 best practices for building a passionate culture:

Hire the right people
Communicate
Tend to the weeds
Work hard, play hard
Be ambitious
Celebrate differences
Create the space
Take the long view

ESOP Administration: Valuation of Company Stock

Kevin Rusch — Thu, 24 May 2012 18:03:00 GMT

One of the most important fiduciary responsibilities with administration of an ESOP is determining the fair market value (“FMV”) of the stock held in an ESOP on an annual basis and as of the specific date when stock is purchased or sold by an ESOP.

As required in IRC Section 401(a)(28)(C), privately held stock must be valued by an independent appraiser. Even though the independent appraiser is required by law, they are not currently considered a fiduciary at the time of this blog post.

While the independent appraiser values the stock held in the ESOP, the ESOP plan document will indicate which individual, entity, or group of individuals has the fiduciary responsibility of hiring the independent appraiser, reviewing valuation report, and determining the value of the company stock. While this duty normally falls to the ESOP trustee, the ESOP plan document should be carefully reviewed to determine if the requirement is directed to another fiduciary of the plan, such as the plan administrator, plan sponsor, administrative committee, or board of directors.

An ESOP fiduciary should be sure to complete at a minimum the following steps in determining the value of the company stock:

Read the valuation report and make an effort to understand it.
Verify the company information in the report is accurate and that the assumptions made by the appraiser make sense.
Review the report with the appraiser and verify that the methods used by the appraiser seem appropriate.

The ESOP fiduciary needs to show a valid effort in the review and determination of the stock valuation. To sum it up nicely, a federal court of appeals stated in the case of Donovan v. Cunningham, 716 F. 2d 1455:

“An independent appraisal is not a magic wand that fiduciaries may simply wave over a transaction to ensure that their responsibilities are fulfilled. It is a tool and, like all tools, is useful only if used properly.”

If you need assistance locating an appraisal firm that is well-versed in ESOP valuations, please feel free to contact us.

Selling to an ESOP in 2012 Increases After-Tax Proceeds by 43%

Aaron Juckett — Tue, 22 May 2012 14:48:00 GMT

When a business is sold to a third party, the buyer generally prefers to purchase a company’s assets rather than its stock for liability and tax reasons. Selling to an ESOP is always a stock sale which is more favorable from a tax standpoint than a traditional asset sale. When analyzing the purchase price, it is essential to consider the after-tax proceeds when comparing an ESOP transaction sale to a third party sale.

In a stock sale, the seller is generally eligible for long-term capital gain treatment at the current long-term capital gains rate (currently at a historically low 2012 long-term capital gains tax rate of 15%). The more common sale alternative, the asset sale, is generally taxed at the higher ordinary income rate (the top ordinary income tax rate is currently 35%).

[While there is an alternative ESOP sale that allows the seller to Defer Taxation in an ESOP Section 1042 Sale , many sellers are currently opting to lock in the historically low 2012 long-term capital gains tax rate of 15%.]

On January 1, 2013 the “Bush tax rates” are scheduled to expire. As a result the long-term capital gains rate will increase from 15% to 20%. In addition, a New 3.8% Medicare Tax on Unearned Income as a result of the Health Care and Education Reconciliation Act of 2010 is effective on January 1, 2013. This puts the 2013 net effective long-term capital gains tax rate at 23.8% and amounts to a 59% increase in capital gains taxes.

Another way to look at the numbers: All other factors being the same, selling to an ESOP in 2012 could increase your overall after-tax sale proceeds by 43% compared to an asset sale in 2013. Even if you are set on selling to an ESOP but not sure about the timing, selling to an ESOP in 2012 could increase your overall after-tax sale proceeds by 12% compare to selling to an ESOP in 2013.

	2012 ESOP Stock Sale	2013 ESOP Stock Sale	2012 Non-ESOP Asset Sale	2013 Non-ESOP Asset Sale
Sale Price	$1,000,000	$1,000,000	$1,000,000	$1,000,000
Tax Rate	15%	23.8%	35%	40.5% *
After-Tax Proceeds	$850,000	$762,000	$650,000	$595,000
Additional After-Tax Proceeds Compared to 2013 Asset Sale	43%	28%	9%	-

* This includes the increase in the highest ordinary income tax bracket from 35% to 39.6% and the New .9% Medicare Tax on Earned Income. Both increases are effective January 1, 2013.

This analysis assumes the company is an S Corporation and uses the tax rates in effect and scheduled as of the original date of this article (May 22, 2012). It also assumes that all of the gain of an asset sale will be taxed at ordinary income rates. It does not contemplate STATE INCOME TAXATION, which could make a 2012 ESOP stock sale even more favorable.

Here are some additional benefits of Selling to an ESOP:

ESOP Repurchase Obligation and ESOP Stock Valuation Interrelationship

Aaron Juckett — Mon, 21 May 2012 22:36:00 GMT

Last week we defined the ESOP Repurchase Liability and how the ESOP Repurchase Obligation is Reported on the Company's Financial Statements. In order to accurately forecast the company’s ESOP future repuchase obligation, it is essential to understand and properly account for the interrelationship between the ESOP stock valuation and the ESOP repurchase obligation.

As we have been exploring in our ESOP Repurchase Obligation series, the ESOP stock valuation (and other Forecast Assumptions), employee demographics, and ESOP distribution timing will be factors in the determination of the ESOP repurchase obligation. The ESOP repurchase obligation will then be reflected in and may even have a direct impact on the ESOP stock valuation. This interrelationship creates an iterative process that may require the involvement of your ESOP appraiser to properly quantify the ESOP repurchase liability.

This is especially important when comparing different scenarios, such as comparing a distribution policy that employs the ESOP Loan Exception to an ESOP cash conversion strategy (aka ESOP Reshuffling) for terminated participants.

You can get started by understanding how the ESOP repurchase obligation is reflected in your ESOP stock valuation, which is an ESOP Repurchase Obligation (RO) best practice:

Understand how the long-term ESOP repurchase obligation is reflected in your valuation.

Senator Mitch McConnell Supports ESOPs in Video Message

Aaron Juckett — Wed, 16 May 2012 10:18:00 GMT

The ESOP Association shared a Message from Senator Mitch McConnell at The ESOP Association’s 35th Annual Conference last week and on their blog. In his remarks, Sen. Mitch McConnell [R-KY] reiterated his support of ESOPs and employee ownership, noted the 100+ ESOP companies in Kentucky, cited the Findings of 2010 General Social Survey (GSS), shared his concerns with the DOL ESOP Fiduciary Regulation, and expressed his support of S.1232 A bill to modify the ERISA definition of fiduciary to exclude appraisers of ESOPs.

ESOP Repurchase Obligation: What is the ESOP Repurchase Liability?

Aaron Juckett — Tue, 15 May 2012 11:04:00 GMT

What is the ESOP repurchase liability?

The ESOP repurchase obligation or liability is the company’s obligation to buy back shares from ESOP participants according to the company’s ESOP document and ESOP Distribution Policy.

The obligation is created by the ESOP put option – right to demand employer securities as provided under IRC Section 409(h) – Right to demand employer securities; put option:

IRC 409(h) Right to demand employer securities; put option

(1) In general

A plan meets the requirements of this subsection if a participant who is entitled to a distribution from the plan—

(A) has a right to demand that his benefits be distributed in the form of employer securities, and

(B) if the employer securities are not readily tradable on an established market, has a right to require that the employer repurchase employer securities under a fair valuation formula.

The specific ESOP liquidity events are identified in our discussion on the timing of ESOP distributions.

How is the repurchase liability reported on the company’s financial statements?

The repurchase obligation is NOT a balance sheet liability required to be reported on the financial statements. [While there have been some discussions by the Financial Accounting Standards Board (FASB) to require the reporting in recent years, they have currently been shelved.]

The company should disclose the repurchase obligation per Statement of Position 93-6 Employers’ Accounting for Employee Stock Ownership Plans (SOP 93-6):

The existence and nature of any repurchase obligation, including disclosure of the fair value of the shares allocated as of the balance sheet date, which are subject to a repurchase obligation.

What is an ESOP repurchase obligation study?

The ESOP put option creates a call on the company’s cash flow. An ESOP repurchase obligation forecast or study is a long-term projection of the call on company cash needed to satisfy the plan’s ESOP distribution requirements. The results of the forecast are dependent on the participant data/demographics of the employee population, the ESOP Repurchase Obligation Forecast Assumptions, and the ESOP Distribution Policy. In addition to corporate and ESOP planning, the repurchase obligation forecast will help quantify the projected ESOP repurchase obligation for financial statement reporting and stock appraisal purposes.

The Impact of Tax Reform on ESOPs and IRS Qualified Plans

Aaron Juckett — Wed, 09 May 2012 11:22:00 GMT

The May 1, 2012 Employee Ownership Update is online and discusses the following:

Defined Contribution Plans in Congress
Annual Conference Breaks Records
Innovations in Employee Ownership
We the Owners: Trailer
Other Employee Ownership Conferences

In our discussion on the History of ESOP Tax Law we reviewed the House Ways and Means Committee hearing on the Tax Reform and Tax-Favored Retirement Accounts. The Update provides more details on how all of the witnesses stated that eliminating current retirement plan tax incentives would hurt retirement savings:

The House Ways and Means Committee heard testimony on April 17 about the current system of retirement tax incentives. The five witnesses all suggested that eliminating the current tax incentives would weaken the state of retirement security. Chairman Dave Camp (R-Mich.) described three criteria the committee would consider: simplification; increasing participation, especially by those with lower incomes; and effectively targeting benefits. Judy Miller of the American Society of Pension Professionals and Actuaries, argued that the actual cost of the tax incentives is 54% less than projected by the Joint Committee on Taxation and the Treasury's Department's Office of Tax Analysis: "Every dollar that is excluded from income this year will be included in income in a future year. Unfortunately, that is not reflected in the cash basis measurement of the retirement savings tax expenditure."

It also discussed how Sen. Rob Portman [R-OH] and Sen. Benjamin Cardin [D-MD] are working on legislation that would mention their opposition to the DOL ESOP Fiduciary Regulation.

Separately, Senators Rob Portman (R-Ohio) and Ben Cardin (D-Md.) announced that they would continue working together on legislation to promote retirement security, specifically mentioning their opposition to the Department of Labor's proposed changes to the definition of a plan fiduciary. Many members of ESOP companies worry that the regulation would result in appraisers being fiduciaries and increase the cost and complexity of establishing plans.

ESOP Administration: Release of Shares - Part 2 (Special Rule)

Kevin Rusch — Tue, 08 May 2012 14:04:00 GMT

As mentioned in my previous post, ESOP plan documents will typically indicate the share release formula can be either of the two acceptable formulas, as defined in the Treasury Regulations Sec. 54.4975-7(b)(8):

General rule (also known as the Principal and Interest Method)
Special rule (also known as the Principal Only Method)

The Special rule share release formula is based solely on principal payments made on the ESOP loan:

(principal paid for the year) / (principal paid for the year + principal to be paid for all future years) * shares in suspense

As noted in the Treasury Regulations mentioned above, if the release is determined with reference to principal payments only, three additional rules must be followed:

The loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years.
Interest included in any payment is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables.
The term of the loan cannot exceed 10 years (including any renewal, extension, or refinancing)

Summary

It is critical to know what share release formula is cited in the ESOP loan documents (normally noted in the Pledge Agreement) to ensure your plan is being administered correctly in conjunction with the formula(s) allowed in the ESOP plan document. Failure to properly release shares will result in allocation errors and administration rework as required under Employee Plans Compliance Resolution System (EPCRS).

ESOP Repurchase Obligation: Capturing your ESOP Distribution Policy

Aaron Juckett — Mon, 07 May 2012 10:56:00 GMT

We have recently discussed the importance of Identifying your Long-Term ESOP Objectives and Developing Accurate ESOP Repurchase Obligation Forecast Assumptions as part of the ESOP Repurchase Obligation process. Today we will look at the significance of the ESOP Distribution Policy. Here is a quick summary of the various Timing of ESOP Distribution rules:

Participants that terminate due to Death, Disability, or Retirement are eligible to being taking distributions within one year after the plan year of termination.
Participants that terminate due to Other Separations of Service will begin within six years after the plan year of termination. However, there is a ESOP Loan Exception that allows distributions to this group to be delayed until the ESOP loan is repaid in full.
Participants age 55 with 10 years of participation are eligible to Diversify 25% of their account for five years. The diversification percentage goes up to 50% in the sixth and final year.
Distributions generally cannot be forced by the company. However, a company can make Mandatory Distributions to terminated participants with an account balance of $5,000 or less. If the balance is greater than $1,000, then any forced distribution must be rolled into a safe harbor automatic rollover IRA. Distributions can also be forced to take a distribution if the participant attains their Latest Commencement Date (the later of age 65, termination from the plan, and attaining 10 years of participation) or is required to begin receiving Required Minimum Distributions (most participants must begin receiving taxable distributions after they reach age 70½ and terminate).
Depending on the plan rules, a plan may pay the alternate payee of a Qualified Domestic Relations Order (QDRO) before the plan participant is eligible for a distribution.
In addition to commencing distributions, a plan may effectively speed up the repurchase obligation if they employ an ESOP cash conversion strategy (aka ESOP Reshuffling) for terminated participants.

You will also have to determine whether the Form of ESOP Distribution will be paid in cash or shares and whether the Method of ESOP Distribution will be paid in a lump sum payment or installment payments.

Ensuring the distribution policy being used for your forecast is consistent with your actual distribution policy is an ESOP Repurchase Obligation (RO) best practice:

Ensure the distribution policy used in your RO forecast is properly reflected in your written distribution policy.

While adoping a written distribution policy is a best practice, all plans that have paid a distribution have adopted some form of a distribution policy. Every distribution policy starts with the plan document and the statutory minimum requirements discussed above and is then modified as needed to meet the objectives of the company, to manage cash flow, and to control the employee benefit level.

After reviewing the results of your repurchase obligation forecast you may decide to run different scenario(s) using alternate distribution policy(s). A change in distribution policy could significantly change your cash flow and company projections (and potentially the ESOP valuation) now and in the future which could have an impact on your other ESOP Repurchase Obligation Forecast Assumptions.

ESOP Administration: Release of Shares - Part 1 (General Rule)

Kevin Rusch — Thu, 03 May 2012 17:02:00 GMT

An employee stock ownership plan (ESOP) is a type of qualified retirement plan that buys, holds, and sells company stock for the benefit of the employees, providing them with an ownership stake in the company. The ability of the ESOP to purchase company stock Creates an Internal Market and Built-In Buyer.

ESOPs are unique in that they are allowed to incur debt to purchase stock from other shareholders or from corporate treasury. When company stock is purchased by the ESOP with the proceeds of an exempt loan, the shares are put into an ESOP suspense account as collateral on the loan. Shares are released from the ESOP suspense account as loan payments are made on the ESOP debt.

One benefit of using ESOP loans to purchase stock is the share release provides a predetermined share allocation to the ESOP participants over the term of the ESOP loan. A best practice is to structure the ESOP loan to assist a company in facilitating their desired benefit levels to the eligible ESOP participants.

ESOP plan documents will typically indicate the share release formula can be either of the two acceptable formulas, as defined in the Treasury Regulations Sec. 54.4975-7(b)(8):

General rule (also known as the Principal and Interest Method)
Special rule (also known as the Principal Only Method)

The General rule share release formula is based on principal and interest payments made on the ESOP loan:

(principal and interest paid for the year) / (principal and interest paid for the year + principal and interest to be paid for all future years) * shares in suspense

Stay tuned for my next blog post on the Special rule option for releasing ESOP shares.

DOL Denounces Limited Scope Audit & Reiterates ESOP Fiduciary Intent

Aaron Juckett — Wed, 02 May 2012 13:55:00 GMT

As part of the AICPA Employee Benefits Conference the DOL reiterated their desire to impose a potential legal liability on financial advisors (i.e. ESOP appraisers) and specifically mentioned ESOPs as an audit priority. They also provided an update on the timing of the DOL Re-Proposal of the DOL ESOP Fiduciary Regulation that would be consistent with the July 2012 timeframe we have been discussing.

Employee stock ownership plans, one of EBSA's audit priorities, require special vigilance on the part of auditors, Borzi said. EBSA has seen many cases in which auditors accepted improper ESOP valuation methodologies and assumptions, creating serious and expensive problems for ESOP participants.

Fiduciary Rule.

EBSA expects to repropose a redrafted fiduciary regulation when it completes work on clarifying aspects of the rule, which could be a couple of months from now, Borzi said.

In updating the regulation that defines a fiduciary, the department seeks to impose a legal liability on individuals who represent themselves as financial advisers when giving individualized investment advice, Borzi said.

Any financial service providers who represent themselves as trusted advisers to a client must put the client's financial interest first, she said.

They also denounced limited scope audits and stated that the ERISA expectation of auditors is to take a skeptical look at valuations.

ESOP Repurchase Obligation: Developing your Forecast Assumptions

Aaron Juckett — Mon, 30 Apr 2012 09:46:00 GMT

We recently took a look at the importance of Identifying your Long-Term ESOP Objectives as part of the ESOP Repurchase Obligation process. Another important part of the process is developing your forecast assumptions. While any first attempt at preparing assumptions is better than not making an attempt at all, it is essential to continuously revisit the assumptions to ensure that they are accurate. If you don't use accurate assumptions in your forecast, then you won't have an accurate repurchase obligation forecast. In other words, garbage in, garbage out.

Comparing your results to your financial and strategic planning is an ESOP Repurchase Obligation (RO) best practice:

Review your financial forecast and strategic planning to ensure the assumptions are consistent with your RO forecast.

Here is a discussion of the important assumptions that go into a repurchase obligation forecast:

Employee Groups – One of the first steps in the repurchase study process is to organize the participant data into groups. Groups of employees tend to have similar characteristics, such as compensation, account activity, vesting, turnover rates, and employee growth rates. While some companies prefer to group their employees by a method such as job classification or hourly vs. salaried, using a statistical approach to create groups based on the previously mentioned characteristics generally tends to be more accurate.
Stock Growth Rates – This is the most important factor in the study, yet the most difficult to predict. The values used in this study should agree with the enterprise values used by your appraiser and in your corporate and strategic planning. A best practice is to include the appraiser in the repurchase study process, especially given the interrelationship between the stock appraisal and the repurchase obligation.
Employee and Eligible Compensation Growth Rates – How many net new participants will be added to the plan each year as a result of hiring new employees? At what rate will your eligible compensation increase? These questions will need to be answered and the results will be combined to project eligible compensation in the future. While you could combine the numbers into one projection, projecting the numbers separately is another planning best practice and the projections should agree to your corporate and HR projections. These rates can be projected at a company level or by employee group.
Termination Rates – One of the most accurate ways to project future termination rates is to use your own employment history. You will want to adjust your terminations to remove any terminations due to retirement, death, and disability as needed to avoid any double counting. You will also want to account for any unusual circumstances that would inflate or deflate the projected termination rates going forward. You may want to look at multiple years and use a weighted average. These rates should be projected by employee group as their termination rates will vary significantly.
Retirement Rates – In addition to termination rates, you will need to project when active employees will retire from the company. Many plans will use the retirement age of the plan, but it is important that this age somewhat represent the age that most people retire from the company. The retirement age for key individuals with large balances may need to be adjusted accordinly.
Diversification Rates – If your plan is less than 10 years old, diversification may be the first major repurchase obligation for the company. You will need to determine if your plan has the statutory minimum requirements or if provides for more liberal rules. One of the most challenging items to project for a company is the diversification rate, generally communicated as a percentage rate. The natural instinct of many companies is to assume 100% diversifications, but this method will likely overstate the projected diversification distributions in the short-term and, assuming a continuing growth in stock price, understate the long-term repurchase liability. A best practice is to monitor the diversification rate from year to year and make adjustments accordingly. I often see companies prepare multiple scenarios using various diversification rates.
Death and Disability Rates – Generally speaking, the rates of death and disability are statistically insignificant to a repurchase obligation study. As an alternative you could apply a fixed percentage or other actuarially assumptions.
Contribution Rates – This is another area that sparks a lot of discussion. While a loan is outstanding contributions will be made to the plan for loan payments. When the plan is paying distributions, a decision will have to made as to whether shares are recycled or redeemed and this will impact the plan contributions projection. This discussion becomes even more important when the loan is paid. This discussion will generally lead to a very important strategic question of what is the target employee benefit level (EBL) that the company will provide their employees in the long-term.
Special Events – Major corporate events such as acquisitions, dispositions, and layoffs will affect the assumptions. If you are aware of any such events, we should include them in our calculations.
Future Share Activity, ESOP Transactions, Synthetic Equity - If the plan is not 100% ESOP owned, a study would be incomplete if it didn't account for future share activity inside and outside the ESOP as well as any other significant draws on equity such as synthetic equity and deferred compensation.

Because there is a lot of overlap between your repurchase obligation assumptions and the information involved in the financial and strategic planning process, some companies will integrate the repurchase obligation forecasting process into their strategic planning.

Schmalz v. Sovereign Bancorp Inc., No. 2:08-cv-0085 (E.D. Pa. 4/17/12)

Aaron Juckett — Wed, 25 Apr 2012 12:15:00 GMT

In Schmalz v. Sovereign Bancorp Inc., No. 2:08-cv-0085 (E.D. Pa. 4/17/12), a U.S. District Court applied the Moench Presumption of Prudence For Investment in Company Stock in ESOPs and dismissed the related claims.

For the reasons set forth above, the defendants’ motion to dismiss plaintiffs’ claims that the defendants breached their fiduciary duties to prudently manage the Plan, to disclose complete and accurate information, to monitor fiduciaries, to be loyal, and committed breaches as co-fiduciaries, shall be granted and these claims are dismissed.

The ESOP participants had alleged a breach of ERISA Fiduciary Duties by continuing to offer company stock when the value dropped by 91%:

Over the same time period the value of Sovereign’s stock declined. “The price of Sovereign stock fell from $26.42 on February 20, 2007 to $2.33 on September 29, 2008 (a 91.2% drop)” Opp. to MTD at 5-6. In addition to this decline in stock value, on April 23, 2008, Moody’s Investors Service lowered Sovereign’s credit rating two levels from an A3 to a Baa2.

DOL ESOP Fiduciary Regulation Timing Update

Aaron Juckett — Tue, 24 Apr 2012 17:20:00 GMT

The president of The ESOP Association J. Michael Keeling provided some commentary on the DOL Re-Proposal of the DOL Regulation to Change the Definition of ESOP Fiduciary:

The April 2, 2012 Employee Ownership Update provided an update on the likelihood that the DOL Re-Proposal of the DOL Regulation to Change the Definition of ESOP Fiduciary will still be issued in May:

At a hearing of the House Committee on Education and the Workforce, Secretary of Labor Hilda Solis responded to questions from many members of Congress about the agency's proposal to change the definition of a plan fiduciary. One impact of the originally proposed regulations would have been to deem appraisers of ESOP shares to be plan fiduciaries, but the DOL withdrew that proposal in September 2011, promising to modify and re-propose the rules later. Rep. Rush Holt (D-NJ) inquired whether the Employee Benefits Security Administration is "asking the right questions" about the fiduciary rule, and whether the agency has finished collecting data. Solis responded that the agency is still willing to collect information relevant to the rule and described DOL as "not in a hurry" to re-propose the rule. The secretary did not provide a direct answer when asked if the re-proposal would still be issued in May.

We had previously shared an update that discussed how the DOL ESOP Fiduciary Regulation would be updated July 2012 (or later).

The rest of the April 2, 2012 Employee Ownership Update is online and discusses the following:

UK Budget Proposals on Stock Options and Employee Ownership
Secretary of Labor on Re-proposal of Fiduciary Rule
Mondragon Announces Initiatives in the U.S. and India
Deloitte Announces Global Share Plan Survey
U.S. Workers Not Aware of Basic Facts About Their Employers
New University Resource from Scotland

The April 16, 2012 Employee Ownership Update is also online and discusses the following:

New Employee Ownership Fellowships at Rutgers
Two Films on Employee Ownership
Register for the CEP Exam
New CEO at SAIC
Ohio Employee Ownership Conference

The update discusses the Louis O. Kelso Fellows Chosen by Rutgers University.

History of ESOP Tax Law

Aaron Juckett — Tue, 24 Apr 2012 11:23:00 GMT

Last week we provided an Update on ESOPs and Corporate Tax Reform. On April 20, 2012, the ESOP Association submitted a statement to the House Ways and Means Committee hearing on the Tax Reform and Tax-Favored Retirement Accounts that briefly reviewed the Findings of 2010 General Social Survey (GSS):

Today, I do not dwell on the reasons why Federal tax law encourages both retirement savings growth and more widespread ownership of productive assets through the ESOP model of ownership, as I know the ESOP community will have ample opportunity to present to the Committee members, and their staffs reasons that the ESOP model has created in the vast majority of instances more retirement savings for ESOP participants in companies that are more productive, more profitable, and more sustainable, while providing locally controlled U.S. jobs. We have the macro data to back up these statements, such as the recent General Social Survey 2010 that evidences that during the Great Recession of 2008/09, employees of employees stock owned companies were four times less likely to be laid off than employees of conventionally owned companies. The percentage to be specific were employees of employee stock owned companies were laid off during the Great Recession at rate of less than 3% whereas employees of conventionally owned companies were laid off at a rate of just over 12%.

The majority of the statement focused on providing a thorough review of the history of how ESOP laws developed.

The ESOP Association has also published a government relations primer for employee ownership advocates.

ESOP Repurchase Obligation: Identify Long-Term ESOP Objectives

Aaron Juckett — Mon, 23 Apr 2012 14:46:00 GMT

At this week’s NCEO Annual Employee Ownership Conference in Minneapolis I will be leading an expert ESOP Repurchase Obligation Roundtable discussion on ESOP Repurchase Obligation Forecasting. We will answer questions about the forecasting process and share some best practices. Today’s post will focus on an ESOP Repurchase Obligation best practice that will set the tone for the entire process:

Work with the board of directors to identify your long-term ESOP objectives.

In order to effectively forecast your ESOP repurchase obligation and develop a strategy to achieve your long-term corporate and ESOP objectives, you have to identify the objectives. The best way to accomplish this is to work with the board of directors to clearly identify your long-term ESOP objectives. While every company will have a slightly different long-term ESOP objective, they are likely to fall into one of three categories. Each category has different repurchase obligation planning and fiduciary implications for both the plan sponsor and the plan trustees:

Remain Employee Owned.
Maximize the Value of the Company.
Sell the Company.

Remain Employee Owned. If remaining employee owned in the long-term is a top priority, you will need to remain solvent and profitable and will likely need to take a more conservative approach to your repurchase obligation planning and funding. Since you need to consider all offers, you should review your articles of incorporation and corporate bylaws as well as your corporate governance practices to make sure you are able to properly evaluate offers to purchase from the perspective of remaining employee owned. If the company is not 100% employee owned, then acquiring the remaining ownership of the company may also be a top priority.

Maximize the Value of the Company. Maximizing the value of the company means that you may or may not be an ESOP company in the long-term. If maximizing the value of the company is a top priority, at some point you may need to use cash that would otherwise be reserved for repurchase obligation funding to reinvest in the company. This strategy could put you in a position where you will either need to sell the company in the future to fund the repurchase obligation or are put you into a position where an offer to purchase the company cannot be refused.

Sell the Company. This objective is generally preferred when the ESOP is seller-financed and the seller(s) would prefer to be paid more rapidly than provided by the seller note. This will generally happen by selling to a third party when the right offer is obtained or by going public. This objective may also be preferred when the ESOP was used as a transitional owner and another shareholder(s) and/or management would like to be the long-term owner(s) of the company. This will happen by corporate redemption, direct sale, or shrinking the ESOP over time. There are many ways to accomplish this objective, but, as with all fiduciary decisions, it is essential that the ESOP trustee is making decisions solely in the interest of the plan's participants and beneficiaries. Under this objective ESOP repurchase obligation planning will be more short-term focused than under the other two approaches.

ESOP Floor Price Concerns

Aaron Juckett — Thu, 19 Apr 2012 10:19:00 GMT

The March 15, 2012 Employee Ownership Update is online and discusses the following:

Employee Engagement Remains Dismal
Sixth Circuit Breaks with Other Courts on Moench Presumption
SEC Challenges Pre-IPO Trading in Secondary Markets
Second Thoughts on Floor Price Protection?

ESOP Floor Price Concerns

We have previously discussed the use of ESOP Price Protection/Floor Price Agreements and reviewed a related Private Letter Ruling on the subject. We have also shared how Treasury has cited some fiduciary and tax concerns with Floor Price Protection. The Update shares some unofficial comments from an IRS representative that again raise some concerns:

"We don't like this for two reasons. One, you have a provision that is setting the plan up to perform a valuation that won't necessarily reflect true value. Number two, this is really a hypothetical future event that you're asking us to endorse at the time the submission is made. You're saying without regard to any debt that is incurred by the ESOP to the shareholder to a later purchase of the stock in a leverage transaction, that's talking about something that's going to happen in the future that you want us to basically approve today. We would say, "I don't think that's appropriate. We would have a problem with it."

Sixth Circuit Rejects Moench Presumption

While a plan fiduciary has an ERISA Fiduciary Duty to diversify the investments of the plan unless it is clearly prudent not to, the rules are different for ESOPs because they are "designed to invest primarily in qualifying employer securities" and Courts Almost Always Give Presumption of Prudence For Company Stock in ESOPs. The Sixth Circuit had been one of the courts that was considered to have affirmatively adopted the Moench presumption, which grants a presumption of prudence for investment in employer stock in an ESOP. The Update discusses how Pfeil v. State Street Bank and Trust Co., No. 10-2302 (6th Cir. Feb. 22, 2012) broke with the presumption of prudence and challenged the trustee for retaining employer stock as an investment opton:

In Pfeil v. State Street Bank and Trust Co., No. 10-2302 (6th Cir. Feb. 22, 2012), the Sixth Circuit Court of Appeals broke with other circuit courts on the issue of when plan trustees deserve the presumption of prudence for investments in company stock (the "Moench presumption"). Other courts have ruled that if the plan is an ESOP, or is a 401(k) explicitly designed to invest in employer stock, then company stock is considered prudent unless the fiduciaries know or should have known that the company was in dire financial circumstances.

This case looked at the ESOP component of GM's 401(k) plan. Employees could purchase shares in the plan. They challenged the trustee of the plan for retaining it as an option. State Street asked for dismissal based on the prudence presumption, but the court said its standard, as set out in Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995), raises a higher bar, at least at the pleadings stage.

Study Measures Employee Engagement Levels

It also shared the results of a survey that found that U.S. Employee Engagement Levels Increased From 2010 to 2011. The study found that 29% of employees said they are “actively engaged”, 59% are ambivalent, and 12% are actively disengaged.

ESOPs and Corporate Tax Reform

The March 1, 2012 Employee Ownership Update is online and discusses the following:

President's Tax Reform Proposal Would Change S Corporation Taxation
SEC No-Action Letter on RSUs in Private Companies Says RSUs Do Not Count Under Shareholder Limits
Iowa Closer to Passing Employee Ownership Law
NCEO Works with South Africa on Employee Ownership

This Update discusses how the President’s Corporate Tax Reform Proposal would impact S Corporation taxation.

ESOP Administration: 414(s) Compensation

Kevin Rusch — Wed, 18 Apr 2012 18:07:00 GMT

ESOPs, like other qualified retirement plans, define compensation in the plan document for purposes of allocating contributions, determining deduction limits, and nondiscrimination testing. Depending on your plan design, you may have multiple definitions of compensation for different plan purposes.

414(s) Compensation

IRC 414(s) is a definition of compensation utilized in nondiscrimination testing. A qualified plan must provide contributions or benefits that do not discriminate in favor of Highly Compensated Employees (HCEs). Section 414(s) compensation is used in Section 401(a)(4) testing for discrimination purposes and Section 410(b) testing for coverage purposes.

A plan is not required to use a 414(s) safe harbor definition of compensation to allocate contributions. However, if a plan uses a 414(s) safe harbor definition, many discrimination testing issues are eliminated or simplified.

Compensation will satisfy the 414(s) safe harbor definition if it is:

one of the four IRC 415(c)(3) definitions

an alternative safe harbor definition of Section 414(s)

An alternative safe harbor definition of 414(s) compensation starts with an IRC 415 definition and adjusts it by one or more of any of the three following modifications:

Excluding all cash and/or non-cash fringe benefits, reimbursements or other expense allowances, moving expenses, deferred compensation, and welfare benefits
Excluding all elective deferrals under a 401(k) arrangement or a 403(b) plan, contributions to a cafeteria plan under IRC 125, a nonqualified salary deferral under IRC 457, or any qualified transportation fringes under IRC 132(f)(4)
Exclude any portion of the compensation to some or all of the highly compensated employees (HCEs)

Summary

You must follow the plan document’s compensation definition(s) in the operation of the plan for allocating contributions, determining HCE and Key employees, performing compliance testing, and computing deduction limits. Perform annual reviews of compensation definitions and ensure that the person in charge of determining compensation is properly trained to understand the plan document.

Update on ESOPs and Corporate Tax Reform

Aaron Juckett — Wed, 18 Apr 2012 10:43:00 GMT

When we covered President Barack Obama’s 2010 tax reform panel, we discussed the likelihood that Congress would consider tax laws related to employee stock ownership plans (ESOPs) as "tax loopholes" and include them in their efforts to "fund" a reduction in the overall corporate tax rate.

Another proposal that would impact ESOP companies is if the size of pass thru entities (RE: S Corporations) would be limited. If a company exceeded the limit (likely expressed in terms of gross receipts) it would be taxed as a C Corporation and negate the S Corporation ESOP tax benefits. The Report of the President’s Advisory Panel on Federal Tax Reform (November 2005) cites a threshold for the uniform C Corporation taxation at $10 million of receipts:

Gone from the tax code would be most of the special preferences and rates that often apply to such large businesses. This would result in a system that taxes large business entities with more than $10 million of receipts more uniformly and at a lower 31.5 percent tax rate. Business entities with less than $10 million in receipts would be free to report income and to be taxed as a corporation if they so chose; if they did so, their owners would obtain the beneﬁts of the 100 percent exclusion for domestic dividends and the 75 percent exclusion of capital gains on the sale of their corporate stock.

The President’s Framework for Business Tax Reform (February 2012) contemplates these initiatives:

Reduce the corporate tax rate from 35 percent to 28 percent.
Eliminate dozens of business tax loopholes and tax expenditures. – The report states that the plan would “start from a presumption that we should eliminate all tax expenditures for specific industries, with the few exceptions that are critical to broader growth or fairness” and cites a few examples.
Reform the corporate tax base to invest savings in cutting the tax rate and reducing harmful distortions.
Improve transparency and reduce accounting gimmicks.

The report also references the previously mentioned S Corporation taxation issue:

The ability of large pass-through entities to take advantage of preferential tax treatment has placed businesses organizing as C-corporations at a disadvantage. By allowing large pass-through entities preferential treatment, the tax code distorts choices of organizational form, which can lead to losses in economic efficiency; business managers should make choices about organizational form based on criteria other than tax treatment.

Rep. Paul Ryan [R-WI1]’s Fiscal Year 2013 Budget Resolution a.k.a. House Budget also contemplates “closing loopholes”.

The ESOP Association submitted a statement to the House Ways and Means Committee hearing on the Treatment of Closely-Held Businesses in the Context of Tax Reform, citing the Findings of 2010 General Social Survey (GSS):

Citing the 2010 General Social Survey evidencing that companies with employee stock ownership were four times less likely to lay off employees during the Great Recession than conventionally owned companies, ESOP Association President, J. Michael Keeling, urged the Congress to consider job sustainability when reforming the Federal tax code.

Here are links to the 2011 ESOP Association Tax Reform Comments and video commentary from ESOP Association President J. Michael Keeling on ESOPs and tax reform:

ESOP Administration: 415 Compensation Definition

Kevin Rusch — Mon, 16 Apr 2012 14:54:00 GMT

ESOPs, like other qualified retirement plans, will define compensation in the plan document for purposes of allocating contributions, determining deduction limits, and nondiscrimination testing. Depending on your plan design, you may have multiple definitions of compensation for different plan purposes.

415 Compensation

Qualified plans need to define compensation for IRC Section 415 compliance testing. This definition is also used in identifying highly compensated employees (HCEs), key employees, calculating minimum benefits to non-key employees under top heavy plans, and determining deduction limits for Defined Contribution plans. There are four possible definitions, as defined in Treas. Reg. §1.415(c)-2:

§415(c)(3) Compensation
Simplified compensation
Section 3401(a) wages
W-2 Compensation

Summary

You must follow the plan document’s compensation definition in the operation of the plan for allocating contributions, determining HCE and key employees, performing compliance testing, and computing deduction limits. Perform annual reviews of compensation definitions and ensure that the person in charge of determining compensation is properly trained to understand the plan document.

ESOP Awards: 2012 Silver ESOP Award Winners

Aaron Juckett — Thu, 12 Apr 2012 12:27:00 GMT

The ESOP Association has announced the 49 Silver ESOP Award Winners of 2012:

AMSTED Industries, Inc., Chicago, IL
Associated Integrated Marketing, Wichita, KS
Austin Industries, Inc., Dallas, TX
AWC Inc., Baton Rouge, LA
Bay Cities Container Corp, Pico Rivera, CA
Bimba Manufacturing Company, Monee, IL
Bonitz of South Carolina, Inc., Columbia, SC
Braas Company, Eden Prairie, MN
Brookfield Engineering Labs, Inc., Middleboro, MA
Bruckner Truck Sales, Inc., Amarillo, TX
Burns & McDonnell Engineers-Architects, Kansas City, MO
Clyde/West, Inc., Portland, OR
Community Bancshares, Inc., Neosho, MO
Contempora Fabrics, Inc., Lumberton, NC
CPP, Inc., Mountain View, CA
D. L. Evans Bank, Burley, ID
Davis, Gregory & Kyle, Inc., Factoryville, PA
DCS Corporation, Alexandria, VA
DimcoGray Company, Dayton, OH
Edney Distributing Co., Inc., Huron, SD
ELS, Inc., Arlington, VA
FBMC Benefits Management, Tallahassee, FL
Fred Weber, Inc., Maryland Heights, MO
Garland Industries, Inc., Cleveland, OH
The Gazette Company, Cedar Rapids, IA
Glatfelter Insurance Group, York, PA
Gopher Electronics Company, Saint Paul, MN
JBS United, Inc., Sheridan, IN
KAPCO, Brea, CA
Lerch Bates Inc., Littleton, CO
Lincoln Bancorp/Lincoln Savings Bank, Reinbeck, IA
Merchants Bank, South Burlington, VT
Mid-State Consultants, Inc., Nephi, UT
Neil H. Daniels, Inc., Ascutney, VT
New England Biolabs, Inc., Ipswich, MA
Nicholville Telephone Co., Inc., Nicholville, NY
Oxford Construction Company, Albany, GA
Pioneer Power, Inc., Saint Paul, MN
Reell Precision Manufacturing Corp., Saint Paul, MN
RHM Fluid Power, Inc., Westland, MI
Schaedler YESCO, Harrisburg, PA
Sletten, Inc., Great Falls, MT
St. John Holdings, Inc., Radnor, PA
Taggart & Associates, Inc., Boulder, CO
Temperature Systems, Inc., Madison, WI
Trachte Building Systems, Inc., Sun Prairie, WI
Wallace Eannace Associates, Inc., Plainview, NY
Wikoff Color Corporation, Fort Mill, SC
Woodfold-Marco Mfg., Inc., Forest Grove, OR

The Silver ESOP Award was started in 2008 and recognizes ESOPs in existence for at least 25 years. There have now been 241 winners - here are links to the 2011 Silver ESOP Award Winners (41), 2010 Silver ESOP Award Winners (22), 2009 Silver ESOP Award Winners (12), and 2008 Silver ESOP Award Winners (117). Here is the announcement:

WASHINGTON, April 9, 2012 /PRNewswire-USNewswire/ -- The ESOP Association has presented 49 corporate members of the Association with a Silver ESOP Award to recognize their work in sustaining their ESOP (employee stock ownership plan) for 25 years or more. This year, the Silver ESOP Awards are being presented to companies that will be celebrating 25 years or more as an ESOP company in 2012.

This is the fifth year the Silver ESOP Awards have been presented by the Association. In 2008, 117 corporate members were presented with the first annual Silver ESOP Awards; 2009, 12 members; 2010, 22 members; and in 2011, 41 members were honored. To be named a Silver ESOP Award recipient, a company must be a member of The ESOP Association and have an ESOP in place for 25 years or more.

"It is my pleasure to present these 49 companies with the 2012 Silver ESOP Award for excellence in sustaining their ESOP for 25 years," said ESOP Association President J. Michael Keeling. "As recent research has shown, employees with employee stock ownership have more sustainable employment and were four times less likely to be laid off during the Great Recession than employees without employee stock ownership. Preserving locally-controlled jobs in today's global economy is more likely when employees are owners."

2012 Silver ESOP Award Recipients:

AMSTED Industries, Inc., Chicago, IL
Associated Integrated Marketing, Wichita, KS
Austin Industries, Inc., Dallas, TX
AWC Inc., Baton Rouge, LA
Bay Cities Container Corp, Pico Rivera, CA
Bimba Manufacturing Company, Monee, IL
Bonitz of South Carolina, Inc., Columbia, SC
Braas Company, Eden Prairie, MN
Brookfield Engineering Labs, Inc., Middleboro, MA
Bruckner Truck Sales, Inc., Amarillo, TX
Burns & McDonnell Engineers-Architects, Kansas City, MO
Clyde/West, Inc., Portland, OR
Community Bancshares, Inc., Neosho, MO
Contempora Fabrics, Inc., Lumberton, NC
CPP, Inc., Mountain View, CA
D. L. Evans Bank, Burley, ID
Davis, Gregory & Kyle, Inc., Factoryville, PA
DCS Corporation, Alexandria, VA
DimcoGray Company, Dayton, OH
Edney Distributing Co., Inc., Huron, SD
ELS, Inc., Arlington, VA
FBMC Benefits Management, Tallahassee, FL
Fred Weber, Inc., Maryland Heights, MO
Garland Industries, Inc., Cleveland, OH
The Gazette Company, Cedar Rapids, IA
Glatfelter Insurance Group, York, PA
Gopher Electronics Company, Saint Paul, MN
JBS United, Inc., Sheridan, IN
KAPCO, Brea, CA
Lerch Bates Inc., Littleton, CO
Lincoln Bancorp/Lincoln Savings Bank, Reinbeck, IA
Merchants Bank, South Burlington, VT
Mid-State Consultants, Inc., Nephi, UT
Neil H. Daniels, Inc., Ascutney, VT
New England Biolabs, Inc., Ipswich, MA
Nicholville Telephone Co., Inc., Nicholville, NY
Oxford Construction Company, Albany, GA
Pioneer Power, Inc., Saint Paul, MN
Reell Precision Manufacturing Corp., Saint Paul, MN
RHM Fluid Power, Inc., Westland, MI
Schaedler YESCO, Harrisburg, PA
Sletten, Inc., Great Falls, MT
St. John Holdings, Inc., Radnor, PA
Taggart & Associates, Inc., Boulder, CO
Temperature Systems, Inc., Madison, WI
Trachte Building Systems, Inc., Sun Prairie, WI
Wallace Eannace Associates, Inc., Plainview, NY
Wikoff Color Corporation, Fort Mill, SC
Woodfold-Marco Mfg., Inc., Forest Grove, OR

All 241 Silver ESOP Award recipients will be honored at The ESOP Association's Annual Conference in May (May 10 – 11, 2012) and highlighted at the 21st Annual Awards Banquet held on the evening of May 9th.

Turn Your Company's Ownership Culture Into A Profit Center

Sarah Trovato — Wed, 11 Apr 2012 13:24:00 GMT

The establishment of an Employee Stock Ownership Plan is a key strategic initiative for a company. However, employee ownership must be more than just words on paper, or numbers in a spreadsheet. The most successful employee owned companies set their goal of becoming the best in their industry by creating a strong organizational structure based upon the trust, teamwork, and expertise of the employees to make it all happen.

Selling to an ESOP Provides Greater Employment Stability and Increases Job Satisfaction. With serious focus on the importance of developing your culture, employee ownership will result in an outstanding organization with very little turnover and one that is able to attract the best talent in your industry.

Employee-owned Robert W. Baird & Co., Milwaukee, WI has put this practice to the test, going as far as to actually appoint Senior Vice President, Beth Kavelaris, as Director of Culture & Integration. Beth says, “we truly believe that our culture is a profit center which creates more efficiency and bottom-line profit for our clients, and more profit for us as a company”. Baird CEO Paul Purcell adds, “if we don’t have the best people, we can’t be the best…”.

Read further about Baird’s success in Treating Company Culture as a Profit-Center, which details the building of a great ownership culture inside their organization, and how the company maintains consistent growth, while holding down turnover to 4.7%; well below their industry’s average of 16%.

For even more employee-ownership success stories and how to grow an unbeatable culture, check out Example of a High Performance Ownership Culture.

ESOP Awards: 2012 AACE Award Winners

Aaron Juckett — Wed, 11 Apr 2012 11:58:00 GMT

The ESOP Association announced the winners of the 2012 Annual Awards for Communications Excellence (AACE):

Category 1-A, Total Communications Program, 100 or Fewer Employees

Winner: The Onyx Group

Alexandria, VA

Runner Up: Priority Sign

(also Runner Up Category 7-A, Special Events, Promotions, Series, 250 or Fewer Employees)

Sheboygan, WI

Category 1-B, Total Communications Program, 101 – 500 Employees

Winner: Van Meter Inc.

(also Runner Up 5-B, Advertising – Ownership Marketing – Web Sites)

Waterloo, IA

Runner Up: Mid South Building Supply Inc.

(also Runner Up 3-A, Printed Materials, 250 or Fewer Employees & Top Winner, 5-A, ESOP Advertising – Ownership Marketing – General)

Springfield, VA

Category 1-C, Total Communications Program, 501 – 1,000 Employees

Winner: Woodward Communications, Inc.

Dubuque, IA

Runner Up: Hot Dog on a Stick

(also Winner 3-B, Printed Materials, Over 250 Employees & Runner Up 5-A, ESOP Advertising – Ownership Marketing – General)

Carlsbad, CA

Category 1-D, Total Communications Program, Over 1,000 Employees

Winner: SRC Holdings Corporation

Springfield, MO

Runner Up: Burns & McDonnell

(also Winner 5-B, ESOP Advertising – Ownership Marketing – Web Sites)

Kansas City, MO

Category 2-A, Video, 250 or Fewer Employees

Winner: Unique Home Solutions

Indianapolis, IN

Runner Up: Sonnax Industries

Bellows Falls, VT

Category 2-B, Video, Over 250 Employees

Winner: The Cianbro Companies

Pittsfield, ME

Runner Up: Acadian Companies
(also Top Winner 6-B, Special Events & Promotions, 1 Outstanding Event, Over 250 Employees)

Lafayette, LA

Category 3-A, Printed Materials, 250 or Fewer Employees

Winner: Cal-Tex Protective Coatings

Schertz, TX

Runner Up: Mid South Building Supply Inc.

(also Runner Up 1-B, Total Communications Program, 101 – 500 Employees & Top Winner 5-A, ESOP Advertising – Ownership Marketing – General)

Springfield, VA

Category 3-B, Printed Materials, Over 250 Employees

Winner: Hot Dog on a Stick

(also Runner Up 1-C, Total Communications Program, 501 – 1,000 Employees & Runner Up 5-A, ESOP Advertising – Ownership Marketing – General)

Carlsbad, CA

Runner Up: Forsythe Technology, Inc.

Skokie, IL

Category 4-A, Intranet, 250 or Fewer Employees

Winner: Foldcraft Co.

Kenyon MN

Category 4-B, Intranet, Over 250 Employees

Winner: DCS Corporation

Lexington Park, MD

Runner Up: Holden Industries, Inc.

Deerfield, IL

Category 5-A, ESOP Advertising – Ownership Marketing – General

Winner: Mid South Building Supply Inc.

(also Runner Up in 1-B, Total Communications Program, 101 – 500 Employees & Runner Up 3-A, Printed Materials, 250 or Fewer Employees)

Springfield, VA

Runner Up: Hot Dog on a Stick

(also Runner Up in 1-C, Total Communications Program, 501 – 1,000 Employees & Top winner in 3-B, Printed Materials, Over 250 Employees)

Carlsbad, CA

Category 5B, ESOP Advertising – Ownership Marketing – Web Sites

Winner: Burns & McDonnell

(also Runner Up in 1-D, Total Communications Program, Over 1,000 Employees)

Kansas City, MO

Runner Up: Van Meter Inc.

(also Top Winner 1-B, Total Communications Program, 101 – 500 Employees)

Waterloo, IA

Category 6-A, Special Events & Promotions, 1 Outstanding Event, 250 or Fewer Employees

Winner: Vermeer Equipment of Texas

Irving, TX

Runner Up: ComSonics, Inc.

Harrisonburg, VA

Category 6-B, Special Events & Promotions, 1 Outstanding Event, Over 250 Employees

Winner: Acadian Companies

(also Runner Up in 2-B, Video, Over 250 Employees)

Lafayette, LA

Runner Up: Sleep Train

Rocklin, CA

Category 7-A, Special Events, Promotions, Series, 250 or Fewer Employees

Winner: Apache Hose & Belting Co., Inc.

Cedar Rapids, IA

Runner Up: Priority Sign

(also Runner Up in 1-A, Total Communications Program, 100 or Fewer Employees)

Sheboygan, WI

Category 7-B, Special Events, Promotions, Series, Over 250 Employees

Winner: Dakota Supply Group

Aberdeen, SD

Runner Up: Glatfelter Insurance Group

York, PA

Note: A company may not be a Top Winner more than once each year. They can be a Runner Up Winner & Top Winner or Runner Up Winner in several categories. They cannot win the same top award two years in a row. No such restrictions apply to Runner Up Winners. When a judge’s company is in a category being judged, the judge is recused.

Here are links to the 2011 AACE Award Winners, 2010 AACE Award Winners, 2009 AACE Award Winners, and the 2008 AACE Award Winners.

ESOP Administration: Are you correctly determining your employees’ eligibility date of participation?

Kevin Rusch — Fri, 06 Apr 2012 16:31:00 GMT

Last week I discussed the requirement to provide Summary Plan Descriptions (SPDs) to participants in your ESOP, but when do your employees become participants in the ESOP?

Statutory Requirements

Age and Service

Most ESOPs, like other qualified retirement plans, have age and service eligibility requirements before an employee can participate in the plan. There are limits to the eligibility requirements a plan can impose on an employee. The minimum age and service conditions under IRC Section 410(a)(1)(A) state the age requirement cannot exceed the age of 21 and the service requirement cannot exceed 1 year of service. A plan can establish 2 years of service for eligibility into an ESOP, but this provision is not commonly used as the participant must be immediately vested in their account.

Entry Dates

After an employee has met the eligibility requirements, the plan document will indicate the entry dates an employee becomes a participant in the ESOP. As with the age and service requirements, there are limits on the time an employee can wait before commencing participation in the plan. IRC Section 410(a)(4) - Time of participation states an employee must enter the ESOP no later than the earlier of (a) the first day of the plan year which begins after the date the employee completes the statutory age and service requirements, or (b) six months following the date the employee completes the statutory age and service requirements.

As a result, it is very common to see plans with two entry dates, one being the first day of the plan year and the other date being the first day of the seventh month of the plan year. With two entry dates, having employees begin participation in the plan in the next entry date upon completion of the plan eligibility requirements will satisfy the legal requirements.

Plan Requirements

It is critical to know what your eligibility provisions are for your ESOP, as your requirements may be more liberal than the legal limits. For example, your ESOP document may have an age of 18 and 6 months of service requirement, and quarterly entry dates to enter the plan. You should also make sure your SPD portrays the same requirements as your plan document. Not following the provisions in your ESOP document is an operational failure that would need to be corrected under The Employee Plans Compliance Resolution System (EPCRS).

ESOP Administration: When was the last time you updated and distributed your SPD?

Kevin Rusch — Tue, 27 Mar 2012 13:39:00 GMT

ERISA §101(a) requires the plan administrator to furnish the Summary Plan Description (SPD) to each participant covered under the plan and to each beneficiary who is receiving benefits under the plan. The SPD informs participants of the material provisions of the plan, how to make a claim for benefits, and what their rights are under ERISA.

While most plan administrators understand new participants should receive an SDP no later than 90 days after becoming a participant, the periodic SPD distribution requirement may be accidentally overlooked.

An updated SPD should be delivered to all participant and beneficiaries every 5 years if there have been amendments made to the plan that would affect the contents of the SPD. Regardless of whether amendments were made to the plan, an updated SPD must be distributed to all participants and beneficiaries at least every 10 years. Title 29 of the Code of Federal Regulations § 2520.104b-2 requires the administrator of an employee benefit plan provide an updated SPD no later than 210 days following the end of the plan year for which the SPD is updated.

While ERISA does not impose penalties related to the disclosure rules of SPDs, penalties of $100 per day (with a $1,000 maximum) can be assessed by the DOL for failure to produce an SPD within 30 days of their request. In addition, fines up to $5,000 or imprisonment up to one year can be sentenced to any person who willfully violates the disclosure requirements.

ERISA attorneys that draft and maintain ESOP documents would be a good source in preparing and updating your SPD. If you need assistance locating an attorney that is well-read in ESOPs, please feel free to contact us for a referral.