The One-Stop ESOP Blog

Bankruptcy Court Reviews Tribune Company Two-Step ESOP Transaction

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 30 Jul 2010 12:03:00 +0000

The July 29, 2010 Employee Ownership Update is online and discusses the following:

People Just Don't Stay with an Employer as Long as They Used To and Other Myths
Examiner Finds Tribune Solvency Opinion in ESOP Transaction May Involve Fraud
Will the New Executive Compensation Rules Matter?
Have a "Don't Do That Story" for Equity Compensation?

The Update reviews the complex two-step Tribune ESOP Transaction:

The Tribune Company was bought by Sam Zell and an ESOP in 2007 in a complex, two-step transaction. In step one, Zell put in equity and the ESOP bought newly issued shares. In step two, a self-tender was undertaken to buy out all the shares, including Zell's, with additional debt. The result was a 100% ESOP with Zell having warrants worth 40% of the company. In question here is step two. The board hired Valuation Research to give a solvency opinion. The examiner found that the opinion lacked credibility, that projections about solvency from management were unreasonably optimistic and poorly vetted, and that Morgan Stanley's imprimatur on the transaction was overstated. In addition, the examiner said in "effect, VRC was required to add to the value derived from its analysis the value conferred on the Tribune Entities from the S-Corporation/ESOP structure as a result of the Merger, even though inclusion of this value in the determination of 'fair market value' and 'fair saleable value' was improper."

The Tribune Company subsequently Filed for Bankruptcy and Terminated the ESOP. Tribune buyout "marred," but not all flawed discusses the findings of the US Bankruptcy Court from the Report of Kenneth N. Klee, As Examiner: Summary of Principal Conclusions, Overview and Conduct of the Examination, and Factual Background:

...Klee, in his 700-page report, concluded that "Step One" of the LBO, selling Tribune Company to an Employee Stock Ownership Plan (ESOP) in mid-2007, while highly leveraged with $8.2 billion of new debt, did not appear to be doomed from the get-go, so it would not likely be found to be a fraudulent conveyance.

"Step Two," adding another $3.6 billion in debt in December 2007, was a transaction that the court would be "somewhat likely to find was an intentional fraudulent transfer," Klee said in his report.

That isn't likely to produce any payoff for the pre-LBO bondholders, since Tribune Company as it stands today appears to be worth less than the initial $8.2 billion of senior debt. If the judge agrees with Klee, however, the banks that put together Step Two could see their fees clawed back for distribution in the Chapter 11 reorganization plan.

The Update also analyzes the findings of the report.

Last week we discussed how the Final Financial Reform Bill was Signed Into Law. This table describes the type of company and the effective date that will be directly impacted by the various provisions of the law. The Update reviews the impact of prior changes to compensation rules, such as the unintended consequences of prior changes to IRC Section 162(m) - Trade or business expenses - Certain excessive employee remuneration, and is skeptical that the new executive compensation rules will matter.

Ownership Culture Committee

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 29 Jul 2010 18:24:00 +0000

While upper management is heavily involved in the task of communicating your ESOP, one best practice for gaining greater employee buy-in is to include employee representatives from various parts of your organization in the communications process. An effective way to obtain broad representation is to establish an ESOP Communications Committee. This type of committee usually functions in an advisory capacity and does not have any formal authority or fiduciary responsibility. Starting Over in Lexington: Taking Ownership discusses how one company implemented an ownership culture committee:

While his associates have increasingly used their weekly huddles to educate themselves on what's involved in the company ESOP, Rob also created what we at SRC call an "ownership culture committee," a team made up of four associates from different levels within the company. The goal of the committee is to serve as an intermediary between management and the associates on the plant floor. To help in that effort, all of the members will receive additional training from our team back in Springfield. And one of their first tasks will be to read through the comments their co-workers made during the survey and find ways to make improvements based on those comments.

The article also includes commentary from each of the committee members.

Preliminary Valuation Resources and Using a Qualified Independent ESOP Valuation Expert

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 23 Jul 2010 16:14:00 +0000

Determining Your Company's Value: Multiples and Rules of Thumb discusses using multiples such as EBITDA or seller's discretionary earnings to determine a starting point for determining the value of your company:

While there are many factors that help determine an appropriate asking price — including competitive advantages, opportunities for growth and historic financial performance — multiples and rules of thumb can be a good place to start. Several resources are available for obtaining data on pricing businesses for sale, including Business Valuation Resources and BizBuySell.com. A business broker, intermediary or transaction adviser will have access to a number of resources for small-business deal flow data, as well.

Business Brokerage Press publishes an annual guide to pricing small businesses for sale in both a print and online version. Here are some multiples and rules of thumb for a handful of businesses from the latest version:

Manufacturing (annual sales of $1 million to $5 million): three to four times S.D.E. plus inventory.

Retail auto parts: 40 percent of annual sales plus inventory.

Commercial printers (annual sales under $2 million): two and a half to three times recast Ebitda.

Retail apparel: one and a half times S.D.E. plus inventory.

Wind farms: 10 times Ebitda.

Some industries have their own rules of thumb. For example, an authorized reseller of wireless phones and service is sometimes valued at 30 times monthly residuals. While there is no such thing as a "comp" (comparable) when it comes to selling a small business, looking at multiples for similar businesses in the same industry — and preferably in a similar geographic area or market — can be the next best thing.

One of the keys to a successful sale is to have a clear understanding of how buyers will value your business, whether it's an individual or a strategic acquirer. More often than not, that value will come down to a multiple of the business's earnings.

You may also find this Estimated Business Valuation Resource useful.

While these resources will give you a good starting point, involving a business valuation expert early in the process will help you maximize your potential after-tax return.

It is important to make sure that your valuation expert has relevant and significant ESOP experience to help you navigate through the ESOP-specific valuation issues.

It is also important to make sure that your appraiser is independent, both in fact and appearance, in order to satisfy the independent appraiser requirements of IRC Section 401(a)(28)(C) - Qualified pension, profit-sharing, and stock bonus plans - Requirements for qualification - Additional requirements relating to employee stock ownership plans. If your appraiser is also providing any other significant services, including TPA recordkeeping services, plan document or other legal services, fiduciary services, or financial, tax, or assurance services, then you should revisit your arrangement to make sure you are still complying with the independent appraiser requirements:

(28) Additional requirements relating to employee stock ownership plans.—

(C) Use of independent appraiser.— A plan meets the requirements of this subparagraph if all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser. For purposes of the preceding sentence, the term "independent appraiser" means any appraiser meeting requirements similar to the requirements of the regulations prescribed under section 170 (a)(1).

Final Financial Reform Bill Signed Into Law

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 21 Jul 2010 16:24:00 +0000

President Obama has just signed into law the Financial-Regulation Bill that he says will "create the strongest financial protections for consumers in history".

Impact of Financial Reform Legislation on Employee Benefit Plans explores the impact of the legislation on employee benefit plans. It asserts that even though there are some exclusions, employee benefit plans will be impacted in three areas, swaps and other derivatives, stable value funds, and the new consumer protection agency.

Financial Reform Bill and the Fiduciary Standard for Brokers discusses how the bill gives the SEC the authority to impose a fiduciary duty on brokers who give investment advice. It also notes that brokers do not have to give investment advice and explains why brokers do not need to be afraid of having a fiduciary duty to their clients:

From an investor perspective, probably the most important change is that the bill, "Gives SEC the authority to impose a fiduciary duty on brokers who give investment advice—the advice must be in the best interest of their customers," according to the summary release from the House Financial Services Committee.

The SEC is tasked with a six-month study of whether brokers who provide advice to investors should have to provide that advice under a fiduciary standard of care as embodied in the Investment Advisers Act of 1940. There will also be comment period, and if it deems it to be necessary, the SEC will then write guidelines and rules for brokers who provide advice to do so under the fiduciary standard of care.

Financial Reform Law Will Impact Executive Compensation and Corporate Governance Practices explores the impact of the legislation on executive compensation and corporate governance practices:

The Dodd-Frank Wall Street Reform and Consumer Protection Act
Shareholder "Say-on-Pay" and "Say-on-Golden Parachutes"
Independence
Executive Compensation Disclosures
Clawbacks
Enhanced Compensation Structure Reporting and Prohibitions at Financial Institutions

While most of the changes impact publicly held companies, the regulations will directly or indirectly impact privately held companies as well.

Latest Estimate of the Potential ESOP Universe

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 20 Jul 2010 19:04:00 +0000

The July 15, 2010 Employee Ownership Update is online and discusses the following:

New Web Site Rates Defined Contribution Plans Versus Peers
How Many ESOP "Sweet Spot" Companies Are There?
NCEO Sponsors Ownership Thinking Conference in Denver

The Update attempts to quantify the potential universe of ESOP companies and comes up with 400,000:

People working on employee ownership often ask us how many companies fit the "sweet spot" for an ESOP. The size when an ESOP is most likely to be appropriate is, broadly speaking, between 20 and 1,000 employees. According to the most recent census data, there are about 590,000 organizations in that range, and these companies employ about 40% of the private sector work force. There are about 8,500 companies with over 1,000 employees, and they employ about 42.5% of the private sector work force; companies with over 10,000 employees employ 27%.

Of course, many of the appropriately sized companies are not ESOP candidates. Many of those 590,000 organizations are ineligible for ESOPs because they are nonprofits or professional firms. (Generally speaking, law firms, accounting firms in most states, and medical practices, cannot have ESOPs, nor can companies such as real estate agencies that have contract employees.) It is difficult to gauge how many of these there are in the 20-1,000 employee range, but we suspect that they bring the number of "sweet spot" companies down to about 400,000.

In 2008 we explored some of the statistics that can help with this projection in Statistics: Number of Baby Boomers, Baby Boomer Business Owners, and Potential ESOP Universe.

It also discusses BrightScope.com, a website that analyzes and ranks defined contribution plans using the IRS Form 5500 data and other sources. The BrightScope website discusses their ratings system and database:

The BrightScope RatingTM

The BrightScope Rating^TM is an industry standard quantitative 401k plan rating developed by BrightScope^TM, Inc. with the help of leading academics and independent 401k fiduciaries. The BrightScope rating algorithm calculates a single numerical score for each 401k plan in the country after considering over 200+ individual data points in broad categories such as total plan cost, company generosity and investment menu quality. The BrightScope Rating^TM is designed to assist industry participants in determining the relative quality of a company's 401k plan when compared to a unique peer group with similar demographic characteristics. We believe that industry adoption of the BrightScope Rating^TM will ultimately lead to more cost-effective plans, increased participation rates, higher employee satisfaction, and better outcomes for employees who depend on their 401k plan for retirement.

The BrightScope Database^TM

BrightScope^TM obtains some of its data from public sources such as the Department of Labor, the Securities and Exchange Commission, the U.S. Census Bureau, the Equal Employment Opportunity Commission, and the Bureau of Labor Statistics. Mutual fund and investment data are obtained from mutual fund prospectuses, statements of additional information, Form NSAR and Xignite, Inc. Data on 401k fees comes directly from plan sponsors who work with us to improve their plan. While all participant level data (ie. names, account balances, identification numbers etc.) is protected and confidential, we aggregate company level fee data across comparable companies to construct relevant benchmarks on fees. BrightScope^TM believes it possesses the most comprehensive private database of 401k information in the country. The company will leverage this database to provide our clients with accurate and high quality data that places them on a level playing field with their providers.

Profile of a Successful ESOP Company

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 14 Jul 2010 23:43:00 +0000

Success Stories: Providing Employees Stability in Unstable Times is a profile of ESOP Company and 2010 Top Small Company Workplace Van Meter Industrial. The article discusses the company's five core values of Place, People, Provider, Continuous Improvement, and Profit:

Giving back to the communities in which they and their employees reside is certainly not a novel concept for companies; many are motivated to do so for the positive PR it brings. But VMI has intentionally built this focus into its workplace culture and its core values, one of which is Place.

"We allow employees eight hours to volunteer on company time," Marketing & Communications Manager Erin Koester told us in VMI's award application. "Not only is this good for the community, it is also a reward for our people."

The company's other four core values, all of which except for one also start with the letter P, include:

People: building and sustaining an engaged workforce is a key strategic goal
Provider: get the right product to the right customer
Continuous imProvement: continue to empower and to expect each of our employees to make the appropriate changes for improving process, services and other activities in our company, and to continue to have a workplace that is constantly reinventing itself
Profit: continue to drive value in our stock price so our fellow employee-owners can reap the rewards of employee ownership

The article also explores their open book management program and their Quick Kaizen continuous program:

At VMI, it is called Quick Kaizen, and it uses technology (their intranet) to empower employees to make small changes in their work habits that collectively lead to large-scale process improvement.

"You can enter ideas and they go to whoever is in charge of that area, and then they interact with you by phone or email," says Delivery Driver Larry Botts. "They ask you about cost savings or a better way to do it. For example, I tried to get a new form for the customers so they don't have to sign multiple times for a delivery. Our competitors make people sign multiple times and another company even takes a picture of the person signing for the delivery. Now we work with the customer so they can either sign, or they don't have to stop what they're doing to sign. This helps us build trust with the customer."

The Quick Kaizen program is based on the Kaizen philosophy:

Continuous Improvement

The principles for continuous improvement include establishing a long-term vision, working on challenges, continual innovation, and going to the source of the issue or problem:

Challenge
Form a long-term vision and meet challenges with courage and creativity.
Kaizen (continuous improvement)
Improve business operations continuously, always driving for innovation and evolution.
Genchi Genbutsu (go and see)
Go to the source to find the facts to make correct decisions, build consensus and achieve goals at best speed.

The ESOP Cadre

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 07 Jul 2010 13:20:00 +0000

Due to the unique complexities of individually designed ESOP plan documents, the IRS created a group of ESOP specialists that has become known as the "ESOP Cadre" to review all ESOP determination letter requests. Beginning with Cycle B submissions (January 31, 2008), the IRS began holding approval and ceased issuing favorable determination letters while they awaited further guidance.

The Employee Plans Rulings and Agreements Director began issuing memos on ESOP issues in November 2009. While the guidance helps give the reviewers as well as the ESOP community a better understanding of the thought process of the IRS, the memos are not formal technical advice memorandums (TAMs) and do not have not any legal authority.

During the recent IRS ESOP Update Phone Forum, the IRS reiterated that the memos could not be considered formal guidance while recognizing that the current regulations are old and incomplete. They also stated that while they are not formally holding all ESOP determination letter requests (noting that some have been recently issued), many requests are on hold as the determination letter branches are still waiting to obtain additional guidance.

We reviewed one of the memoranda, Response to Technical Assistance Request #4, in An IRS Analysis of ESOP Rebalancing and ESOP Reshuffling. We will review the content of the other IRS technical memoranda in the coming weeks.

Employee Ownership Reduces Employee Turnover

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 06 Jul 2010 13:16:00 +0000

The June 30, 2010 Employee Ownership Update is online and discusses the following:

Royal Mail Employees to Get a Share of Company
Academic Interest in Employee Ownership Blossoms
Article Explores Top Five Trends in Equity Compensation
Tech Employees Rate Shared Capitalism as Key Benefit
New Rules on Employer Stock Diversification in 401(k) and KSOP Plans

The Update provides a recap of the Final IRC Section 401(a)(35) Diversification Regulations, noting that stand-alone ESOPs are exempt from the rules:

Under the law, a participant's right to invest in or divest employer securities cannot be any more restricted than it is for any other plan investment options. However, the final regulations modify some of the permitted restrictions. According to the IRS:

A plan may allow transfers to and from stable value funds and out of qualified default investment alternatives more frequently than a fund invested in employer securities.
Under the law, a plan may prohibit further investments in an employer stock fund, thereby "freezing" it. The regulations clarify that if employees are reinvesting Section 404(k) dividends on employer stock, the employer stock fund would still be considered frozen.
Under a transitional rule, leveraged ESOPs that acquired stock in a plan year beginning before January 1, 2007, may allocate such stock as matching contributions to a frozen employer stock fund.

The IRS notes that the final regulations also:

do not treat a multiemployer plan as holding employer securities if they are held indirectly through an investment fund managed by an independent investment manager and do not exceed 10% of the fund;
extend the types of allowed investment companies to include certain exchange traded funds;
state that in determining whether the value of employer securities exceeds 10% of the fund's investment's total value for a plan year, the value at the end of the preceding plan year should be used; and
provide that if a fund that indirectly holds employer securities does not meet the "independent of the employer" requirement, it meets the diversification requirements even if the plan does not offer diversification rights to the participants for up to 90 days after it is found to hold employer securities.

In the preamble, the IRS states that an ESOP that presently has a diversification option under Section 401(a)(28) will not violate anti-cutback rules by eliminating this option in favor of the more favorable (to employees) diversification provisions of the Pension Protection Act.

The Update discussed some of the findings discussed in last week's Beyster Fellowship Symposium, which was a gathering of researchers to explore employee ownership and other topics:

"One of the observations from his research is that there is evidence that the companies that have employee ownership and related practices had improved their performance in terms of employee turnover. Among the 100 Best Companies to Work For in America, the consensus of this new research was that employee ownership made a big difference. Looking around the country, those shareholder rights groups who objected were usually opposed because of the dilution caused as a result of widespread employee ownership. But among leading technology companies with broad-based employee ownership it seems that most shareholder participants were quite happy with the impact employee ownership had."

It also discusses the Employee ownership plan for Royal Mail.

H.R. 5297: Small Business Lending Fund Act of 2010

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 01 Jul 2010 17:39:00 +0000

Pro-Employee Ownership Proposals Pending on Senate Floor announces that Sen. Bernard Sanders [I-VT], Patrick Leahy [D-VT], and Sherrod Brown [D-OH] have filed "pro-employee" amendments to H.R. 5297: Small Business Lending Fund Act of 2010:

One amendment would establish an initiative to promote employee ownership at the Department of Labor; the other amendment would establish a loan guarantee program at the Department of Treasury to help finance certain ESOP transactions. To read the amendments, please click on the following amendment numbers: S. AMDT 4439 and S. AMDT 4440....H.R. 5297 will be considered by the full Senate sometime after July 13th.

Here is a link to the relevant amendments:

SA 4439. Mr. SANDERS (for himself, Mr. Brown of Ohio, and Mr. Leahy) submitted an amendment intended to be proposed to amendment SA 4402 proposed by Mr. Reid (for Mr. Baucus (for himself, Ms. Landrieu, and Mr. Reid)) to the bill H.R. 5297, to create the Small Business Lending Fund Program to direct the Secretary of the Treasury to make capital investments in eligible institutions in order to increase the availability of credit for small businesses, to amend the Internal Revenue Code of 1986 to provide tax incentives for small business job creation, and for other purposes; which was ordered to lie on the table; as follows:

At the appropriate place, insert the following:

TITLE X--WORKER OWNERSHIP, READINESS, AND KNOWLEDGE

SEC. X01. SHORT TITLE.

This title may be cited as the ``Worker Ownership, Readiness and Knowledge Act'' or the ``WORK Act''.

SEC. X02. DEFINITIONS.

In this title:

(1) EXISTING PROGRAM.--The term ``existing program'' means a program, designed to promote employee ownership and employee participation in business decisionmaking, that exists on the date the Secretary is carrying out a responsibility authorized by this title.

(2) INITIATIVE.--The term ``Initiative'' means the Employee Ownership and Participation Initiative established under section X03.

(3) NEW PROGRAM.--The term ``new program'' means a program, designed to promote employee ownership and employee participation in business decisionmaking, that does not exist on the date the Secretary is carrying out a responsibility authorized by this title.

(4) SECRETARY.--The term ``Secretary'' means the Secretary of Labor.

(5) STATE.--The term ``State'' means any of the 50 States within the United States of America.

SEC. X03. EMPLOYEE OWNERSHIP AND PARTICIPATION INITIATIVE.

(a) Establishment.--The Secretary of Labor shall establish an Employee Ownership and Participation Initiative to promote employee ownership and employee participation in business decisionmaking.

(b) Functions.--In carrying out the Initiative, the Secretary shall--

(1) support within the States existing programs designed to promote employee ownership and employee participation in business decisionmaking; and

(2) facilitate within the States the formation of new programs designed to promote employee ownership and employee participation in business decisionmaking.

(c) Duties.--To carry out the functions enumerated in subsection (b), the Secretary shall--

(1) support new programs and existing programs by--

(A) making Federal grants authorized under section X5; and

(B)(i) acting as a clearinghouse on techniques employed by new programs and existing programs within the States, and disseminating information relating to those techniques to the programs; or

(ii) funding projects for information gathering on those techniques, and dissemination of that information to the programs, by groups outside the Department of Labor; and

(2) facilitate the formation of new programs, in ways that include holding or funding an annual conference of representatives from States with existing programs, representatives from States developing new programs, and representatives from States without existing programs.

SEC. X04. PROGRAMS REGARDING EMPLOYEE OWNERSHIP AND PARTICIPATION.

(a) Establishment of Program.--Not later than 180 days after the date of enactment of this Act, the Secretary shall establish a program to encourage new and existing programs within the States, designed to foster employee ownership and employee participation in business decisionmaking throughout the United States.

(b) Purpose of Program.--The purpose of the program established under subsection (a) is to encourage new and existing programs within the States that focus on--

(1) providing education and outreach to inform employees and employers about the

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possibilities and benefits of employee ownership, business ownership succession planning, and employee participation in business decisionmaking, including providing information about financial education, employee teams, open-book management, and other tools that enable employees to share ideas and information about how their businesses can succeed;

(2) providing technical assistance to assist employee efforts to become business owners, to enable employers and employees to explore and assess the feasibility of transferring full or partial ownership to employees, and to encourage employees and employers to start new employee-owned businesses;

(3) training employees and employers with respect to methods of employee participation in open-book management, work teams, committees, and other approaches for seeking greater employee input; and

(4) training other entities to apply for funding under this section, to establish new programs, and to carry out program activities.

(c) Program Details.--The Secretary may include, in the program established under subsection (a), provisions that--

(1) in the case of activities under subsection (b)(1)--

(A) target key groups such as retiring business owners, senior managers, unions, trade associations, community organizations, and economic development organizations;

(B) encourage cooperation in the organization of workshops and conferences; and

(C) prepare and distribute materials concerning employee ownership and participation, and business ownership succession planning;

(2) in the case of activities under subsection (b)(2)--

(A) provide preliminary technical assistance to employee groups, managers, and retiring owners exploring the possibility of employee ownership;

(B) provide for the performance of preliminary feasibility assessments;

(C) assist in the funding of objective third-party feasibility studies and preliminary business valuations, and in selecting and monitoring professionals qualified to conduct such studies; and

(D) provide a data bank to help employees find legal, financial, and technical advice in connection with business ownership;

(3) in the case of activities under subsection (b)(3)--

(A) provide for courses on employee participation; and

(B) provide for the development and fostering of networks of employee-owned companies to spread the use of successful participation techniques; and

(4) in the case of training under subsection (b)(4)--

(A) provide for visits to existing programs by staff from new programs receiving funding under this title; and

(B) provide materials to be used for such training.

(d) Guidance.--The Secretary shall issue formal guidance, for recipients of grants awarded under section X5 and one-stop partners affiliated with the statewide workforce investment systems described in section 106 of the Workforce Investment Act of 1998 (29 U.S.C. 2881), proposing that programs and other activities funded under this title be--

(1) proactive in encouraging actions and activities that promote employee ownership of, and participation in, businesses; and

(2) comprehensive in emphasizing both employee ownership of, and participation in, businesses so as to increase productivity and broaden capital ownership.

SEC. X05. GRANTS.

(a) In General.--In carrying out the program established under section X4, the Secretary may make grants for use in connection with new programs and existing programs within a State for any of the following activities:

(1) Education and outreach as provided in section X4(b)(1).

(2) Technical assistance as provided in section X4(b)(2).

(3) Training activities for employees and employers as provided in section X4(b)(3).

(4) Activities facilitating cooperation among employee-owned firms.

(5) Training as provided in section X4(b)(4) for new programs provided by participants in existing programs dedicated to the objectives of this title, except that, for each fiscal year, the amount of the grants made for such training shall not exceed 10 percent of the total amount of the grants made under this title.

(b) Amounts and Conditions.--The Secretary shall determine the amount and any conditions for a grant made under this section. The amount of the grant shall be subject to subsection (f), and shall reflect the capacity of the applicant for the grant.

(c) Applications.--Each entity desiring a grant under this section shall submit an application to the Secretary at such time, in such manner, and accompanied by such information as the Secretary may reasonably require.

(d) State Applications.--Each State may sponsor and submit an application under subsection (c) on behalf of any local entity consisting of a unit of State or local government, State-supported institution of higher education, or nonprofit organization, meeting the requirements of this title.

(e) Applications by Entities.--

(1) ENTITY APPLICATIONS.--If a State fails to support or establish a program pursuant to this title during any fiscal year, the Secretary shall, in the subsequent fiscal years, allow local entities described in subsection (d) from that State to make applications for grants under subsection (c) on their own initiative.

(2) APPLICATION SCREENING.--Any State failing to support or establish a program pursuant to this title during any fiscal year may submit applications under subsection (c) in the subsequent fiscal years but may not screen applications by local entities described in subsection (d) before submitting the applications to the Secretary.

(f) Limitations.--A recipient of a grant made under this section shall not receive, during a fiscal year, in the aggregate, more than the following amounts:

(1) For fiscal year 2011, $300,000.

(2) For fiscal year 2012, $330,000.

(3) For fiscal year 2013, $363,000.

(4) For fiscal year 2014, $399,300.

(5) For fiscal year 2015, $439,200.

(g) Annual Report.--For each year, each recipient of a grant under this section shall submit to the Secretary a report describing how grant funds allocated pursuant to this section were expended during the 12-month period preceding the date of the submission of the report.

SEC. X06. EVALUATIONS.

The Secretary is authorized to reserve not more than 10 percent of the funds appropriated for a fiscal year to carry out this title, for the purposes of conducting evaluations of the grant programs identified in section X05 and to provide related technical assistance.

SEC. X07. REPORTING.

Not later than the expiration of the 36-month period following the date of enactment of this Act, the Secretary shall prepare and submit to Congress a report--

(1) on progress related to employee ownership and participation in businesses in the United States; and

(2) containing an analysis of critical costs and benefits of activities carried out under this title.

SEC. X08. AUTHORIZATIONS OF APPROPRIATIONS.

(a) In General.--There are authorized to be appropriated for the purpose of making grants pursuant to section X5 the following:

(1) For fiscal year 2011, $3,850,000.

(2) For fiscal year 2012, $6,050,000.

(3) For fiscal year 2013, $8,800,000.

(4) For fiscal year 2014, $11,550,000.

(5) For fiscal year 2015, $14,850,000.

(b) Administrative Expenses.--There are authorized to be appropriated for the purpose of funding the administrative expenses related to the Initiative, for each of fiscal years 2011 through 2015, an amount not in excess of--

(1) $350,000; or

(2) 5.0 percent of the maximum amount available under subsection (a) for that fiscal year.-

SA 4440. Mr. SANDERS (for himself, Mr. Brown of Ohio, and Mr. Leahy) submitted an amendment intended to be proposed to amendment SA 4402 proposed by Mr. Reid (for Mr. Baucus (for himself, Ms. Landrieu, and Mr. Reid)) to the bill H.R. 5297, to create the Small Business Lending Fund Program to direct the Secretary of the Treasury to make capital investments in eligible institutions in order to increase the availability of credit for small businesses, to amend the Internal Revenue Code of 1986 to provide tax incentives for small business job creation, and for other purposes; which was ordered to lie on the table; as follows:

At the appropriate place, insert the following:

SEC. __X. ESTABLISHMENT OF THE EMPLOYEE OWNERSHIP BANK.

(a) Findings.--Congress finds that--

(1) between December 2007 and May 2010, payroll employment in the United States fell by 7,381,000;

(2) between January 2000 and May 2010, the manufacturing sector lost 5,632,000 jobs;

(3) as of May 2010, fewer than 12,000,000 workers in the United States were employed in the manufacturing sector, the fewest number of factory jobs since March 1941;

(4) at the end of 2009, the United States had a trade deficit of more than $374,908,000,000, including a $226,877,200,000 trade deficit with China;

(5) preserving and increasing decent paying jobs must be a top priority of Congress;

(6) providing loan guarantees, direct loans, and technical assistance to employees to buy their own companies will preserve and increase employment in the United States; and

(7) just as the United States Export-Import Bank was created in 1934, in the midst of the Great Depression, as a way to increase United States jobs through exports, the time has come to establish the United States Employee Ownership Bank within the Department of the Treasury to preserve and expand jobs in the United States.

(b) Definitions.--In this section--

(1) the term ``Bank'' means the Unites States Employee Ownership Bank, established under section 4;

(2) the term ``eligible worker-owned cooperative'' has the same meaning as in section 1042(c)(2) of the Internal Revenue Code of 1986;

(3) the term ``employee stock ownership plan'' has the same meaning as in section

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4975(e)(7) of the Internal Revenue Code of 1986; and

(4) the term ``Secretary'' means the Secretary of the Treasury.

(c) Establishment of United States Employee Ownership Bank Within the Department of the Treasury.--

(1) IN GENERAL.--Before the end of the 90-day period beginning on the date of enactment of this Act, the Secretary shall establish the United States Employee Ownership Bank, to foster increased employee ownership of United States companies and greater employee participation in company decision making throughout the United States.

(2) ORGANIZATION OF THE BANK.--

(A) MANAGEMENT.--The Secretary shall appoint a Director to serve as the head of the Bank, who shall serve at the pleasure of the Secretary.

(B) STAFF.--The Director may select, appoint, employ, and fix the compensation of such employees as are necessary to carry out the functions of the Bank.

(d) Duties of Bank.--The Bank is authorized to provide loans, on a direct or guaranteed basis, which may be subordinated to the interests of all other creditors--

(1) to purchase a company through an employee stock ownership plan or an eligible worker-owned cooperative, which shall be at least 51 percent employee owned, or will become at least 51 percent employee owned as a result of financial assistance from the Bank;

(2) to allow a company that is less than 51 percent employee owned to become at least 51 percent employee owned;

(3) to allow a company that is already at least 51 percent employee owned to increase the level of employee ownership at the company; and

(4) to allow a company that is already at least 51 percent employee owned to expand operations and increase or preserve employment.

(e) Preconditions.--Before the Bank makes any subordinated loan or guarantees a loan under subsection (d)(1), a business plan shall be submitted to the bank that--

(1) shows that--

(A) not less than 51 percent of all interests in the company is or will be owned or controlled by an employee stock ownership plan or eligible worker-owned cooperative;

(B) the board of directors of the company is or will be elected by shareholders on a one share to one vote basis or by members of the eligible worker-owned cooperative on a one member to one vote basis, except that shares held by the employee stock ownership plan will be voted according to section 409(e) of the Internal Revenue Code of 1986, with participants providing voting instructions to the trustee of the employee stock ownership plan in accordance with the terms of the employee stock ownership plan and the requirements of that section 409(e); and

(C) all employees will receive basic information about company progress and have the opportunity to participate in day-to-day operations; and

(2) includes a feasibility study from an objective third party with a positive determination that the employee stock ownership plan or eligible worker-owned cooperative will generate enough of a margin to pay back any loan, subordinated loan, or loan guarantee that was made possible through the Bank.

(f) Terms and Conditions for Loans and Loan Guarantees.--Notwithstanding any other provision of law, a loan that is provided or guaranteed under this section shall--

(1) bear interest at an annual rate, as determined by the Secretary--

(A) in the case of a direct loan under this Act--

(i) sufficient to cover the cost of borrowing to the Department of the Treasury for obligations of comparable maturity; or

(ii) of 4 percent; and

(B) in the case of a loan guaranteed under this section, in an amount that is equal to the current applicable market rate for a loan of comparable maturity; and

(2) have a term not to exceed 12 years.

(g) Employee Right of First Refusal Before Plant or Facility Closing.--Section 3 of the Worker Adjustment and Retraining Notification Act (29 U.S.C. 2102) is amended--

(1) in the section heading, by adding at the end the following: ``

; employee stock ownership plans or eligible worker owned cooperatives''; and

(2) by adding at the end the following:

``(e) Employee Stock Ownership Plans and Eligible Worker-Owned Cooperatives.--

``(1) GENERAL RULE.--If an employer orders a plant or facility closing in connection with the termination of its operations at such plant or facility, the employer shall offer its employees an opportunity to purchase such plant or facility through an employee stock ownership plan (as that term is defined in section 4975(e)(7) of the Internal Revenue Code of 1986) or an eligible worker-owned cooperative (as that term is defined in section 1042(c)(2) of the Internal Revenue Code of 1986) that is at least 51 percent employee owned. The value of the company which is to be the subject of such plan or cooperative shall be the fair market value of the plant or facility, as determined by an appraisal by an independent third party jointly selected by the employer and the employees. The cost of the appraisal may be shared evenly between the employer and the employees.

``(2) EXEMPTIONS.--Paragraph (1) shall not apply--

``(A) if an employer orders a plant closing, but will retain the assets of such plant to continue or begin a business within the United States; or

``(B) if an employer orders a plant closing and such employer intends to continue the business conducted at such plant at another plant within the United States.''.

(h) Regulations on Safety and Soundness and Preventing Competition With Commercial Institutions.--Before the end of the 90-day period beginning on the date of enactment of this Act, the Secretary of the Treasury shall prescribe such regulations as are necessary to implement this section and the amendments made by this section, including--

(1) regulations to ensure the safety and soundness of the Bank; and

(2) regulations to ensure that the Bank will not compete with commercial financial institutions.

(i) Community Reinvestment Credit.--Section 804 of the Community Reinvestment Act of 1977 (12 U.S.C. 2903) is amended by adding at the end the following new subsection:

``(l) Establishment of Employee Stock Ownership Plans and Eligible Worker-Owned Cooperatives.--In assessing and taking into account, under subsection (a), the record of a financial institution, the appropriate Federal financial supervisory agency may consider as a factor capital investments, loans, loan participation, technical assistance, financial advice, grants, and other ventures undertaken by the institution to support or enable employees to establish employee stock ownership plans or eligible worker-owned cooperatives (as those terms are defined in sections 4975(e)(7) and 1042(c)(2) of the Internal Revenue Code of 1986, respectively), that are at least 51 percent employee-owned plans or cooperatives.''.

(j) Authorization of Appropriations.--There are authorized to be appropriated to the Secretary to carry out this section, $500,000,000 for fiscal year 2010, and such sums as may be necessary thereafter. -

Definition of Publicly Traded Securities for ESOP Purposes

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 25 Jun 2010 13:42:00 +0000

Yesterday we reviewed the current IRC Section 401(a)(28) ESOP diversification rules and discussed the ESOP Update Phone Forum. The Government is Here to Help; No Really! provides another recap of the forum, splitting up the presentation into the following areas:

Introduction
Non-ESOP Diversification
ESOP Diversification
Mandatory Repurchase of Employer Securities under Section 409(h)(2)(B)(i)
Rebalancing and Reshuffling of Employer Securities
Some Additional Q &A

In the forum, Robert Gertner reiterated that the Final IRC Section 401(a)(35) Diversification Regulations are intended to clearly define publicly trade securities.

First, he made clear that the regulations are intended to create a bright-line test on the definition of publicly traded securities. Therefore, stocks that are quoted only in the Pink Sheets or in the OTCBB will not be treated as publicly traded, even if there is a relatively liquid market for the stock.

ESOP Update Phone Forum Recap: Diversification, Rebalancing, and Reshuffling

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 24 Jun 2010 16:39:00 +0000

The IRS just concluded an ESOP Update Phone Forum. Robert Gertner from the Employee Plans Guidance Branch and Clare Diefenbach from the Employee Plans Technical Branch were the presenters:

They discussed the Final IRC Section 401(a)(35) Diversification Regulations and some of the recent technical assistance requests, including their Analysis of ESOP Rebalancing and ESOP Reshuffling.
They discussed how a plan with employer securities is subject to either IRC Section 401(a)(28) Diversification or IRC Section 401(a)(35) Diversification, but not both.
When drafting language for rebalancing and reshuffling, they noted that the 409(p) Transfer Plan Document Sample Plan Language (SPL) might be useful.
They stressed that the recent technical assistance memos and the information provided on the call could not be considered formal guidance, yet they recognized that the current regulations are old and incomplete.
They are still determining whether the technical assistance memos will be published.
While they stated that they are not formally holding all ESOP determination letter requests (noting that some have been issued as recently as this week), they noted that many requests are on hold as the determination letter branches are waiting to obtain guidance on issues such as 409(p), rebalancing, and reshuffling.
They referenced the 2008 technical advice memorandum (TAM) 200841042 that provided guidance on processing Stock Distributions.

In preparation for today's call we reviewed the current IRC Section 401(a)(28) ESOP diversification rules.

The Employee Plans News – Summer 2010 Edition provided a recap of the Final IRC Section 401(a)(35) Diversification Regulations:

On May 18, 2010, the IRS and the Treasury Department released final regulations on Code §401(a)(35) investment diversification requirements for certain defined contribution plans with publicly traded employer securities.

DC plans holding publicly traded employer securities are considered "applicable defined contribution plans" and subject to the diversification requirements of Code §401(a)(35). These plans must contain at least three investment options other than employer securities. The diversification requirement applies to:

employee contributions; and
employer contributions allocated to participants (or their beneficiaries) with at least three years of service.

A plan can't restrict a participant's right to invest in or to divest employer securities any more than it restricts any other plan investment options. However, the final regulations modify some of the permitted restrictions:

A plan may have more frequent transfers to and from stable value funds and qualified default investment alternatives than a fund invested in employer securities.
A plan may not allow reinvestment of divested amounts in the same employer securities account, but may allow investment of those amounts in another employer securities account if the only difference between the two accounts is the Code §402(e)(4) cost or other basis.
Under a transitional rule, certain leveraged ESOPs may allocate matching contributions to an otherwise frozen employer stock fund.

Exceptions to the diversification requirements include a:

stand-alone ESOP that does not hold amounts attributable to §§401(k) or (m);
one-participant retirement plan; or
plan with an investment fund holding employer securities as part of a broader fund is not treated as holding employer securities if the:

investment was independent of the employer;
employer's securities did not exceed 10% of the fund; and
employer securities were held indirectly through:

an investment company registered under the Investment Company Act of 1940;
a common or collective trust fund or pooled investment fund maintained by a bank or trust company supervised by a state or federal agency;
a qualified insurance company's pooled investment fund; or
any other IRS-designated investment fund.

The final regulations:

do not treat a multiemployer plan as holding employer securities if they are held indirectly through an investment fund managed by an independent investment manager and do not exceed 10% of the fund;
extend the types of allowed investment companies to include certain exchange traded funds;
state that in determining whether the value of employer securities exceeds 10% of the fund's investment's total value for a plan year, use the value at the end of the preceding plan year; and
provide that if a fund that indirectly holds employer securities doesn't meet the "independent of the employer" requirement, it meets the diversification requirements even if the plan doesn't offer diversification rights to the participants for up to 90 days after it is found to hold employer securities.

The final regulations are effective May 19, 2010, and apply for plan years beginning on or after January 1, 2011. Until then, plans may satisfy Code §401(a)(35) by relying on Notice 2006-107, the proposed regulations or the final regulations.

Here is the text of the ESOP diversification provisions under IRC Section 401(a)(35) - Qualified pension, profit-sharing, and stock bonus plans - Requirements for qualification - Diversification requirements for certain defined contribution plans:

(35) Diversification requirements for certain defined contribution plans.—

(A) In general.— A trust which is part of an applicable defined contribution plan shall not be treated as a qualified trust unless the plan meets the diversification requirements of subparagraphs (B), (C), and (D).

(B) Employee contributions and elective deferrals invested in employer securities.— In the case of the portion of an applicable individual's account attributable to employee contributions and elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if the applicable individual may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D).

(C) Employer contributions invested in employer securities.— In the case of the portion of the account attributable to employer contributions other than elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if each applicable individual who—

(i) is a participant who has completed at least 3 years of service, or

(ii) is a beneficiary of a participant described in clause (i) or of a deceased participant,

may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D).

(D) Investment options.—

(i) In general.— The requirements of this subparagraph are met if the plan offers not less than 3 investment options, other than employer securities, to which an applicable individual may direct the proceeds from the divestment of employer securities pursuant to this paragraph, each of which is diversified and has materially different risk and return characteristics.

(ii) Treatment of certain restrictions and conditions.—

(I) Time for making investment choices.— A plan shall not be treated as failing to meet the requirements of this subparagraph merely because the plan limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly.

(II) Certain restrictions and conditions not allowed.—Except as provided in regulations, a plan shall not meet the requirements of this subparagraph if the plan imposes restrictions or conditions with respect to the investment of employer securities which are not imposed on the investment of other assets of the plan. This subclause shall not apply to any restrictions or conditions imposed by reason of the application of securities laws.

(E) Applicable defined contribution plan.— For purposes of this paragraph—

(i) In general.— The term "applicable defined contribution plan" means any defined contribution plan which holds any publicly traded employer securities.

(ii) Exception for certain esops.— Such term does not include an employee stock ownership plan if—

(I) there are no contributions to such plan (or earnings thereunder) which are held within such plan and are subject to subsection (k) or (m), and

(II) such plan is a separate plan for purposes of section 414(l) with respect to any other defined benefit plan or defined contribution plan maintained by the same employer or employers.

(iii) Exception for one participant plans.— Such term does not include a one-participant retirement plan.

(iv) One-participant retirement plan.— For purposes of clause (iii), the term "one-participant retirement plan" means a retirement plan that on the first day of the plan year—

(I) covered only one individual (or the individual and the individual's spouse) and the individual (or the individual and the individual's spouse) owned 100 percent of the plan sponsor (whether or not incorporated), or

(II) covered only one or more partners (or partners and their spouses) in the plan sponsor.

(F) Certain plans treated as holding publicly traded employer securities.—

(i) In general.— Except as provided in regulations or in clause (ii), a plan holding employer securities which are not publicly traded employer securities shall be treated as holding publicly traded employer securities if any employer corporation, or any member of a controlled group of corporations which includes such employer corporation, has issued a class of stock which is a publicly traded employer security.

(ii) Exception for certain controlled groups with publicly traded securities.— Clause (i) shall not apply to a plan if—

(I) no employer corporation, or parent corporation of an employer corporation, has issued any publicly traded employer security, and

(II) no employer corporation, or parent corporation of an employer corporation, has issued any special class of stock which grants particular rights to, or bears particular risks for, the holder or issuer with respect to any corporation described in clause (i) which has issued any publicly traded employer security.

(iii) Definitions.— For purposes of this subparagraph, the term—

(I) "controlled group of corporations" has the meaning given such term by section 1563 (a), except that "50 percent" shall be substituted for "80 percent" each place it appears,

(II) "employer corporation" means a corporation which is an employer maintaining the plan, and

(III) "parent corporation" has the meaning given such term by section 424 (e).

(G) Other definitions.— For purposes of this paragraph—

(i) Applicable individual.— The term "applicable individual" means—

(I) any participant in the plan, and

(II) any beneficiary who has an account under the plan with respect to which the beneficiary is entitled to exercise the rights of a participant.

(ii) Elective deferral.— The term "elective deferral" means an employer contribution described in section 402 (g)(3)(A).

(iii) Employer security.— The term "employer security" has the meaning given such term by section 407(d)(1) of the Employee Retirement Income Security Act of 1974.

(iv) Employee stock ownership plan.— The term "employee stock ownership plan" has the meaning given such term by section 4975 (e)(7).

(v) Publicly traded employer securities.— The term "publicly traded employer securities" means employer securities which are readily tradable on an established securities market.

(vi) Year of service.— The term "year of service" has the meaning given such term by section 411 (a)(5).

(H) Transition rule for securities attributable to employer contributions.—

(i) Rules phased in over 3 years.—

(I) In general.— In the case of the portion of an account to which subparagraph (C) applies and which consists of employer securities acquired in a plan year beginning before January 1, 2007, subparagraph (C) shall only apply to the applicable percentage of such securities. This subparagraph shall be applied separately with respect to each class of securities.

(II) Exception for certain participants aged 55 or over.—Subclause (I) shall not apply to an applicable individual who is a participant who has attained age 55 and completed at least 3 years of service before the first plan year beginning after December 31, 2005.

(ii) Applicable percentage.— For purposes of clause (i), the applicable percentage shall be determined as follows:

Plan year to which The applicable subparagraph (C) applies:percentage is: 1st 33 2d 66 3d and following 100.

ESOP Distribution Timing: Diversification

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 24 Jun 2010 13:24:00 +0000

The Tax Reform Act of 1986 established the ESOP diversification rules under IRC Section 401(a)(28). As a result, the ESOP diversification provisions do not apply to employer securities held by an ESOP that were acquired before January 1, 1987.

The ESOP diversification rules under IRC Section 401(a)(28)(B) provide that a qualified participant must be given the opportunity to elect to diversify a portion of their ESOP account during their qualified election period.

A qualified participant is an employee who has completed at least 10 years of participation under the plan and has attained age 55. The latter is straight forward and the former is not clearly defined by the IRS.
The initial opportunity to elect must be offered within 90 days after the close of the plan year. The amount must be distributed within 180 days after the close of the plan year. The first requirement is easy to satisfy and the latter creates administrative issues for many ESOP companies.
The qualified election period is the 6-plan year period beginning after becoming a qualified participant.
A qualified participant is eligible to diversify 25% of their post-1986 stock balance for the first five years of their qualified election period and 50% of their post-1986 stock balance during their sixth and final year. The diversification calculation is a cumulative calculation, meaning that the stock balance consists of the number of eligible shares that have ever been allocated to a qualified participant's account less any shares previously distributed, transferred, or diversified. The resulting number may be rounded to the nearest whole integer.
Diversification can be satisfied by a distribution, a transfer to another qualified plan, or offering three or more investment options in the ESOP (certain requirements apply).
There is a $500 de minimis exception.
IRC Section 401(a)(35) was added by the Pension Protection Act of 2006 (PPA) (Public Law 109–280—Aug. 17, 2006). The rules apply to plans holding "publicly traded employer securities" and are therefore not applicable in most closely held ESOPs. If your company is thinly traded, you may be impacted by the regulations. See our analysis of the Final Diversification Regulations and the Proposed Regulations for more information.

Here is the text of the relevant regulations:

IRC Section 401(a)(28) - Qualified pension, profit-sharing, and stock bonus plans - Requirements for qualification - Additional requirements relating to employee stock ownership plans.:

(28) Additional requirements relating to employee stock ownership plans.—

(A) In general.— In the case of a trust which is part of an employee stock ownership plan (within the meaning of section 4975 (e)(7)) or a plan which meets the requirements of section 409 (a), such trust shall not constitute a qualified trust under this section unless such plan meets the requirements of subparagraphs (B) and (C).

(B) Diversification of investments.—

(i) In general.— A plan meets the requirements of this subparagraph if each qualified participant in the plan may elect within 90 days after the close of each plan year in the qualified election period to direct the plan as to the investment of at least 25 percent of the participant's account in the plan (to the extent such portion exceeds the amount to which a prior election under this subparagraph applies). In the case of the election year in which the participant can make his last election, the preceding sentence shall be applied by substituting "50 percent" for "25 percent".

(ii) Method of meeting requirements.— A plan shall be treated as meeting the requirements of clause (i) if—

(I) the portion of the participant's account covered by the election under clause (i) is distributed within 90 days after the period during which the election may be made, or

(II) the plan offers at least 3 investment options (not inconsistent with regulations prescribed by the Secretary) to each participant making an election under clause (i) and within 90 days after the period during which the election may be made, the plan invests the portion of the participant's account covered by the election in accordance with such election.

(iii) Qualified participant.— For purposes of this subparagraph, the term "qualified participant" means any employee who has completed at least 10 years of participation under the plan and has attained age 55.

(iv) Qualified election period.— For purposes of this subparagraph, the term "qualified election period" means the 6-plan-year period beginning with the later of—

(I) the 1st plan year in which the individual first became a qualified participant, or

(II) the 1st plan year beginning after December 31, 1986.

For purposes of the preceding sentence, an employer may elect to treat an individual first becoming a qualified participant in the 1st plan year beginning in 1987 as having become a participant in the 1st plan year beginning in 1988.

(v) Exception.— This subparagraph shall not apply to an applicable defined contribution plan (as defined in paragraph (35)(E)).

IRS Notice 88-56, I.R.B. 1988-19, 26, May 9, 1988

A. Code Section 401(a)(28)

Courts Almost Always Give Presumption of Prudence For Company Stock in ESOPs

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Mon, 21 Jun 2010 06:00:00 +0000

The June 15, 2010 Employee Ownership Update is online and discusses the following:

Only 141 ESOP Lawsuits Involving Private Companies Reach Court Over 20 Years
Huawei Now the Second-Largest Employee-Owned Company in the World
Four Employee Ownership Companies Named Winning Workplaces Winners for 2010; Four More Named Finalists
Twelve Minutes

The Update discusses ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2010, a comprehensive review of ESOP and 401(k) plan litigation over the last 20 years. In their review, the NCEO found that courts have generally given the presumption of prudence for company stock in 401(k) plans and almost always in ESOPs. In fact, they only found 175 ESOP lawsuits (141 in private companies) that reached the courts:

In this review, we found only 141 ESOP cases involving closely held companies (plus 35 involving public companies), not counting a handful we did not include because they deal with issues tangential to current plans. The most important issues in these cases have been valuation, improper distributions, and questions about whether assets should have been diversified.

The review makes it very clear that companies that hire qualified professionals, follow good plan practices, and are not using the ESOP to extract money from the company for the benefit of a few people (often by stretching the law), are very unlikely to be sued, much less lose in court. On the public company front, the review shows that almost all the ESOP cases and about two-thirds of the 401(k) cases have been dismissed at the pleadings stage based on the so-called Moench presumption, which grants a presumption of prudence for investment in company stock, especially if the plan mandates employer securities as an investment. On issues of required disclosure, courts have fairly evenly split over whether fiduciaries must release non-public information.

In addition to the 4-Top Small Company Workplaces and finalists that are ESOP companies that we discussed earlier this week, the Update lists one additional Top Small Company Workplace 2010 that is an ESOP company and three others with alternative employee ownership structures. Top Small Company Workplaces 2010. Here is the bio of the additional ESOP company winner:

Biomark
Boise, Idaho

Founded: 1990
Employees: 22
2009 revenue: $7.9 million
CEO: Dean Park
biomark.com

Makes electronic identification tags for fish and wildlife study.

Because Biomark believes cross-training and variety make for higher job satisfaction, all employees have the opportunity to do fieldwork and get their hands dirty tagging fish and animals. Staff members from the CEO to the customer service reps tag salmon with the staff biologists. When choosing his new company headquarters, CEO Dean Park passed on cheaper options and chose a location to minimize commuting time (and maximize the number of employees able to bike to work).

It also discusses how Huawei, a China-based global provider of telecommunications networks, is now the second largest employee owned company in the world.

Building a Trust System

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 18 Jun 2010 15:39:00 +0000

Building a System of Trust: Ten Hidden Secrets of Success in Employee-Owned Companies is the first in a three part series that discusses the elements of a "trust system":

Shared Vision and Purpose – "A shared strategic vision aligns teams onto one central target. This enables trust by ensuring that everyone has the same ultimate agenda, going in the same direction for the same reason."
Balancing Self-Interest versus Greater Good – "Balancing self-interest with mutual interests is the essential commencement of trust building. It is here that employee ownership makes a unique contribution — it holds the possibility of actually aligning self-interests with what's for the greater good of all the stakeholders."
Honoring Differences, Respect and Integrity – "This is the essence of a high-trust organization — one that cherishes differences in thinking, while being intolerant of dishonorable actions. In turn, trust builds in an organization when people begin to see that their leaders are worthy of being trusted."

Top Small Company Workplaces and ESOPs

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 15 Jun 2010 12:56:00 +0000

Last week we discussed the 2010 Top Small Company Workplaces. ESOP and employee owned companies generally make up a good portion of the list and this year is no exception. One of the winners, Van Meter Industrial, is a 100% ESOP-owned company and a great ESOP success story:

Van Meter Industrial
Cedar Rapids, Iowa

Founded: 1928
Employees: 342
2009 revenue: $165 million
CEO: Barry Boyer
vanmeterindustrial.com

Distributes electrical, lighting, and automation products.

Five years ago, Van Meter became 100 percent employee owned. After a new hire puts in six months, the company throws an "I'm In" meeting, celebrating his or her official initiation into the employee stock ownership program, or ESOP. Every staff member is expected to regularly offer ideas on improving efficiency, putting a dollar amount on how much the ideas will save the company—and hence increase the value of everyone's shares.

The website also discusses their four-step onboarding process in How to Make New Employees Feel at Home.

Here are the profiles of the finalists that are ESOP companies (if I missed a winner or finalist that has an ESOP, please let me know and I will add them to the list):

NewAge Industries

Southampton, PA-based NewAge Industries has lived up to its name by reinventing itself: from a distributor of plastic tubing to a manufacturer, to a premier provider of disposable pharmaceutical processing systems. Since its founding in 1954, this family-owned business has steadily followed its core values focusing upon customer appreciation, high ethical standards and sharing the wealth with employees. This formula has paid off. Today, NewAge employs 84 people and is a modern lean operation with a tenured workforce known for its innovation, commitment and agility. This firm has consistently been profitable throughout it 56-year history with its share price steadily increasing while those of its publicly traded competitors dropped.

Pool Covers, Inc.

Pool Covers is a Fairfield, CA-based ESOP company which sells, installs and services swimming pool covers. Founded in 1984 and now employing 35 folks, the company has consistently seen strong returns in large part by due to its implementation of "The Great Game of Business" open-book management – practices they have been refining since 1997. To successfully adopt such practices requires patience, trust and lots of education. All employees learn about the business finances and how their role impacts the firm's bottom line. This gives them the information and confidence necessary to provide extraordinary client care. While 2009 profits were down, they did not lose money – a stark contrast to some competitors who saw their revenues shrink 50 percent or more.

Torch Technologies, Inc.

Since 2002, employee-owned Torch Technologies, of Huntsville, AL, has provided aerospace and engineering services primarily to Defense Agencies. Recognized by the Inc. 5000 as the fastest-growing private defense contractor in the Southeastern U.S., Torch incentivizes its 152 employees by letting those interested serve as project lead on small teams, as well as through open-book management and an ESOP. The company is also committed to giving back to its community: an employee-funded donation program contributes five figures annually to worthy local charities. Good or bad economy, it seems that aerospace and engineering services are always in demand; in 2009 Torch saw a 50 percent increase in revenues.

What is the Status of the Outstanding Pro-ESOP Legislation?

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 09 Jun 2010 11:04:00 +0000

The Employee Ownership Blog defines 30/100 as a target to pass Pro-ESOP Legislation. The 30 represents the number of the 41 members of the House Committee on Ways and Means that need to support a pro-ESOP bill. The 100 represents the number of non-Ways and Mean members that need to co-sponsor a pro-ESOP bill.

It cites H.R. 5207: Employee Stock Ownership Plan Promotion and Improvement Act of 2010, H.R. 3586: S Corporation ESOP Promotion and Expansion Act of 2009, and H. Con. Res. 204: Expressing continued support for employee stock ownership plans as three pro-ESOP bills currently pending in the House Committee on Ways and Means and provides an update on the current level of support:

Right now, nine members of Ways and Means support one, or two, of the three pieces of legislation mentioned above. Twenty-one more co-sponsors are needed...

Right now, 34 members of the House co-sponsor one, or two, of the three pieces of legislation mentioned above. Sixty-six more are needed.

So the 30/100 is right now 21/66. Can the ESOP community reach these goals before Congress quits in the fourth quarter of this year? We have before.

Top Small Company Workplaces 2010

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 08 Jun 2010 21:30:00 +0000

Inc. magazine announced the Top Small Company Workplaces 2010:

Meet the Top Small Company Workplaces of 2010
What smart, principled, and effective management looks like today.

No entrepreneur starts out intending to build a lousy culture, or even an average one. All leaders want work forces whose productivity is born of passion, whose loyalty springs from the perception of beneficence and fair play. Yet in the mad crush of business, many fail to invest in their employees: to develop their potential, reward their labors, and respect their personal lives. By contrast, the companies honored as 2010 Top Small Company Workplaces lavish on their staffs the care and consideration other companies reserve for their best customers. As a result, these honorees have proved uncommonly resilient during the recession and are reliable talent magnets in economies fair and foul. People come. They stick. They grow.

Building a great workplace is both a strategic decision and a moral one. The companies honored in these pages were selected by Inc.'s partner organization, Winning Workplaces, because they are successful in their industries and proudly trace that success to their cultures. CEOs are forever tossing metrics at their companies to judge how well run they are. High marks in employee satisfaction are the hallmark of best in class.

In addition to announcing the 2010 winners, they also announced the finalists. Here are some relevant bottom line results from the winners and finalists:

100% of winners profitable in 2009
90% of finalists profitable in 2009
36% average revenue growth, 2007-09
Ability to weather bad times with the good: average of 28 years in business
High average employee tenure of 7 years
Low average turnover of 8% across 18 diverse industries

Here is the press release:

New York, NY, June 7, 2010 – Inc. magazine and Winning Workplaces today announce the winners of the 2010 Top Small Company Workplaces competition – the best small and mid-sized places to work in the country – in Inc.'s June issue. The magazine features the 20 winners, which range from the New York Jets professional football team to A Yard and a Half landscaping company to Patagonia, the outdoor clothing designer and retailer. A list of the 20 finalists also is included.

This is the eighth consecutive year that Winning Workplaces, the Evanston, IL-based nonprofit organization, has recognized those firms that attribute much of their business success to their commitment to exemplary people practices and outstanding workplace cultures.

The common characteristics of the Top Small Company Workplaces include a commitment to aligning their workforce with a clear vision, mission, and values; communicating with openness and trust; and investing in employees' continuous learning and development. These practices were maintained or strengthened as a means to weather the recession. Further, many winners chose to share the pain rather than lay off colleagues. Salary reductions were taken across the organization, starting with the CEO.

Winning Workplaces and Inc. received nearly 500 completed applications for the contest. A national panel of experts in leadership and small to mid-sized business judged the finalists based on specific metrics and qualitative assessments of their success in creating the kind of workplaces that engage employees and deliver successful results.

"This year's winners show that the quality of the workplace can be a competitive advantage. I'm amazed at how well they have come through the recession. Clearly, their commitment to their values and people practices are an important part of this success," said Gaye van den Hombergh, President of Winning Workplaces.

"People want employers who care for and challenge them. And they want those employers to be financially healthy so they can keep caring for and challenging them far into the future. The 2010 Top Small Company Workplaces do just that. Their stories, in the June issue of Inc. magazine, are models of smart management and enlightened leadership," said Jane Berentson, Editor-in-Chief of Inc. magazine.

The 2010 Top Small Company Workplaces winners include:

A Yard & A Half Landscaping LLC - Waltham, MA
All4 Inc. - Kimberton, PA
Alternate Solutions HomeCare - Kettering, OH
Biomark Inc. - Boise, ID
Chroma Technology Corp - Bellows Falls, VT
Daphne Utilities - Daphne, AL
Dealer.com - Burlington, VT
Dixon Schwabl - Victor, NY
Ginger Bay Salon & Spa - Kirkwood, MO
MAYA Design Inc. - Pittsburgh, PA
NY Jets - Florham Park, NJ
Optimax Systems Inc. - Ontario, NY
Patagonia - Ventura, CA
PortionPac Chemical Corporation - Chicago, IL
Red Door Interactive Inc. - San Diego, CA
Return Path Inc. - New York, NY
Tarlton Corporation - St. Louis, MO
Tasty Catering - Elk Grove Village, IL
The Sky Factory LC - Fairfield, IA
Van Meter Industrial - Cedar Rapids, IA

Many companies on the Top Small Company Workplaces 2009, Top Small Workplaces 2008, and Top Small Workplaces 2007 were ESOP-owned or had some other form of employee ownership and this year is no different. Over the next few days we will analyze the 2010 winners and highlight some of their best practices.

More Analysis of the Final Diversification Regulations

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Mon, 07 Jun 2010 12:42:00 +0000

Last month we discussed the publication of the Final ESOP Diversification Regulations. While the diversification regulations generally do not apply to closely held ESOPs, the regulations could create some challenges for Thinly Traded ESOP Companies.

Final Regulations Issued on ESOP Diversification Rules provides another review and notes that the Final ESOP Diversification Regulations are similar to the 2008 Proposed ESOP Diversification Regulations. It also provides some background information on some changes related to investment funds holding employer securities.

Total Employment at Largest ESOP Companies Grew 1.4%

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Mon, 07 Jun 2010 12:19:00 +0000

The June 1, 2010 Employee Ownership Update is online and discusses the following:

Employee Ownership 100 List Updated for 2010
French Employee-Owned Companies Perform Well
British Coalition Government Promises More Employee Ownership
Vermont Employee Ownership Center Conference Set for June 9

The NCEO has released the 2010 Employee Ownership 100:

Collectively, they employ 597,000 employees, essentially the same as last year's 598,000, and up from 580,500 in 2008. As usual, Publix Super Markets tops the list, with 144,000 employees. The smallest companies on the list have 1,050 employees. Sixteen are in architecture and/or engineering, 15 in manufacturing, 14 are supermarkets or (in one case) convenience stores, and 9 are in construction or construction services.

Total employment at the 92 companies that were also on the list in both 2008 and 2009 grew 1.4% over last year, partly from acquisitions and partly from internal growth. Of the eight companies that dropped off the list, one (the Tribune Co.) went bankrupt, one terminated its plan, and the rest were near the cutoff point last year and did not quite make it this year. To make the list, at least 50% of the company's stock must be owned by an ESOP (which accounts for almost all of the plans), or the company must have a profit sharing or similar plan and/or a direct stock purchase plan in which most employees participate.

The Update also discusses the references to employee ownership in Britain's Our Programme for Government and the results of a French employee ownership study.

The Most Important Position in the ERISA World

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 04 Jun 2010 11:51:00 +0000

Yesterday we discussed how engaging an Independent Fiduciaries Does Not Eliminate Fiduciary Liability in all cases. Nonetheless, if selected and monitored diligently, an independent fiduciary can significantly reduce fiduciary risk. They also bring expertise to the table that can help a company achieve their plan and corporate objectives. Independent Fiduciary Role Set to "Explode" discusses how the most important responsibility of a fiduciary is for the plan to stay qualified and how pending DOL regulations will increase the importance of engaging independent fiduciaries:

Speaking at the Independent Fiduciary Symposium in New York on May 26, Mamorsky asserted that, "the independent fiduciary is the most important position in the ERISA world today." Sponsors don't want to have fiduciary responsibility for their ERISA plans. Most don't have the time or skills needed to fulfill this responsibility, according to Mamorsky. And many don't even realize that they have a fiduciary obligation to participants; that leaves them open to lawsuits by participants or missing compliance with IRS or ERISA rules that could disqualify a plan—and result in hefty monetary sanctions.

When sponsors understand that they can outsource the fiduciary responsibility to an expert, it would seem to be an easy choice for them to make. Mamorsky says this area of expertise is ready to "explode," especially with the changes pending in Department of Labor legislation that is expected to require that plans reveal all fees or costs to participants.

Independent Fiduciaries Do Not Eliminate Liability

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 03 Jun 2010 16:41:00 +0000

We have often discussed the corporate governance conflicts that occur when the same person wears multiple hats (e.g. Seller, Board member, Trustee, etc.). One solution to reduce the conflicts is to engage an independent fiduciary.

Outsourcing Does Not Make a Fiduciary Bullet Proof discusses how it is not reasonable to expect that the delegation of fiduciary responsibilities to an independent fiduciary will completely insulate the named fiduciaries from liability. It discusses how ERISA Section 405(c) provides guidance on how naming a third party fiduciary does and does not relief for the named fiduciaries:

The truth is that a plan's in-house or named fiduciaries cannot avoid fiduciary responsibility and potential liability under ERISA simply by retaining a third party to manage plan investments or other fiduciary functions, regardless of the terms of its agreement with the third party. Delegating fiduciary responsibility and deciding whether to continue an existing delegation are themselves fiduciary functions subject to ERISA. Not only does this mean that a named fiduciary must satisfy ERISA's prudence and exclusive benefit requirements when it delegates its fiduciary responsibilities to third parties— it also means that the named fiduciary is responsible for oversight of the third party delegatee's performance. A named fiduciary's failure to monitor a third party delegatee's performance and, if appropriate, terminate the delegation, is a breach of its fiduciary responsibilities and could result in co-fiduciary liability for enabling a fiduciary breach or for failing to try to remedy such a breach when the named fiduciary knew or should have known that a breach had occurred.

Here is the text of ERISA Section 405(c) - Liability for breach of co-fiduciary - Allocation of fiduciary responsibility; designated persons to carry out fiduciary responsibilities:

(1) The instrument under which a plan is maintained may expressly provide for procedures (A) for allocating fiduciary responsibilities (other than trustee responsibilities) among named fiduciaries, and (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan.

(2) If a plan expressly provides for a procedure described in paragraph (1), and pursuant to such procedure any fiduciary responsibility of a named fiduciary is allocated to any person, or a person is designated to carry out any such responsibility, then such named fiduciary shall not be liable for an act or omission of such person in carrying out such responsibility except to the extent that--

(A) the named fiduciary violated section 1104(a)(1) of this title--

(i) with respect to such allocation or designation,

(ii) with respect to the establishment or implementation of the procedure under paragraph (1), or

(iii) in continuing the allocation or designation; or

(B) the named fiduciary would otherwise be liable in accordance with subsection (a) of this section.

(3) For purposes of this subsection, the term ``trustee responsibility'' means any responsibility provided in the plan's trust instrument (if any) to manage or control the assets of the plan, other than a power under the trust instrument of a named fiduciary to appoint an investment manager in accordance with section 1102(c)(3) of this title.

A 2010 Plan Document To Do List

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 26 May 2010 22:17:00 +0000

Each year we review your ESOP plan document action items in our annual ESOP Planning: Plan Documents and Disclosures article. Reminder – Required 2010 Tax-Qualified Plan Amendments and January 2011 IRS Determination Letter Filing Deadline provides a summary of the 2010 amendments that may be needed, for design changes, to comply with the latest "cumulative list" as provided in IRS Notice 2009-98 – 2009 Cumulative List of Changes in Plan Qualification Requirements, or for Cycle E filers:

2010 Amendments

2010 Design Changes
2011 Design Changes
PPA Amendments (non-calendar year plans)
Special PPA Deadlines for Defined Benefit Plans
Right to Diversify Employer Stock – Final Diversification Regulations
Normal Retirement Age
HEART Act –An amendment for the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), including treating Differential Military Pay as Wages, must generally be made by the end of the 2010 plan year. The IRS issued their Latest HEART Act Guidance in 2010.
Rollovers by Non-Spousal Beneficiaries
Hurricane/Flood Relief
MRD Amendment – The 2009 Required Minimum Distribution Language must be amended by the last day of the 2011 plan year.

January 2011 IRS Submission Deadline – Cycle E Filers Do You Know Your 5-Year Remedial Amendment Cycle?

Requiring ESOP Written Distribution Policies

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 21 May 2010 06:00:00 +0000

The May 14, 2010 Employee Ownership Update is online and discusses the following:

IRS Said to Be Set to Require Written Distribution Policies
Boustany and Pomeroy Introduce ESOP Improvements Act
PBS NewsHour Story on SRC Holdings

The Update discusses how the IRS is going to Require the Submission of a Written ESOP Distribution Policy Document, either in the plan document or in a separate document.

The IRS is going to require ESOP companies to submit written distribution policies, whether in their plans or as separate documents, according to ESOP attorney Larry Goldberg. Goldberg and other ESOP attorneys have been working with the so-called "ESOP Cadre" at the IRS on issues concerning the letter or determination process. Until this year, the IRS has reviewed plan documents simply to assure that the maximum payout terms were specified. Many ESOP companies either do not have such policies or have only rudimentary ones. Currently, ESOPs must submit their plan documents for new letters of determination in the five-year cycle for resubmission of plans. While the language can be included in the plan document itself, any changes the company might want to make would require a plan amendment. Most advisors agree a better approach would be to write the plan to allow for the maximum amount of time for distributions to be made, leaving the details of benefit distribution planning to be spelled out in the ESOP distribution policy. The policy might, for instance, provide for more liberal distribution rules, provided this is done in a consistent and non-discriminatory manner specifically detailed in the plan.

It also discusses H.R. 5207: Employee Stock Ownership Plan Promotion and Improvement Act of 2010 and the positive PBS NewsHour coverage of ESOP-owned SRC Holdings.

Final Diversification Regulations

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 20 May 2010 11:53:00 +0000

IRC Section 401(a)(35) was added by the Pension Protection Act of 2006 (PPA) (Public Law 109–280—Aug. 17, 2006). The rules apply to plans holding "publicly traded employer securities" and are therefore not applicable in most closely held ESOPs. If your company is thinly traded, you may be impacted by the regulations. See our Analysis of the IRC Section 401(a)(35) Proposed Regulations for more details.

The IRS published final regulations that are effective on May 19, 2010 and applicable for plan years beginning on or after January 1, 2011: Treasury Regulation [TD 9484] – Diversification Requirements for Certain Defined Contribution Plans

Featured IRS Project - 401(k) Compliance Check Questionnaire

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 19 May 2010 11:48:00 +0000

The Retirement News for Employers – Spring 2010 Edition discusses how the IRS Employee Plans Compliance Unit (EPCU) will be sending a 401(k) Compliance Check Questionnaire (to be completed online) to 1,200 employers sponsoring 401(k) plans:

During the week of May 17th, IRS Employee Plans Compliance Unit (EPCU) will send a letter and instructions to 1,200 employers sponsoring 401(k) plans asking them to complete the 401(k) Compliance Check Questionnaire. The information gathered from the Questionnaire will provide a comprehensive view of 401(k) plans and will help EP maximize its resources for education, outreach, guidance and enforcement efforts while minimizing the burden to compliant plan sponsors.

EPCU will use a secure website to collect responses on the following topics:

Demographics
Participation
Employer and employee contributions
Top-heavy and nondiscrimination testing
Distributions and plan loans
Other plan operations
Automatic contribution arrangements
Designated Roth features
IRS voluntary compliance and correction programs
Plan administration

All plan sponsors will complete the same Questionnaire; however, some questions may only apply to plans with particular features. Failure to respond or provide complete information will result in further action or examination of the plan.

The Questionnaire was developed because of the critical role 401(k) plans play in our private retirement system. There are nearly half a million 401(k) plans in America covering over 50 million participants.

Here is a link to the questionnaire. The questionnaire is considered a compliance check and failure to complete it will result in further action:

This contact is a compliance check. A compliance check is not an audit or investigation under section 7605(b) of the Internal Revenue Code or an audit under section 530 of the Revenue Act of 1978, however, failure to complete the Questionnaire will result in further enforcement action. If you have any questions regarding your specific compliance check questionnaire, please contact the Internal Revenue Service promptly at the phone number provided on the letter.

IRS 401(k) Compliance Questionnaires Issued notes that the IRS has used similar questionnaires in the past and has subsequently opened audits based on the questionnaire responses and provides some action items:

In order to proactively address the compliance questionnaire for 401(k) plans, a plan sponsor should consider conducting a self-audit of its 401(k) plan to determine its level of compliance. Conducting a self-audit will allow a plan sponsor to evaluate its 401(k) plan compliance on its own terms. A copy of the questionnaire is available on the IRS website at the URL referenced below. A plan sponsor that identifies issues may use the IRS's Employee Plans Correction Resolution System (EPCRS) to address areas of noncompliance. Under EPCRS, a plan sponsor may correct noncompliance issues through disclosure to the IRS and payment of a fee. Plan sponsors that voluntarily correct noncompliance issues may avoid the increased penalties that would result if the IRS discovers the same issue in an audit.