The One-Stop ESOP Blog

Las Vegas ESOP Association Conference

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 06 Nov 2009 15:22:00 +0000

It's hard to believe this year's ESOP Association Las Vegas Conference is almost upon us. The two-day conference begins next Thursday and is jam-packed with informative ESOP sessions. I will be presenting ESOPs in Challenging Economic Times: Valuation & Communication Issues on Friday from 2 – 3:15:

ESOPs in Challenging Economic Times: Valuation & Communication Issues

The recent volatility experienced in the public markets along with a general lack of short-term visibility for many ESOP companies has resulted in ESOP trustees and company management inquiring about (1) the impact such factors have on private ESOP company valuations, and (2) how they should communicate with their ESOP participants during these challenging economic times. This session will address how ESOP valuations could be impacted by the current economic conditions, and explore issues that companies face in communicating business information during these challenging times.

Andrew S Ward, Stout Risius Ross, Inc.
Aaron J. Juckett, ESOP Insourcing LLC

In addition to gaining lots of valuable information, the conference is a great time to network with other ESOP companies and advisors. If you see me at the conference, I hope you will stop by and say hello. Please send me an email and let me know if you will be attending so I can look for you.

ESOPs Provide Greater Employment Stability and Increase Job Satisfaction

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 04 Nov 2009 16:02:00 +0000

In addition to Increasing Employee Wealth and Wages, a review of existing research on ESOPs found that ESOP companies have greater employment stability. Studies found that the average employee tenure was "significantly longer" than their non-ESOP counterparts and that firms were more likely to adjust wages than the number of employees.

It also found a mild increase in "job satisfaction, organizational commitment, identification, motivation, and workplace participation." Job satisfaction is generally not impacted by employee ownership alone. Job satisfaction and employee engagement are driven by having a meaningful ownership stake AND active participation in the decision making process. The NCEO's Research on Employee Ownership and Corporate Performance reiterates the formula of OWNERSHIP + PARTICIPATIVE MANAGEMENT = OWNERSHIP CULTURE:

Over the years, the NCEO has conducted and reported on research on employee ownership and corporate performance. The research comes to a very definite conclusion: the combination of ownership and participative management is a powerful competitive tool. Neither ownership nor participation alone, however, accomplishes very much...Researchers now agree that "the case is closed" on employee ownership and corporate performance. Findings this consistent are very unusual. We can say with certainty that when ownership and participative management are combined, substantial gains result. Ownership alone and participation alone, however, have, at best, spotty or short-lived results.

Pros and Cons of SARs and Stock Options

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 03 Nov 2009 15:03:00 +0000

The November 2, 2009 Employee Ownership Update is online and discusses the following:

Defined Contribution Plan Limits to Remain Unchanged in 2010
House Concurrent Resolution Expressing Continued Support for ESOPs Introduced
NCEO Board Nominations Now Open
SARs or Options in Closely Held Companies?

The Update discusses some of the differences between stock appreciation rights (SARs) and stock options and considers some of the pros and cons of each:

Options are still the most popular choice, but consider some downsides: when someone exercises an option, they have to pay after-tax cash for the shares. Then, unless there is a simultaneous liquidity event, they have to hold onto the shares until a liquidity event occurs at some uncertain future date. They may also have to pay ordinary income taxes on the spread between the grant and strike price (on nonqualified options) or alternative minimum tax (in incentive options).

From the owners' standpoint, this seems like a great reward. Employees will have the chance to cash in big when a liquidity event (typically a sale of the company or, more rarely, an IPO) happens. From the employee's standpoint, there is current pain and uncertain future gain. We know from behavioral economics that most people overvalue costs and risks relative to potential gains, so they may see the award as more punishment than reward. Moreover, some employees may not see themselves staying until a liquidity event occurs, or will be uncertain whether one ever will occur. What will they do with their shares if the event doesn't happen or they leave before it? Will the company buy their shares at current value or just tell them to hold on to them? This uncertainty further erodes the value of the award.

Of course, the company could just buy the shares immediately. But in that case, why bother with the shares at all? A stock appreciation right accomplishes the same thing and leaves the employee with a net settlement, after taxes, of cash or shares. No pain, all gain.

There are two potential drawbacks, however. First, the company has to have resources to pay for the SAR at exercise (at the very least, to pay the taxes due if just shares are issued, but all the costs is cash is issued). Second, the employee typically has less flexibility in choosing when to exercise after vesting occurs, although it is possible to structure a deferral election into the process.

A 2008 NCEO survey found that ESOP Companies More Likely to Use SARSs. Both instruments are considered synthetic equity for IRC Section 409(p) Anti-Abuse Testing purposes.

The Update also discusses the 2010 Pension Plan Limits and H. Con. Res. 204: Expressing continued support for employee stock ownership plans and announces that NCEO board nominations are now open.

Employee Ownership as a Growth Strategy

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Mon, 02 Nov 2009 19:04:00 +0000

Last week we discussed King Arthur Flour Company, a 100% ESOP-owned company. The Winning Workplaces Blog continues their coverage by discussing how People Practices Fueled Three Stages of Revenue Growth at King Arthur Flour. The three pivot points of their ownership culture, starting the ESOP, becoming 100% ESOP-owned, and developing a strong ownership cutlure, demonstrate the impact that an ESOP combined with a strong ownership culture can have on revenues and growth.

Fiduciary Liability Insurance Considerations

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 30 Oct 2009 06:00:00 +0000

We have previously discussed the differences between Fiduciary Liability Insurance and ERISA Fidelity Bonding. We have also discussed D&O Insurance Trends. Fiduciary Liability Insurance vs. ERISA Fidelity Bonds – What's the Difference? explains the differences between fidelity bonding and fiduciary liability insurance and uses an excellent illustration of how the two work together. It discusses the various kinds of fiduciary liability coverage that plans can purchase and the coverage that fiduciaries can personally purchase, recommending that fiduciaries negotiate the latter as part of their compensation if it isn't already included:

Several companies offer fiduciary liability insurance designed to cover claims and losses arising out of claimed breaches of fiduciary duty. The coverages provided by those policies, like other policy features, can differ significantly. The plan itself can purchase liability insurance for its fiduciaries as long as the policy allows the insurer to seek recourse against the fiduciary if the fiduciary is determined to have breached his duty to the plan. Otherwise, the employer or the fiduciary himself can purchase insurance. (Executives who are expected to assume some responsibility over the company's benefit plans should consider incorporating fiduciary liability insurance as part of their overall compensation package.)

It also stresses the exposure to personal liability and discusses issues to consider when choosing your fiduciary liability insurance.

There are several issues to think about in considering fiduciary liability insurance. Among them: the annual premium cost; the amount of coverage needed; the amount of any deductible; whether the deductible is charged any time a claim is made or only if there is a settlement or judgment, and; whether the limits of liability under the policy are reduced by attorneys fees and costs incurred in defending against a claim.

Fiduciaries are personally liable for losses incurred by a plan due to their breach. Although it isn't required by ERISA – as is a bond – every fiduciary of an ERISA plan should seriously consider obtaining fiduciary liability insurance.

Avoiding Us vs. Them, Employee Recognition, and 460% Revenue Growth

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 29 Oct 2009 06:00:00 +0000

Last year we discussed the Employee Engagement Practices of King Arthur Flour Co., an ESOP company and one of the 2008 Top Small Workplaces.

A Two-Century Commitment to Quality and Community reviews the success of King Arthur, noting that revenues have increased from $14.5 million when the ESOP was established in 1996 to over $67 million today:

In 1996 legacy owner Frank Sands felt like the company needed to make another big change. In a move to avoid the classic model of union-management relations in which a union must protect the workers against a management drive solely to maximize value to the owners, papers were drawn up to sell the 200-year-old company to its staff. Revenues at the time were $14.5 million.

"The classical model," explains Voigt, "does not include the workers. So when you have a model that is 100 percent owned by an ESOP, it isn't an 'us-them' situation."

It took until 2004 for the company to become completely bought up by its associates, but it's a move that has cemented success for the organization: Revenues jumped 124 percent from the start of the sale, to $32.5 million. After being named a Winning Workplaces/Wall Street Journal Top Small Workplace in 2008, King Arthur made this year's list of America's fastest-growing private companies in Inc. magazine, and has remained one of the fastest-growing companies in Vermont since going ESOP.

Accolades and sales growth have naturally translated to employee recognition – something the company takes pride in and does in a way that fits their culture. "Knighting" ceremonies honor long-term employees and "Vesting" ceremonies mark an employee's vested stake in the ESOP account. Even the stationery awarded for a job well done has the image of a knight on horseback and the stamp, "A message from an owner."

Travis Oman calls the Knighting ceremonies a "truly unique and terrific experience," and P.J. Hamel, a Senior Editor with 19 years tenure at the company, says such activities, though whimsical, are worthwhile.

"I love to see a colleague celebrated. The ceremonies themselves are touching, funny, and memorable," Hamel says. "Bottom line, they're an opportunity for us all to say thanks to one another."

…As Hamel puts it simply, "It reinforces our 200-plus-year history of doing the right thing." And doing the right thing has continued to pay handsomely: from 2004, when the sale of the company to its employees was completed, to today, revenues have increased over 100 percent to $67 million.

Share Distributions, Promissory Notes, and Adequate Security

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 28 Oct 2009 15:00:00 +0000

Our post on a recent Technical Advice Memorandum (TAM) shared some best practices when making share distributions. It also discussed the put option (participant's right to demand a stock distribution) and the net unrealized appreciation (NUA) tax benefits of making share distributions.

Some ESOP companies have opted to pay their participants with a lump sum share distribution, with the shares immediately put to the company in exchange for a promissory note. Reasons for doing this include:

To provide NUA treatment;
To comply with the share distribution requirements;
To protect the participants from the fluctuations in company stock when they are no longer with the company;
To reduce the number of shares in the trust; and/or
For other repurchase planning reasons

In order to use a promissory note and spread the payments over a period of time, you have to satisfy the put option requirements of IRC Section 409(h)(5) - Right to demand employer securities; put option - Payment requirement for total distribution:

(h) Right to demand employer securities; put option

(5) Payment requirement for total distribution

If an employer is required to repurchase employer securities which are distributed to the employee as part of a total distribution, the requirements of paragraph (1)(B) shall be treated as met if—

(A) the amount to be paid for the employer securities is paid in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than 30 days after the exercise of the put option described in paragraph (4) and not exceeding 5 years, and

(B) there is adequate security provided and reasonable interest paid on the unpaid amounts referred to in subparagraph (A).

For purposes of this paragraph, the term "total distribution" means the distribution within 1 taxable year to the recipient of the balance to the credit of the recipient's account.

29 CFR 2550.408b-3(l) - Loans to Employee Stock Ownership Plans provides additional guidance:

(l) Other put option provisions—

(1) Manner of exercise. A put option is exercised by the holder notifying the employer in writing that the put option is being exercised.

(2) Time excluded from duration of put option. The period during which a put option is exercisable does not include any time when a distributee is unable to exercise it because the party bound by the put option is prohibited from honoring it by applicable Federal or State law.

(3) Price. The price at which a put option must be exercisable is the value of the security, determined in accordance with paragraph (d)(5) of 26 CFR 54.4975-11.

(4) Payment terms. The provisions for payment under a put option must be reasonable. The deferral of payment is reasonable if adequate security and a reasonable interest rate are provided for any credit extended and if the cumulative payments at any time are no less than the aggregate of reasonable periodic payments as of such time. Periodic payments are reasonable if annual installments, beginning with 30 days after the date the put option is exercised, are substantially equal. Generally, the payment period may not end more than 5 years after the date the put option is exercised. However, it may be extended to a date no later than the earlier of 10 years from the date the put option is exercised or the date the proceeds of the loan used by the ESOP to acquire the security subject to such put option are entirely repaid.

(5) Payment restrictions. Payment under a put option may be restricted by the terms of a loan, including one used to acquire a security subject to a put option, made before November 1, 1977. Otherwise, payment under a put option must not be restricted by the provisions of a loan or any other arrangement, including the terms of the employer's articles of incorporation, unless so required by applicable state law.

The promissory note must have a reasonable interest rate and provide adequate security. One of the ways that many ESOP companies used to attempt to provide adequate security was by purchasing surety bonds to serve as collateral. As of 2002, "the principal issuer of surety bonds in this market…indicated it will no longer issue the surety bonds."

Another way some ESOP companies have tried to satisfy the requirement is by pledging the stock of the company. Purchasing a Participant's ESOP Stock With a Promissory Note: Is Your "Adequate Security" Really Adequate? explores the problems with the stock pledge and adequate security requirement:

First, a question arises as to whether the stock is really "adequate security." Some will argue that pledging the stock of the employer is not "adequate security" because if the employer runs into financial difficulty and cannot make payments on the note, the value of its stock will undoubtedly decrease as well. However, if the employer is the purchaser, the company's assets are often given as collateral for the original ESOP loan, and there may be no other available assets to use as collateral, other than the stock purchased from the participant.

Second, IRS and Department of Labor ("DOL") regulations provide that the only collateral the ESOP may give as security is the stock purchased with the loan (in this case, the promissory note). If pledging the stock as collateral is not "adequate security," the result would be the ESOP cannot use a promissory note to purchase the participant's stock at all, which appears contrary to the statutory authority.

Third, neither the IRS nor the DOL has issued formal guidance regarding whether the pledge of employer stock will be considered "adequate security." Therefore, the plan sponsor and the ESOP is pretty much on its own in attempting to determine what will pass as "adequate security."

It notes that little guidance and case law is available, but does cite an IRS ruling that "a company's "full faith and credit" is not adequate security". It also cites two cases, including Craig v. Smith, 2009 WL 438635 (S.D. Ind. Feb. 20, 2009), a case where the company issued 10-year promissory notes with an acceleration clause requiring payment in full if there is a default in payments, and ponders whether that constitutes adequate security. Putting the shares to the ESOP instead of the company may also provide a stronger case of adequate security since the ESOP will own the security.

Using Promissory Notes to Repurchase ESOP Stock Becomes More Difficult also cites TAM 9438002 and Internal Revenue Manual Part 4. Examining Process, Chapter 72. Employee Plans Technical Guidelines, Section 4. Employee Stock Ownership Plans (ESOPs) as additional guidance:

Check that employer securities not readily tradeable on an established market can be put to the employer.
Make sure the put is exercisable for two 60 day periods: 60 days following the date the employer securities were distributed and 60 days in the following plan year.
If the employee puts shares to the employer received in a total distribution, make sure the employer provides adequate security and pays reasonable interest on the unpaid portion. A put option is not adequately secured if it is not secured by any tangible assets.
- For example, adequate security may be an irrevocable letter of credit, a surety bond issued by a third party insurance company rated " A" or better by a recognized insurance rating agency, or by a first priority perfected security interest against company assets capable of being sold, foreclosed upon or otherwise disposed of in case of default. Promissory notes secured by a company's full faith and credit are not adequate security. Nor are employer securities adequate security.

ESOPs Increase Employee Wealth and Wages

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 27 Oct 2009 12:00:00 +0000

A review of existing research on ESOPs found that, in addition to the equity benefits of the ESOP, overall wages of employees of ESOP companies are "at least as high as—and may be higher than" the wages of their non-ESOP counterparts. Steven Freeman of the University of Pennsylvania asserts that this "may partly reflect higher average productivity levels in employee ownership companies, the use of high wages in combination with employee ownership to motivate workers, the influence of workers in setting wages, or beneficence on the part of management that adopts ESOPs."

UPDATE 10/27/09: The NCEO website discusses research on The Impact of ESOPs on Employee Compensation that finds that, rather than replacing wages or benefits with stock, employees are “significantly better compensated in ESOP companies than are employees in comparable non-ESOP companies.” One study found that the median hourly wage is 5% to 12% higher, and another found that total compensation is 5.2% higher for companies with more than 5% ESOP ownership in the company.

H. Con. Res. 204: Expressing continued support for employee stock ownership plans

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Mon, 26 Oct 2009 16:42:00 +0000

H. Con. Res. 204: Expressing continued support for employee stock ownership plans was introduced on September 22, 2009, by Rep. Maurice Hinchey [D-NY22] and co-sponsored by Eric Cantor [R-VA7], Howard Coble [R-NC6], Walter Jones [R-NC3], Dana Rohrabacher [R-CA46], Edward Royce [R-CA40], and Mark Souder [R-IN3]. It has been referred to the House Committee on Education and Labor. The ESOP Association supports the bill:

H. Con. Res. 204 cites the Congressional history of ESOPs, references the 35 years of data evidencing that the vast majority of ESOP companies are high performing companies, with better benefits than non-employee owned companies. It concludes that Congress expresses its continued support for ESOPs… "A commitment by Congress to a fair and more equitable form of ownership is important in the 21^st century. On behalf of the nearly 2,500 members of The ESOP Association, I urge all members of Congress to co-sponsor this resolution," said J. Michael Keeling, president of The ESOP Association. "Research has consistently shown that employee owned companies are high performing, have better sales, and provide more retirement savings compared to their non-ESOP counterparts. To have Congress express its continued support for ESOPs is important in the current economic climate."

Here is the full text:

HCON 204 IH

111th CONGRESS

1st Session

H. CON. RES. 204

Expressing continued support for employee stock ownership plans.

IN THE HOUSE OF REPRESENTATIVES

October 22, 2009

Mr. HINCHEY (for himself, Mr. ROHRABACHER, Mr. CANTOR, Mr. COBLE, Mr. JONES, Mr. ROYCE, and Mr. SOUDER) submitted the following concurrent resolution; which was referred to the Committee on Education and Labor

CONCURRENT RESOLUTION

Expressing continued support for employee stock ownership plans.

Whereas in the Employee Retirement Income Security Act of 1974, Congress codified a technique of corporate finance which utilizes employee stock ownership, officially named an employee stock ownership plan (ESOP);

Whereas in the 35 years since the statutory recognition of ESOPs, there have been ample data collected by objective research indicating that the vast majority of corporations sponsoring employee stock ownership through ESOPs are high performing companies that, among other indicia of high performing companies, have better sales, are more sustainable, pay better, and provide more retirement savings compared to similar companies that are not employee-owned; and

Whereas Congress, in more than 15 laws since 1974, has made it explicit that ESOPs are to serve the dual purpose of providing retirement savings and stock ownership for employees, as well as being a financing technique for corporations: Now, therefore, be it

Resolved by the House of Representatives (the Senate concurring), That Congress expresses its continued support for employee stock ownership plans.

New Guidance on 2009 Schedule C Reporting Requirements

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 23 Oct 2009 18:19:00 +0000

The DOL has published new guidance to help service providers comply with the new Schedule C reporting requirements effective for plans beginning on or after January 1, 2009: EBSA issues additional guidance on 2009 Form 5500 Schedule C

2009 Required Minimum Distributions (RMDs)

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 23 Oct 2009 16:25:00 +0000

As a result of the economic downturn that occurred in the second half of 2008, a provision was included in the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) to provide a waiver of the requirement to take RMDs in 2009. IRS Notice 2009-09 – Required Minimum Distributions for 2009 provided some initial guidance. Now that we are into the last quarter of 2009 and the 2009 RMD deadlines of 12/31/09 and 4/1/10 are coming closer, you may be dealing with questions such as:

Can I still pay a required minimum distribution if the participant would like to take it?
Do participants have to opt out or do they opt in?
Are 2009 RMD amounts eligible for a rollover?
What about the plan document?

IRS Notice 2009-82 – Guidance on 2009 Required Minimum Distributions provides some additional guidance:

The plan document generally must be amended to account for how you are treating 2009 RMDs. However, the amendment is generally not required to be adopted until the last day of plan year beginning in 2011.
The Notice provides two sample amendments that can be used or modified to meet your particular RMD procedures. The two sample amendments provide that participants can 1) "default to continue 2009 RMDs" or 2) "default to discontinue 2009 RMDs".
You will need to choose whether participants have to elect to receive a 2009 RMD or whether they will need to elect NOT to receive one.
You will need to choose one of the following options about whether or not 2009 RMDs are eligible for rollover:
- 2009 RMDs are eligible for rollover (generally subject to mandatory 20% federal withholding if the amount is not rolled over per IRC Section 3405 - Special rules for pensions, annuities, and certain other deferred income)
- 2009 RMDs are eligible for rollover (generally subject to mandatory 20% federal withholding if the amount is not rolled over per IRC Section 3405 - Special rules for pensions, annuities, and certain other deferred income) ONLY if paid with an additional amount that is an eligible rollover distribution.
- 2009 RMDs are NOT eligible for rollover (generally subject to voluntary 10% federal withholding if the amount is not rolled over per IRC Section 3405 - Special rules for pensions, annuities, and certain other deferred income)
If a participant has already received a 2009 RMD, the Notice provides that the participants have until the later of November 30, 2009 or 60 days after the date the distribution was received to roll it over.
2009 distributions are considered to first consist of prior unpaid RMDs and then 2009 RMDs.

Here is some background information on RMDs:

What are Required Minimum Distributions?

IRC Section 401(a)(9) - Qualified pension, profit-sharing, and stock bonus plans - Required distributions provides statutory guidance on RMDs. An IRS Retirement Plans FAQs regarding the Required Minimum Distributions also provides a definition:

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner's benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner's death, or (2) over the life of the beneficiary starting no later than one year following the owner's death. See Publication 590 - Individual Retirement Arrangements (IRAs) for complete details on when beneficiaries must start receiving RMDs.

The IRS RMD information page also answers the following questions

What types of retirement plans require minimum distributions?
When is the deadline for receiving a RMD from an IRA?
How is the amount of the RMD calculated?
Can an account owner just take a RMD from one account instead of separately from each account?
Who calculates the amount of the RMD?
Can an account owner withdraw more than the RMD?
What happens if a person does not take a RMD by the required deadline?
Can the penalty for not taking the full RMD be waived?
Can a distribution in excess of the RMD for one year be applied to the RMD for a future year?
How are RMDs taxed?
Can RMD amounts be rolled over into another tax-deferred account?
Is an account owner who turned 70½ in 2008 and had planned to take his or her first RMD by the April 1, 2009 deadline still required to take that 2008 RMD?
How does the 2009 RMD waiver affect an account owner who may turn 70½ in 2009?
If an account owner does receive a 2009 RMD, can he or she roll it over into an IRA?
Does the 2009 RMD waiver also apply to defined benefit plans?

Required Beginning Date

Generally, all participants must receive their first RMD by the April 1 of the year following the year they meet both of the following requirements: attain age 70½ and terminate employment. This date is referred to as the participant's required beginning date.

Here is an example of a participant that met both requirements in 2007:

Required Beginning Date – Since the participant met both requirements in 2008, the required beginning date is April 1, 2009.
RMD #1 - The participant must receive their first RMD by April 1, 2009. This RMD is the participant's 2008 RMD and is calculated using the 2007 balance.
RMD #2 - The participant must receive their second RMD by December 31, 2009. This RMD is the participant's 2009 RMD and is calculated using the 2008 balance. As discussed above, the 2009 RMD has been waived and is subject to special rules.
Each subsequent RMD - Each subsequent RMD will be due on each subsequent December 31 (calculated using the prior year's balance).

Some plans provide eligible participants with the option to take their first RMD in the year they satisfy both requirements. Using the example, the participant would take their first RMD in 2008.

Another option is for the participant to take both their first and second RMDs before April 1 of the year the RMDs are due. Using the example, the first two RMDs would be taken in 2009 by April 1, 2009.

RMD Calculators

Here are two online RMD calculators you may find useful.

Required Minimum Distribution Calculator – This calculator requires you to enter the age as of December 31, 2008, and the balance as of December 31, 2007.
Financial Calculators – Required Minimum Distribution (RMD) – This calculator has more factors to input and is able to handle the beneficiary scenario discussed above. The calculator will also estimate future RMDs and account balances based on the future estimated rate of return. It appears that this is now a premium feature of the site.
Calculate Your Minimum Required Distribution calculator – This is a basic calculator that only requires your age at the end of this year and the balance.

I previously tested some of the calculators using this Uniform Lifetime Table and my calculation agreed with the online calculators. Most RMD calculators will not be able to handle the scenario of a spouse beneficiary that is more than ten years younger than the participant, as this scenario requires the usage of the Joint Expectancy tables.

Do you have enough cash in the ESOP to pay RMDs?

Another factor to consider for RMDs is that the plan may not have enough cash to pay to the participant(s) to satisfy the RMD requirements. If this is the case, the plan will most likely have three options:

The stock will be repurchased (recycled) in the plan to other participants - cash will need to be contributed to the plan.
The stock will be sold and the proceeds used to pay the participants – a stock appraisal on the date of the sale will need to be obtained.
The stock will be distributed and put back to the company (or the ESOP). It is important to note that as it gets closer to December 31, it becomes more likely that the stock value may be "stale" (see above discussion) and not an accurate reflection of the actual stock value.

This situation can be avoided if you have identified RMDs ahead of time and have a well-planned distribution policy.

What value should be used to determine the number of shares to distribute?

The value of the distribution is calculated using the fair market value of the stock as of the date of the distribution, and the value of the distribution must be at least equal to the amount required to be distributed to satisfy the RMD requirements. RMDs – How many shares to distribute? discusses an example.

Proposal to Repeal ESOPs

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 22 Oct 2009 11:27:00 +0000

Yesterday the Employee Ownership Blog discussed how an Influential Tax Journal Features Respected ERISA Expert Saying "Kill ESOPs".

The Tax Notes's Shelf Project is a column to report "proposals to help Congress when it is ready to raise revenue in the coming years." According to the ESOP Association the Tax Notes publication has “influence in the tight circles of tax law decision makers.” In January 2009 the project announced they had completed 27 proposals and announced they were working on a proposal to repeal ESOPs. They are also working on projects like returning the Estate tax and repealing the step up in basis, implementing a $2/gallon tax or a Carbon auction, and expanding Rangel's Corporate Tax Proposal.

According to the Employee Ownership Blog, the Shelf Project published "Repeal Tax Incentives for ESOPs" on October 19, 2009:

While a close read of the article reveals more of a dislike, or debunking if you will, of the economic theories of ESOP originator Louis O. Kelso, its bottom line is ESOPs do not improve company performance, do not increase wealth consistently, and therefore do not deserve to be ERISA plans nor have tax benefits.

According to their particular proposal, all qualified retirement plan would have to be well-diversified investments. Meaning that ESOPs would and should be subject to diversification rules and all ESOPs tax incentives should be repealed because as the authors state, "ESOPs represent bad public retirement policy…"

They provide four reasons for changing the tax policy to repeal ESOP tax incentives: (1.) ESOPs are not necessary to, and do not, increase workers' wealth; (2.) Stock ownership does not improve worker productivity; (3.) The pain of underdiversification; and (4.) No reason to subsidize ESOPs.

The Employee Ownership Blog post goes on to address the same stale anti-ESOP arguments that the ESOP community has countered with facts in the past.

One of the authors of the Shelf Project article, Andrew W. Stumpff, has also authored Fifty Years of Utopia: A Half-Century After Louis Kelso's The Capitalist Manifesto, a Look Back at the Weird History of the ESOP, 62 Tax Law. 419 (2009). I have not read the article, but observed that the introduction compares Louis O. Kelso to Karl Marx and has an overall negative tone towards ESOPs.

According to the ESOP Association, Norman Stein, the second professor who authored the article, is “a sought after advisor to the Congress on retirement savings policy, and is highly respected by staff policy makers in the Administration and the key Congressional tax committees” and “probably called to testify before Congress on ERISA more than any other person in America.”

Steve Sheppard addressed the article on his blog:

Academics and some politicians don't see the solutions residing there, instead relying upon their own inexperience and often untested ideas to throw rocks. The latest attack on ESOPs comes from Andrew Stumpff, an employee benefits law professor at the University of Michigan Law School and the University of Alabama Law School, along with Norman Stein, a Douglas Arant Professor of Law at the University of Alabama Law School. Their article published in the October 19, 2009 issue of Tax Notes posits four arguments against current ESOP law, arguments which likely would never have even been made had either of these pundits actually been part of an ESOP or even seriously studied ESOP performance. Nonetheless, they have taken their best shot out of some egalitarian and/or short-sighted perspectives, views that have always been killers of creativity, innovation and change. While the ESOP community implores business and government entities to look at the realities of ESOPs, the academics argue from theory and supposition.

2009 Safe Harbor Notice of Tax Treatment (402(f) Notice)

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 21 Oct 2009 13:01:00 +0000

IRC Section 402(f) - Written explanation to recipients of distributions eligible for rollover treatment requires that a plan administrator provide a participant receiving an eligible rollover distribution with a written notice of tax treatment between 30 and 180 days before a distribution (the minimum 30-day period can be waived):

(f) Written explanation to recipients of distributions eligible for rollover treatment

(1) In general

The plan administrator of any plan shall, within a reasonable period of time before making an eligible rollover distribution, provide a written explanation to the recipient—

(A) of the provisions under which the recipient may have the distribution directly transferred to an eligible retirement plan and that the automatic distribution by direct transfer applies to certain distributions in accordance with section 401 (a)(31)(B),

(B) of the provision which requires the withholding of tax on the distribution if it is not directly transferred to an eligible retirement plan,

(C) of the provisions under which the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date on which the recipient received the distribution,

(D) if applicable, of the provisions of subsections (d) and (e) of this section, and

(E) of the provisions under which distributions from the eligible retirement plan receiving the distribution may be subject to restrictions and tax consequences which are different from those applicable to distributions from the plan making such distribution.

(2) Definitions

For purposes of this subsection—

(A) Eligible rollover distribution

The term "eligible rollover distribution" has the same meaning as when used in subsection (c) of this section, paragraph (4) of section 403 (a), subparagraph (A) of section 403 (b)(8), or subparagraph (A) of section 457 (e)(16).

(B) Eligible retirement plan

The term "eligible retirement plan" has the meaning given such term by subsection (c)(8)(B).

IRS Notice 2009-68 – Safe Harbor Explanation — Eligible Rollover Distributions provides updated guidance and describes what must be in the safe harbor notice:

The written explanation must describe the direct rollover rules, the mandatory income tax withholding rules for distributions not directly rolled over, the tax treatment of distributions not rolled over, and when distributions may be subject to different restrictions and tax consequences after being rolled over. Section 402(f) provides that this explanation must be given within a reasonable period of time before the plan makes an eligible rollover distribution. Under § 1.402(f)-1, A-5, of the Income Tax Regulations, the requirements of § 402(f) are satisfied if this explanation (§ 402(f) notice) is provided through the use of an electronic medium that complies with the requirements of § 1.401(a)-21. This explanation should be provided only to participants who are eligible to receive distributions that are eligible rollover distributions.

The updated guidance splits the previous model safe harbor notice into two separate model notices, one for "Payments From a Designated Roth Account" and one for "Payments Not From a Designated Roth Account". Both notices should be provided if you have both accounts. The notices can be combined or modified as appropriate or you can even develop your own notice as long as it satisfies the legal requirements.

The previous model Safe Harbor Explanation was provided in IRS Notice 2002-3 - Safe Harbor Explanation - Certain Qualified Plan Distributions and had fallen out of date as a result of EGTRRA, PPA, TIPRA, HEART, and WRERA changes and could not be relied upon. The updated guidance provides that the 2002 guidance (adjusted with law changes) will be a safe harbor until December 31, 2009 and reiterates that the notice will need to modified as the relevant laws change:

If the law governing the tax treatment of distributions or other provisions described in a safe harbor explanation in this notice is amended after September 28, 2009, the safe harbor explanation will not satisfy § 402(f) to the extent that the safe harbor explanation no longer accurately describes the relevant law. The safe harbor explanations in Notice 2002-3, appropriately modified to reflect statutory changes since Notice 2002-3 was published, will continue to be safe harbor explanations with respect to notices provided through December 31, 2009.

Here is the sample notice for "For Payments Not From a Designated Roth Account":

For Payments Not From a Designated Roth Account
*YOUR ROLLOVER OPTIONS*
You are receiving this notice because all or a portion of a payment you are receiving from the [INSERT NAME OF PLAN] (the "Plan") is eligible to be rolled over to an IRA or an employer plan. This notice is intended to help you decide whether to do such a rollover.
This notice describes the rollover rules that apply to payments from the Plan that are not from a designated Roth account (a type of account with special tax rules in some employer plans). If you also receive a payment from a designated Roth account in the Plan, you will be provided a different notice for that payment, and the Plan administrator or the payor will tell you the amount that is being paid from each account.
Rules that apply to most payments from a plan are described in the "General Information About Rollovers" section. Special rules that only apply in certain circumstances are described in the "Special Rules and Options" section.
GENERAL INFORMATION ABOUT ROLLOVERS
How can a rollover affect my taxes?
You will be taxed on a payment from the Plan if you do not roll it over. If you are under age 59¹/₂ and do not do a rollover, you will also have to pay a 10% additional income tax on early distributions (unless an exception applies). However, if you do a rollover, you will not have to pay tax until you receive payments later and the 10% additional income tax will not apply if those payments are made after you are age 59¹/₂ (or if an exception applies).
Where may I roll over the payment?
You may roll over the payment to either an IRA (an individual retirement account or individual retirement annuity) or an employer plan (a tax-qualified plan, section 403(b) plan, or governmental section 457(b) plan) that will accept the rollover. The rules of the IRA or employer plan that holds the rollover will determine your investment options, fees, and rights to payment from the IRA or employer plan (for example, no spousal consent rules apply to IRAs and IRAs may not provide loans). Further, the amount rolled over will become subject to the tax rules that apply to the IRA or employer plan.
How do I do a rollover?
There are two ways to do a rollover. You can do either a direct rollover or a 60-day rollover.
If you do a direct rollover, the Plan will make the payment directly to your IRA or an employer plan. You should contact the IRA sponsor or the administrator of the employer plan for information on how to do a direct rollover.
If you do not do a direct rollover, you may still do a rollover by making a deposit into an IRA or eligible employer plan that will accept it. You will have 60 days after you receive the payment to make the deposit. If you do not do a direct rollover, the Plan is required to withhold 20% of the payment for federal income taxes (up to the amount of cash and property received other than employer stock). This means that, in order to roll over the entire payment in a 60-day rollover, you must use other funds to make up for the 20% withheld. If you do not roll over the entire amount of the payment, the portion not rolled over will be taxed and will be subject to the 10% additional income tax on early distributions if you are under age 59¹/₂ (unless an exception applies).
How much may I roll over?
If you wish to do a rollover, you may roll over all or part of the amount eligible for rollover. Any payment from the Plan is eligible for rollover, except:
Certain payments spread over a period of at least 10 years or over your life or life expectancy (or the lives or joint life expectancy of you and your beneficiary) Required minimum distributions after age 70¹/₂ (or after death) Hardship distributions ESOP dividends Corrective distributions of contributions that exceed tax law limitations Loans treated as deemed distributions (for example, loans in default due to missed payments before your employment ends) Cost of life insurance paid by the Plan Contributions made under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment Amounts treated as distributed because of a prohibited allocation of S corporation stock under an ESOP (also, there will generally be adverse tax consequences if you roll over a distribution of S corporation stock to an IRA).
The Plan administrator or the payor can tell you what portion of a payment is eligible for rollover.
If I don't do a rollover, will I have to pay the 10% additional income tax on early distributions?
If you are under age 59¹/₂, you will have to pay the 10% additional income tax on early distributions for any payment from the Plan (including amounts withheld for income tax) that you do not roll over, unless one of the exceptions listed below applies. This tax is in addition to the regular income tax on the payment not rolled over.
The 10% additional income tax does not apply to the following payments from the Plan:
Payments made after you separate from service if you will be at least age 55 in the year of the separation Payments that start after you separate from service if paid at least annually in equal or close to equal amounts over your life or life expectancy (or the lives or joint life expectancy of you and your beneficiary) Payments from a governmental defined benefit pension plan made after you separate from service if you are a public safety employee and you are at least age 50 in the year of the separation Payments made due to disability Payments after your death Payments of ESOP dividends Corrective distributions of contributions that exceed tax law limitations Cost of life insurance paid by the Plan Contributions made under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment Payments made directly to the government to satisfy a federal tax levy Payments made under a qualified domestic relations order (QDRO) Payments up to the amount of your deductible medical expenses Certain payments made while you are on active duty if you were a member of a reserve component called to duty after September 11, 2001 for more than 179 days Payments of certain automatic enrollment contributions requested to be withdrawn within 90 days of the first contribution.
If I do a rollover to an IRA, will the 10% additional income tax apply to early distributions from the IRA?
If you receive a payment from an IRA when you are under age 59¹/₂, you will have to pay the 10% additional income tax on early distributions from the IRA, unless an exception applies. In general, the exceptions to the 10% additional income tax for early distributions from an IRA are the same as the exceptions listed above for early distributions from a plan. However, there are a few differences for payments from an IRA, including:
There is no exception for payments after separation from service that are made after age 55. The exception for qualified domestic relations orders (QDROs) does not apply (although a special rule applies under which, as part of a divorce or separation agreement, a tax-free transfer may be made directly to an IRA of a spouse or former spouse). The exception for payments made at least annually in equal or close to equal amounts over a specified period applies without regard to whether you have had a separation from service. There are additional exceptions for (1) payments for qualified higher education expenses, (2) payments up to $10,000 used in a qualified first-time home purchase, and (3) payments after you have received unemployment compensation for 12 consecutive weeks (or would have been eligible to receive unemployment compensation but for self-employed status).
Will I owe State income taxes?
This notice does not describe any State or local income tax rules (including withholding rules).
SPECIAL RULES AND OPTIONS
If your payment includes after-tax contributions
After-tax contributions included in a payment are not taxed. If a payment is only part of your benefit, an allocable portion of your after-tax contributions is generally included in the payment. If you have pre-1987 after-tax contributions maintained in a separate account, a special rule may apply to determine whether the after-tax contributions are included in a payment.
You may roll over to an IRA a payment that includes after-tax contributions through either a direct rollover or a 60-day rollover. You must keep track of the aggregate amount of the after-tax contributions in all of your IRAs (in order to determine your taxable income for later payments from the IRAs). If you do a direct rollover of only a portion of the amount paid from the Plan and a portion is paid to you, each of the payments will include an allocable portion of the after-tax contributions. If you do a 60-day rollover to an IRA of only a portion of the payment made to you, the after-tax contributions are treated as rolled over last. For example, assume you are receiving a complete distribution of your benefit which totals $12,000, of which $2,000 is after-tax contributions. In this case, if you roll over $10,000 to an IRA in a 60-day rollover, no amount is taxable because the $2,000 amount not rolled over is treated as being after-tax contributions.
You may roll over to an employer plan all of a payment that includes after-tax contributions, but only through a direct rollover (and only if the receiving plan separately accounts for after-tax contributions and is not a governmental section 457(b) plan). You can do a 60-day rollover to an employer plan of part of a payment that includes after-tax contributions, but only up to the amount of the payment that would be taxable if not rolled over.
If you miss the 60-day rollover deadline
Generally, the 60-day rollover deadline cannot be extended. However, the IRS has the limited authority to waive the deadline under certain extraordinary circumstances, such as when external events prevented you from completing the rollover by the 60-day rollover deadline. To apply for a waiver, you must file a private letter ruling request with the IRS. Private letter ruling requests require the payment of a nonrefundable user fee. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).
If your payment includes employer stock that you do not roll over
If you do not do a rollover, you can apply a special rule to payments of employer stock (or other employer securities) that are either attributable to after-tax contributions or paid in a lump sum after separation from service (or after age 59¹/₂, disability, or the participant's death). Under the special rule, the net unrealized appreciation on the stock will not be taxed when distributed from the Plan and will be taxed at capital gain rates when you sell the stock. Net unrealized appreciation is generally the increase in the value of employer stock after it was acquired by the Plan. If you do a rollover for a payment that includes employer stock (for example, by selling the stock and rolling over the proceeds within 60 days of the payment), the special rule relating to the distributed employer stock will not apply to any subsequent payments from the IRA or employer plan. The Plan administrator can tell you the amount of any net unrealized appreciation.
If you have an outstanding loan that is being offset
If you have an outstanding loan from the Plan, your Plan benefit may be offset by the amount of the loan, typically when your employment ends. The loan offset amount is treated as a distribution to you at the time of the offset and will be taxed (including the 10% additional income tax on early distributions, unless an exception applies) unless you do a 60-day rollover in the amount of the loan offset to an IRA or employer plan.
If you were born on or before January 1, 1936
If you were born on or before January 1, 1936 and receive a lump sum distribution that you do not roll over, special rules for calculating the amount of the tax on the payment might apply to you. For more information, see IRS Publication 575, Pension and Annuity Income.
If your payment is from a governmental section 457(b) plan
If the Plan is a governmental section 457(b) plan, the same rules described elsewhere in this notice generally apply, allowing you to roll over the payment to an IRA or an employer plan that accepts rollovers. One difference is that, if you do not do a rollover, you will not have to pay the 10% additional income tax on early distributions from the Plan even if you are under age 59¹/₂ (unless the payment is from a separate account holding rollover contributions that were made to the Plan from a tax-qualified plan, a section 403(b) plan, or an IRA). However, if you do a rollover to an IRA or to an employer plan that is not a governmental section 457(b) plan, a later distribution made before age 59¹/₂ will be subject to the 10% additional income tax on early distributions (unless an exception applies). Other differences are that you cannot do a rollover if the payment is due to an "unforeseeable emergency" and the special rules under "If your payment includes employer stock that you do not roll over" and "If you were born on or before January 1, 1936" do not apply.
If you are an eligible retired public safety officer and your pension payment is used to pay for health coverage or qualified long-term care insurance
If the Plan is a governmental plan, you retired as a public safety officer, and your retirement was by reason of disability or was after normal retirement age, you can exclude from your taxable income plan payments paid directly as premiums to an accident or health plan (or a qualified long-term care insurance contract) that your employer maintains for you, your spouse, or your dependents, up to a maximum of $3,000 annually. For this purpose, a public safety officer is a law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew.
If you roll over your payment to a Roth IRA
You can roll over a payment from the Plan made before January 1, 2010 to a Roth IRA only if your modified adjusted gross income is not more than $100,000 for the year the payment is made to you and, if married, you file a joint return. These limitations do not apply to payments made to you from the Plan after 2009. If you wish to roll over the payment to a Roth IRA, but you are not eligible to do a rollover to a Roth IRA until after 2009, you can do a rollover to a traditional IRA and then, after 2009, elect to convert the traditional IRA into a Roth IRA.
If you roll over the payment to a Roth IRA, a special rule applies under which the amount of the payment rolled over (reduced by any after-tax amounts) will be taxed. However, the 10% additional income tax on early distributions will not apply (unless you take the amount rolled over out of the Roth IRA within 5 years, counting from January 1 of the year of the rollover). For payments from the Plan during 2010 that are rolled over to a Roth IRA, the taxable amount can be spread over a 2-year period starting in 2011.
If you roll over the payment to a Roth IRA, later payments from the Roth IRA that are qualified distributions will not be taxed (including earnings after the rollover). A qualified distribution from a Roth IRA is a payment made after you are age 59¹/₂ (or after your death or disability, or as a qualified first-time homebuyer distribution of up to $10,000) and after you have had a Roth IRA for at least 5 years. In applying this 5-year rule, you count from January 1 of the year for which your first contribution was made to a Roth IRA. Payments from the Roth IRA that are not qualified distributions will be taxed to the extent of earnings after the rollover, including the 10% additional income tax on early distributions (unless an exception applies). You do not have to take required minimum distributions from a Roth IRA during your lifetime. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).
You cannot roll over a payment from the Plan to a designated Roth account in an employer plan.
If you are not a plan participant
Payments after death of the participant. If you receive a distribution after the participant's death that you do not roll over, the distribution will generally be taxed in the same manner described elsewhere in this notice. However, the 10% additional income tax on early distributions and the special rules for public safety officers do not apply, and the special rule described under the section "If you were born on or before January 1, 1936" applies only if the participant was born on or before January 1, 1936.
	If you are a surviving spouse. If you receive a payment from the Plan as the surviving spouse of a deceased participant, you have the same rollover options that the participant would have had, as described elsewhere in this notice. In addition, if you choose to do a rollover to an IRA, you may treat the IRA as your own or as an inherited IRA.
	An IRA you treat as your own is treated like any other IRA of yours, so that payments made to you before you are age 59¹/₂ will be subject to the 10% additional income tax on early distributions (unless an exception applies) and required minimum distributions from your IRA do not have to start until after you are age 70¹/₂.
	If you treat the IRA as an inherited IRA, payments from the IRA will not be subject to the 10% additional income tax on early distributions. However, if the participant had started taking required minimum distributions, you will have to receive required minimum distributions from the inherited IRA. If the participant had not started taking required minimum distributions from the Plan, you will not have to start receiving required minimum distributions from the inherited IRA until the year the participant would have been age 70¹/₂.
	If you are a surviving beneficiary other than a spouse. If you receive a payment from the Plan because of the participant's death and you are a designated beneficiary other than a surviving spouse, the only rollover option you have is to do a direct rollover to an inherited IRA. Payments from the inherited IRA will not be subject to the 10% additional income tax on early distributions. You will have to receive required minimum distributions from the inherited IRA.
Payments under a qualified domestic relations order. If you are the spouse or former spouse of the participant who receives a payment from the Plan under a qualified domestic relations order (QDRO), you generally have the same options the participant would have (for example, you may roll over the payment to your own IRA or an eligible employer plan that will accept it). Payments under the QDRO will not be subject to the 10% additional income tax on early distributions.
If you are a nonresident alien
If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or U.S. employer plan, instead of withholding 20%, the Plan is generally required to withhold 30% of the payment for federal income taxes. If the amount withheld exceeds the amount of tax you owe (as may happen if you do a 60-day rollover), you may request an income tax refund by filing Form 1040NR and attaching your Form 1042-S. See Form W-8BEN for claiming that you are entitled to a reduced rate of withholding under an income tax treaty. For more information, see also IRS Publication 519, U.S. Tax Guide for Aliens, and IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Other special rules
If a payment is one in a series of payments for less than 10 years, your choice whether to make a direct rollover will apply to all later payments in the series (unless you make a different choice for later payments).
If your payments for the year are less than $200 (not including payments from a designated Roth account in the Plan), the Plan is not required to allow you to do a direct rollover and is not required to withhold for federal income taxes. However, you may do a 60-day rollover.
Unless you elect otherwise, a mandatory cashout of more than $1,000 (not including payments from a designated Roth account in the Plan) will be directly rolled over to an IRA chosen by the Plan administrator or the payor. A mandatory cashout is a payment from a plan to a participant made before age 62 (or normal retirement age, if later) and without consent, where the participant's benefit does not exceed $5,000 (not including any amounts held under the plan as a result of a prior rollover made to the plan).
You may have special rollover rights if you recently served in the U.S. Armed Forces. For more information, see IRS Publication 3, Armed Forces' Tax Guide.
FOR MORE INFORMATION
You may wish to consult with the Plan administrator or payor, or a professional tax advisor, before taking a payment from the Plan. Also, you can find more detailed information on the federal tax treatment of payments from employer plans in: IRS Publication 575, Pension and Annuity Income; IRS Publication 590, Individual Retirement Arrangements (IRAs); and IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). These publications are available from a local IRS office, on the web at www.irs.gov, or by calling 1-800-TAX-FORM.

The Board of Directors’ Role in Overseeing Tax Risk and Tax Strategies

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 20 Oct 2009 21:40:00 +0000

Many of you are 100% S Corporation ESOPs and are not subject to federal or state income taxation. Others are C Corporations or have less than 100% ESOP structures that may make you subject to federal income taxes. Whether or not you pay income taxes, you likely file tax and/or information returns with the IRS each year (including IRS Form 5500 for your ESOP) and you are subject to tax risk.

The IRS released IRS Commissioner Doug Shulman's comments to the National Association of Corporate Directors (NACD) Corporate Governance Conference. A main theme of the commentary is the Board of Directors' role and responsibility to oversee how management manages the tax risk and tax strategies of the company:

WASHINGTON -- I realize that the IRS Commissioner has not customarily addressed the NACD's corporate governance conference…but what I want to discuss with you this afternoon is the important role that boards of directors can play in overseeing tax risk and tax strategies of corporations. After all, taxes are one of the biggest expenses of a corporation, so how they are managed is very important to most corporations.

Clearly, corporate boards of directors play an incredibly important role in the vibrancy of businesses and our economy. Boards are a source of creative ideas, strategic thinking, and, importantly, governance and oversight. Boards hold management accountable, and in that role, understanding the risk posture of the company is critically important.

So today, I want to share with you some observations of what I have seen since I've taken the helm of the organization responsible for collecting 96 percent of all federal receipts – around $2.5 trillion.

To begin, I understand that many of you – actually most of you – are not tax experts and you were not installed on the board because of your tax expertise. You bring other critical skills, experiences and expertise to the boardroom.

And I also understand that even with all of your sophistication, expertise and experience in business and financial affairs, it's difficult to understand the tax consequences of a complicated business transaction, such as a tax-free reorganization or a hedging transaction, let alone the corporation's overall tax profile as it relates to federal, state and international taxes. That's why you need to have strong tax departments and outside tax advisors. After all, you have finance experts to help you understand the economic value of hedging transactions, and you need tax experts to help you understand the myriad and complex tax issues facing your company.

Now, my motivation to create this dialogue with you is based in part on personal and professional experience. I moved from the business world where I interacted with boards… to FINRA, the largest independent securities regulator in the U.S. ….to the IRS, where I am focusing on major trends, such as the globalization of tax administration, and innovative ways to strengthen and improve our tax system. In all of these roles, I have seen the importance of board oversight of major areas of risk.

So, I know first hand that in the post-Sarbanes Oxley world, corporations have invested significant time and resources on compliance issues and internal controls. In the tax arena, some have instituted regular meetings between the Audit Committee and the tax director to ensure an open dialogue.

As I mentioned earlier, tax issues should remain on your radar screen – and for good reason. It's one of the biggest expenses on your income statement. In addition, a number of public companies have reported material weaknesses in internal controls related to taxes. Tax strategies can also present a financial and restatement risk, and sometimes when the cases are high profile, a significant risk to corporate reputations. In today's business climate, the general public has little tolerance for overly aggressive tax planning that can be viewed as corporations playing tax games.

So, although the complexity of the tax code may make your eyes glaze over, Board members – like you –are critically important to making sure that the tax system works well and is worthy of the confidence of the American people.

But how can you increase your oversight of tax compliance given the limited amount of time you have available and the competing business issues you face?

Well, you probably know or could figure out, that the IRS conducts risk assessments of its own when determining how to use its time and resources and whom to audit. Similarly, the board of directors can assess its corporation's tax risk profile, internal controls, and relationship with its corporate tax department, to help determine the tax matters of which it should be aware.

Now, we recognize that many businesses are trying to get it right. Positions taken in tax returns may be well-grounded and taken in good faith. Other tax positions taken may be more aggressive and use elaborately structured transactions or arrangements to push tax planning up to the edge, or beyond acceptable bounds.

Enter FIN 48, which establishes the financial statement accounting for uncertain tax positions, including recognizing and measuring their effect on financial statements.

Under FIN 48, companies must identify their material uncertain tax positions. They must quantify the company's maximum exposure and estimated likelihood of winning or losing the issue if challenged by the IRS. And they must record as a liability a specified amount of money relating to these uncertain tax positions. In other words, FIN 48 is a very significant window into tax risk, liability and management in your company.

FIN 48 paints a picture of tax risk by indicating how much money a corporation has to book in tax reserves to reflect the risk should one or more of its tax positions go south.

But let's get behind the reserve numbers for a moment. What are they telling you – the board directors – beyond the dollars in the tax reserve?

They're saying that the audit committee needs to know and influence what tax posture the tax planners are taking. They and you need to know whether that multi-million – or in some cases multi-billon-dollar bet – you and your company are making could be too aggressive and therefore risky.

So where does that bring us? What are the next steps?

Before I get to that, I want to be clear about what I "do" intend and "don't" intend in this dialogue.

We don't intend to second-guess legitimate and thoughtful business decision-making by corporate leaders. And we don't expect that you will always agree with us on identifying and quantifying the risk of various tax positions. But we do want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk.

I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of your governance process. For example you might want to:

Set a threshold confidence level for taking a tax position…
Discourage or eliminate opinion shopping by tax departments by having an independent tax firm, which has some direct dialogue with the board of directors, review major tax positions …
Specifically address transfer pricing and the relative profit allocated to low-tax jurisdictions, and make sure they reflect real economic contributions made in those jurisdictions.

And diving down a little deeper, here are some questions you might ask of your tax director and your external auditors relating to FIN 48:

What was the process for identifying uncertain tax positions and how do you know all material issues have been identified?
How did you go about determining the maximum tax exposure relating to each uncertain tax position? What makes you comfortable that it accurately reflects your maximum exposure?
How did you go about quantifying the likelihood of winning or losing uncertain tax positions? Do you plan to litigate the issue if the IRS challenges the position? Does the external auditor or tax advisor agree with the tax director's assessment?
Could the company be subject to potential penalties, such as for underpayment of tax, negligence or worse? If so, are they appropriately recorded, and perhaps more important, what does this say about how aggressive the company's position is regarding those issues?

There are already some IRS programs in place that help provide greater certainty and can give a board more comfort that there won't be second guessing down the road. For example, our compliance assurance program, or CAP where we agree on issues with the taxpayer before a corporate return is filed, envisions full disclosure by the taxpayer in exchange for real time tax certainty. And the Advance Pricing Agreement program, where we agree with a taxpayer on pricing methodology before a return is filed, provides certainty in the complex and uncertain area of transfer pricing.

Now, we're not the only government thinking about the notion that corporate taxpayers that employ sound management and governance practices on tax matters are more likely to be compliant.

One example is Australia. The Australian Tax Office publishes a Governance Guide for Board Members and Directors that suggests useful questions – similar to the ones I just posed – that a corporate director can ask of management.

Some of the Australian Tax Office's questions include: Is there a material difference between the losses reported for accounting purposes and the losses claimed for tax purposes? If so, can the difference be satisfactorily explained? Is the structure and financing for your business or a major transaction complicated, perhaps more complex than necessary to achieve the commercial objectives? These questions give you a flavor of what some other countries are thinking about and doing in the corporate governance area.

On a broader scale, the Organisation for Economic Co-operation and Development has charted a worldwide trend of increased boardroom attention to issues of taxation. A recent guidance document outlines good corporate governance principals in relation to tax, based on advice from governments around the world.

In summary, my main observation to share with you is this: Taxes are an important expense, and like any important expense, management responsible will try to control it. In the case of taxes, controlling it can expose the company to challenge, which can result in reputational damage and perhaps large, unexpected expenses. So you need to understand how management controls this expense and how it decides how aggressive to be. You also need to be certain that reporting is effective.

Tax expense in this sense is no different from other expenses. Manage it too loosely and you give up profit. Manage it too aggressively and there are bad consequences. You, the board, have to oversee how management manages it. That means some level of understanding, a set of policy principles and then a control system of reporting that assures you that the policy is being carried out.

My goal here today was to start a discussion about the board of directors' role in overseeing tax risk. I encourage you to have the dialogue, and offer the IRS as a resource as you continue to evolve your thinking about this topic. At the end of the day, my proposition is that the board needs to have the tools, not to do tax planning, but to oversee tax strategies and risks.

I see my time is up today. I hope it was a good start and that this beneficial dialogue will continue and mature in the weeks and months ahead. Thank you.

Involving Employees in a Non-Fiduciary Capacity

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Mon, 19 Oct 2009 12:12:00 +0000

The October 16, 2009 Employee Ownership Update is online and discusses the following:

S Corporation ESOP Promotion and Expansion Act of 2009 Introduced
New Data on Employee Ownership in S&P 900
ESOP Governance Tip

We recently discussed Appointing a Non-Company Officer as Fiduciary. The Update discusses how involving employees and outsiders at the board level in a non-fiduciary capacity is a great way to involve others:

Some ESOP companies want to get employees and/or outsiders involved at the board level, but do not want them to have fiduciary obligations. They may also want them only for certain parts of a meeting or for certain meetings. Nothing in corporate law prevents a company from having people serve in a non-fiduciary advisory capacity to the board. By institutionalizing that, you can get a lot of the benefit of getting people who can add value without exposing them to excessive risk.

The Update also discusses H.R. 3586: S Corporation ESOP Promotion and Expansion Act of 2009.

Best Practices for Building an Enterprise

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 16 Oct 2009 16:27:00 +0000

10 Company-Building Lessons Learned by a Successful Entrepreneur (Plus 2 Bonus Lessons) shares some best practices for building an enterprise:

Do not fall in love with your own idea
Customers are everything
Look for serendipity
Hire passionate people
Communicate constantly
Learn to be a great salesperson
Make it a great culture
You don't have to be brilliant to sell great, just "smart enough"
Relish the tough times
Focus on building an amazing company
Celebrate accomplishments along the way
Expand your stakeholders

2010 Pension Plan Limits

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 15 Oct 2009 19:32:00 +0000

The IRS has announced the 2010 pension plan limits, including the following:

401(k) Deferral Limit - $16,500
Annual Additions Limit - $49,000
Maximum Compensation Limit - $245,000
Catch-Up Contribution Limit - $5,500
Highly Compensated Employee - $110,000
ESOP 5-Year Distribution Threshold - $985,000
ESOP Additional Year Threshold - $195,000

Note that all of the above limits are exactly the same as the 2009, and that because the cost-of-living index is less this year than last year, most all of the limits remain unchanged.

Here are some related links:

Here is the complete press release:

WASHINGTON — The Internal Revenue Service today announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2010.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for costofliving increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

The limitations that are adjusted by reference to Section 415(d) will remain unchanged for 2010. This is because the cost-of-living index for the quarter ended September 30, 2009, is less than the cost-of-living index for the quarter ended September 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2010, which is the same amount as for 2009. This limitation affects elective deferrals to Section 401(k) plans and to the Federal Government's Thrift Savings Plan, among other plans.

Effective January 1, 2010, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $195,000. For participants who separated from service before January 1, 2010, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2009, by 1.0000.

The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged for 2010 at $49,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2010 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $245,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $160,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5year distribution period remains unchanged at $195,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $110,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed costofliving adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $360,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.

The compensation amounts under Section 1.6121(f)(5)(i) of the Income Tax Regulations concerning the definition of "control employee" for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under Section 1.6121(f)(5)(iii) remains unchanged at $195,000.

The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2010 are as follows:

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $33,000 to $33,500; the limitation under Section 25B(b)(1)(B) remains unchanged at $36,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $55,500.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $24,750 to $25,125; the limitation under Section 25B(b)(1)(B) remains unchanged at $27,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $41,625.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $16,500 to $16,750; the limitation under Section 25B(b)(1)(B) remains unchanged at $18,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $27,750.

The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) remains unchanged at $89,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $55,000 to $56,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $166,000 to $167,000.

The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $166,000 to $167,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $105,000.

UPDATE 10/20/09:

The 2010 Cost-of-Living Adjustments (COLAs) for determining annual limits for most retirement plans remain the same as in 2009, except for the following:

The modified adjusted gross income limits for determining the deductible amount of traditional IRA contributions for single and head of household filers who are active participants in a plan, and for married taxpayers filing jointly who aren’t active participants in a plan but whose spouses are;
The modified adjusted gross income for Roth IRA purposes for determining the maximum Roth IRA contributions for taxpayers whose filing status is married filing jointly or qualifying widow(er); and
The adjusted gross income limits for taxpayers who qualify for the 50% savers credit.

Long-Term ESOP Objectives

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 14 Oct 2009 18:02:00 +0000

Yesterday we discussed the Reasons for Selling an ESOP Company and the importance of identifying your long-term ESOP objectives. What are your long-term ESOP objectives? While every company will have a slightly different long-term ESOP objective, they are likely to fall into one of three categories. Each category has different repurchase obligation planning and fiduciary implications for both the plan sponsor and the plan trustees:

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

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

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

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

Reasons for Selling an ESOP Company

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 13 Oct 2009 19:45:00 +0000

Last week I participated in a conference on handling the ESOP repurchase obligation. I am going to discuss a couple of takeaways from my presentation.

In 2007 the NCEO performed a study on the reasons why companies terminate ESOPs. The first phase asked executives of ESOP companies about the reason for termination:

-- 17% of acquired companies said that repurchase obligation was one of the primary reasons the ESOP was terminated; another 28% said it was a important reason; 6% said it contributed to the decision; 6% said it played a minor role; and 44% said it played no role

-- For 17% of companies that terminated the ESOP, repurchase obligation was the sole reason; another 17% said it was the primary reason; 33% said it was an important reason; 17% said it had a minor impact; and 17% said it played no role

The second phase surveyed ESOP service providers and found that An Attractive Acquisition Offer was the Primary Reason for ESOP Termination:

-- 51.2% of the companies could handle repurchase obligation but received an attractive acquisition offer that was too good to turn down

-- 15.6% were dissatisfied with the ESOP for reasons other than repurchase obligation

-- 13.2% of companies were doing well financially but could not manage their repurchase obligation or did not expect to do so in the future

It also found that "about 85% of the terminations were in response to an offer "too good to refuse" as the price offered for shares was very lucrative." In other words, many ESOP companies are acquired (with the ESOP being terminated) due to the success of the company, which is a reason Why the Number of ESOPs is not Growing at a Faster Rate.

To recap, the study found that the majority of ESOP companies cite the repurchase obligation as a significant factor for selling the company and the reason that a majority of companies sold their ESOP is because they received a lucrative offer. Is selling the company in your plans? What are your long-term plans for the ownership of the company and the ESOP? Your long-term ESOP objectives are an important part of the repurchase obligation planning process. Identifying your long-term ESOP objectives and planning accordingly will also put the trustee(s) in a better position to satisfy their fiduciary obligations when contemplating offers, negotiate from a position of strength, and allow you to remain employee owned, if that is your objective. More on your long-term ESOP objectives tomorrow…

More DOL Guidance on their ESOP Initiative

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 07 Oct 2009 10:48:00 +0000

Last week we noted that the DOL said that ESOPs are a priority in a recent speech and referenced one of our most read posts on What a DOL Auditor is Looking For When Auditing an ESOP. New Guidance on Department of Labor Enforcement Priorities for Employee Benefits discusses another recent DOL speech that detailed the new criminal and civil enforcement priorities of the DOL. The criminal projects include embezzlement of plan assets and Filing a False IRS Form 5500. The article stressed four enforcement efforts:

fees of pension consultants and service providers. An existing project focused on the propriety and disclosure of these fees will be expanded to address situations in which the service providers use their fiduciary status to increase their compensation;
ESOPs (employee stock ownership plans). This initiative will include issues of valuation – whether ESOPs and their participants are being overcharged for the stock acquired by the plan – as well as fiduciary self-dealing and conflicts of interest;
bankrupt and financially distressed plan sponsors. Through its "REACT" project, the Labor Department will focus on taking legal action on to protect the interests of these participants; and
multiple employer welfare arrangements (MEWAs). These arrangements sometimes involve health care fraud and are often put together by individuals not qualified to establish them.

The DOL also said they are working on the revised final investment advice regulations, a review of two plan expense disclosure regulations, and a review of target date funds.

The DOL's ERISA enforcement page provides more guidance on ESOP priorities:

The Employee Stock Ownership Plan (ESOP) project is designed to identify and correct violations of ERISA in connection with ESOPs. ESOPs are designed to invest primarily in employer securities. Due to their unique nature, ESOPs can have distinct violations, as well as violations that might occur in any employee benefit plan. One of the most common violations found is the incorrect valuation of employer securities. This can occur when purchasing, selling, distributing, or otherwise valuing stock. Other issues involve the failure to provide participants with the specific benefits required or allowed under ESOPs, such as voting rights, ability to diversify their account balances at certain times, and the right to sell their shares of stock when received. EBSA will also review the refinancing of ESOP loans following EBSA's issuance of FAB 2002-1.

An ESOP by definition is "designed to invest primarily in qualifying employer securities". The DOL provided guidance on the fiduciary considerations of refinancing an ESOP Loan in Field Assistance Bulletin 2002-01 - ESOP Refinancing Transactions.

The IRS has also put together a team to look at ESOP-specific plan document including Rebalancing and/or Segregation Plan Provisions.

Verbal Plan Terms Cannot Modify the Written Terms of the Plan

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Tue, 06 Oct 2009 14:34:00 +0000

We summarized the importance of having clear, concise, and consistent written plan terms and administrative procedures in ESOP Planning 2008: Plan Documents and Disclosures, including making sure the terms of all your plan documents are consistent, ensuring the plan is being administered consistent with the written plan documents, and ensuring all plan provisions and administrative procedures are documented appropriately. Written Plan Requirement Defeats Breach Of Fiduciary Duty Claims discusses how Ladouceur v. Credit Lyonnais, No. 07-4040 (2d Cir. Sep. 30, 2009) found that verbal promises cannot change the written terms of the plan. The case cites 29 U.S.C. Section 1102(a)(1) – Establishment of plan – Named fiduciaries:

(a) Named fiduciaries

(1) Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.

The case cites Perreca v. Gluck, 295 F.3d 215, 225 (2d Cir. 2002):

"[O]ral promises are unenforceable under ERISA and therefore cannot vary the terms of an ERISA plan." Perreca v. Gluck, 295 F.3d 215, 225 (2d Cir. 2002); see also 29 U.S.C. § 1102(a)(1) ("Every employee benefit plan shall be established and maintained pursuant to a written instrument . . . ."). For this reason, we held in Perreca that an oral statement purporting to alter the terms of an ERISA benefit plan was insufficient to give rise to a claim for promissory estoppel. Perreca, 295 F.3d at 225.

The article also discusses how Ladouceur v. Credit Lyonnais found that the Perreca standard also applies to fiduciary breach claims, because ERISA fiduciaries are held to the terms of the plan:

Thus, the Court held that Perreca applies "with equal force to alleged breaches of fiduciary duty when the alleged breach is an oral representation that purports to change an ERISA benefit plan." The basis for the holding stems from the benefit of holding ERISA fiduciaries to the written terms of the plan.

2009 Employee Ownership Month (EOM)

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 02 Oct 2009 19:02:00 +0000

In Employee Ownership Month 2009 we discussed how October is Employee Ownership Month (EOM) and how October would be here before we knew it. Well, it is here! Our 2008 Employee Ownership Month (EOM) information page contains a lot of great ideas and resources and we will be sharing more ideas throughout the month.

Yesterday the ESOP Association announced that the ESOP Community Celebrates Employee Ownership Month!:

Washington, DC (October 1, 2009) – This October, The ESOP Association and the employee ownership community will celebrate Employee Ownership Month, which is a tribute to the incredible spirit of employee ownership.

Employee Ownership Month is an opportunity for ESOP (employee stock ownership plan) companies across the U.S. to educate employee owners and the public about the tremendous benefits of ESOPs. Companies celebrate with picnics for employee owners, roundtable discussions with local public officials, and award ceremonies to honor outstanding employee owners.

"The recent Economic Performance Survey by the Employee Ownership Foundation shows that 88.2% of companies believe that ESOPs are good for business," said J. Michael Keeling, president of The ESOP Association. "In these challenging times, that is saying a lot about employee ownership. Of course, these numbers prove what we in the ESOP community have been saying every October for about 20 years, and once again, I'm proud of our members and the work they do to promote employee ownership."

Employee Ownership Facts:

There are approximately 11,000 ESOPs in place in the U.S., covering 10 million employees.
Total assets owned by U.S. ESOPs are estimated to be $800 million.
The Economic Performance Survey conducted by the Employee Ownership Foundation earlier this year found:
50.9% of survey respondents indicated a better performance than the previous year
65% indicated the ESOP improved the overall productivity of the company's employees
88.5% of ESOP companies that responded to the 18th Annual Economic Performance Survey outperformed the stock market in 2008

18th Annual ESOP Economic Performance Survey (EPS) contains more details on the EPS.

Top Small Workplaces: Steady Revenues and Declining Turnover

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Fri, 02 Oct 2009 18:52:00 +0000

Revenues Hold, Turnover Lower Among 2009 Top Small Workplaces looks at the trends of the Top Small Workplaces 2009 winners and notes that revenues have remained steady, even in the current economic environment, while average turnover fell:

Steady revenues over the past year is a tremendous feat – one made easier by the innovative workplace team building and employee engagement practices these organizations use.

How do we know that employees at these companies are satisfied and committed to their employers' mission and goals? Because they are less inclined to leave. As this chart shows, average turnover fell 3 percentage points from last year

DOL Says ESOPs a Priority/Once Again, One-Third of Top Small Workplaces are Employee Owned

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Thu, 01 Oct 2009 06:00:00 +0000

The September 30, 2009 Employee Ownership Update is online and discusses the following:

Five of Fifteen Top Small Workplaces in 2009 Are Employee Ownership Companies
EBSA Assistant Secretary Phyllis Borzi Says ESOPs a Priority
New Directory of Professionals to Help Employees Deal with Their Equity Grants
Efficient Markets: My Own Definition
NCEO Starts Search for New Executive Director in 2011
A Personal Note on My Upcoming Change of Roles at the NCEO

In early 2008 we shared a DOL perspective of What a DOL Auditor is Looking For When Auditing an ESOP. The Update discusses how the EBSA Assistant Secretary of Labor told an audience that she will be making ESOPs a top priority:

Phyllis Borzi, the Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA) in the U.S. Department of Labor, told the audience at the ASPPA/DOL Speaks conference on September 17 that she will be taking a hard look at both compliance and enforcement issues for plans the U.S. Department of Labor covers. While major issues will be delayed remittances of contributions to 401(k) plans and criminal prosecutions for embezzlement of plan funds, ESOP valuations will also be one of the priorities.

The Update also discusses how, like last year, 33% (5 of 15) of the Top Small Workplaces 2009 are employee owned and provides a brief profile of each company:

Analytical Graphics: This 263-employee aerospace and defense software company in Exton, Pennsylvania, uses its profit sharing plan to invest in company stock. One unusual perk is that the company offers free breakfast, lunch, and dinner. Families are welcome to come by. Employee ideas are solicited through quarterly town-hall meetings. Fridays, employees have "Storytime," where they can shares stories of their work with other employees.

Bailard Inc: This 49-employee Foster City, California, private investment firm allows employees to buy stock with loans from the company or, in some cases, from customers. An internal market helps provide liquidity. The company is currently looking at other ownership options as well. The offices have no doors, and every morning at 9:05 the staff gathers to discuss company news and projects. An open-book policy even extends to salaries.

Heavy Construction Systems Specialists, Inc: This 106-employee construction software company in Sugar Land, Texas, was an NCEO Innovations in Employee Ownership Award winner for the unique way it combines an ESOP with stock appreciation rights (SARs) targeted at new employees to give them more parity with more senior ESOP participants. The company is very open-book, with regular opportunities for employee input into decisions. It also has an extensive wellness program, including a jogging trail and gym on site.

Skyline Construction: This 50-employee San Francisco construction company became ESOP-owned in 2005. The plan includes unionized employees. The move to an ESOP brought a major cultural shift to a highly inclusive management style. It practices extensive open-book management and has regular meetings to discuss workplace issues. Each fall, one employee from each department attends a two-day strategic retreat.

Another employee ownership company, this time a non-NCEO member, was named one of the winners. Railroad Associates Corp. is a Hershey, Pennsylvania-based railroad engineering and contracting company with 33 employees. Its employees own 40% of the company through an employee ownership plan. The company does not hire middle managers to handle field calls from job sites but rather pushes decisions down to front-line employees.

We shared two of the Wall Street Journal profiles in Top Small Workplaces 2009 – Profiles of Two ESOP Winners. Here are the other three profiles from the Wall Street Journal's Top Small Workplaces 2009 article:

Top Small Workplaces 2009 – Profiles of Two ESOP Winners

ajuckett@esopinsourcing.com (Employee Stock Ownership Plan (ESOP) Consultant) — Wed, 30 Sep 2009 10:51:00 +0000

Earlier this week we discussed the Top Small Workplaces 2009. The Employee Ownership Blog has announced that Two ESOP Association Members have been Named 2009 Top Small Workplaces:

Two members of The ESOP Association have been named among the Top Small Workplaces. Congratulations to Heavy Construction Systems Specialists, Inc. (HCSS) of Houston, TX and Skyline Construction, Inc. of San Francisco, CA.

Here are their profiles from the Wall Street Journal's Top Small Workplaces 2009 article:

HEAVY CONSTRUCTION SYSTEMS SPECIALISTS INC.

BUSINESS: Construction software

BASED: Sugar Land, Texas

FOUNDED: 1986

EMPLOYEES: 106
2008 REVENUE: $19.3 million

Talented job seekers—particularly younger ones—don't just look for good pay. They increasingly look for employers that care for them both personally and professionally.

Heavy Construction Systems Specialists, a Houston-area software developer better known as HCSS, tries to answer that need with a robust wellness program. Its newly opened Sugar Land, Texas, headquarters includes a one-third-mile crushed-granite jogging trail, exercise room, game room, gym with a basketball court and putting green. The company also pays fitness and wellness trainers to counsel employees on nutrition and exercise and offers on-site yoga, pilates and exercise classes—as well as Nintendo Wii game systems to borrow and take home.

Each year, all employees are eligible to receive $100 for each good result in an annual health screening, such as good cholesterol levels, not smoking and moderate body-mass index. HCSS recently contracted with a company that will provide employees doctor consultations over the Internet from its offices.

"I feel like the company really walks the talk, not just talks the talk," says Sonia Byrd, 35, administrative assistant for HCSS. Ms. Byrd says she regularly uses the on-site gym and takes classes and says she's now better able to squeeze workouts into her busy day.

The wellness initiative seems to be a win for both employees and the company, says founder and Chief Executive Mike Rydin. The company-paid annual health-insurance premiums fell to $2,318 per employee in 2008, from $2,950 in 2004. The company credits this to its vast wellness program and to its introduction of a high-deductible health plan coupled with health-reimbursement accounts—to which the company contributes $1,000 to $3,000 annually for employee and dependent out-of-pocket health expenses.

Beyond wellness, HCSS occasionally brings in experts to teach employees important life skills, such as personal finance and public speaking.

Despite all the benefits, HCSS doesn't skimp on compensation. The company has an employee stock-purchase plan—through which all employees own 30% of the company. It also shares profits with employees, and last year gave employees a profit-sharing contribution of cash and stock valued at 22% of their salary. The company holds weekly lunch meetings to communicate with employees, including going over financials.

"We're just trying to make the ideal life for our employees," adds Mr. Rydin.

SKYLINE CONSTRUCTION INC.

BUSINESS: Commercial construction

BASED: San Francisco

FOUNDED: 1996
EMPLOYEES: 50
2008 REVENUE: $101 million

In 2005, two of Skyline Construction's three founders left the company. Rather than find new owners, the shares were purchased by an employee stock-ownership plan that gives stock to employees each year in a qualified retirement account. That move helped usher in a major cultural shift, says remaining founder and now Chief Executive David Hayes. "It's been interesting to watch the evolution," he says. "The ownership culture has really been ingrained into our core here."

Today, the company is 100% employee-owned, and every employee gets shares. Mr. Hayes decided early on to allow unionized employees, such as carpenters and laborers, to participate in the plan even though some advisers tried to dissuade him; they feared the workers might try to bargain for bigger contributions to the plan, among other things. He felt it was important to have everyone, especially front-line workers, involved.

Mr. Hayes also tried to create a more inclusive, engaged environment by sharing financial information and regularly holding meetings to discuss workplace issues. Previously, most decisions were made top-down by the three owners and "then announced," he says.

Each fall, one employee from every department is selected to participate in a two-day retreat at a hotel where the company develops its strategic goals for the coming year. Mr. Hayes also urges employees to come forward with problems—and then brainstorm solutions collectively. In 2006, for instance, some project managers reported that they felt overworked and harried due to juggling duties. He called a dinner meeting with the project managers, and they ultimately decided to start taking on interns to help out.

The team spirit has helped the company stay cohesive in the recession. Skyline has laid off more than a dozen workers due to slow demand in the construction business. In a June meeting, Mr. Hayes asked his employees for ways to prevent further layoffs, and they volunteered to take pay cuts instead. The company cut employee pay up to 10%, but paid back half of the back pay in August.

Claudia Mahallati, a 28-year-old project accountant, says Mr. Hayes and other managers make her feel appreciated by asking for her input. Last year, she and other accountants expressed frustration with the accounts-payable process, which they felt was disorganized. They met with the controller and ultimately decided to set up a collective email account for accounts payable, instead of having customers correspond with individual employees. She adds: "It's little things sometimes, but they're always listening to you."