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Questions to ask when terminating a non leveraged ESOP?


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a small C-corp has appx 4mil in assets in its non-leveraged esop. It's a plain vanilla esop. Strictly employer stock, no employee funds. The plan sponsor is considering shutting it down. Of course the main question is has the plan served it's purpose. The company is eyeballing a 401(k).

It is my understanding that the plan does not need to be frozen and that a resolution signed by the board can effectively start the termination process and cease future funding and an optional letter of determination on termination can be pursued.

The company is in good shape financially, is not being sold or going public and the plan has been in existence for several decades.

One question, do terminated participants with account balances as of the last valuation date (12/31/13) and who have not been paid out as of resolution to terminate become fully vested?

They are not considering employer stock as an option in any successor plan at this time.

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Anyone with a balance on the day the resolution is signed will become 100% vested.

You may want to consult a lawyer to help with this some. Most plans will need an amendment to terminate the plan. Maybe that is why you mean by a board resolution but it does need to be in the form of an amendment.

You might also want to make sure the plan doesn't need to be restated or anything like that. That can be a trap.

I little bit of legal fees now can be cheap insurance vs finding out problems later.

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I concur with both replies. To follow up with QDROphile's reply (assuming the employer is a non publicly traded entity), the employer is going to essentially acquire the securites held in the ESOP. Once the exchange of cash for securities occurs, you would then follow the plan termination procedures of any qualified retirement plan.

Before the plan termination process, the following is a short and incomplete list of things for discussion:

Assuming the employer is a non publicly traded company you then have a Valuation/Appraisal issue:

The securities will have to be valued before the employer acquires them.

Plan Trustee Issue:

The Plan Trustee will have to work with the valuation/appraisal of the Securities. Is the Plan self trusteed in that some make up of the employees of the company are serving as the Plan Trustees. The issue of an outside trustee needs to be explored.

Documentation of the securities acquisition needs to be addressed.

As ESOP Guy noted: The employer needs to retain competent ERISA counsel that is knowledgeable about ESOP's.

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I concur with both replies. To follow up with QDROphile's reply (assuming the employer is a non publicly traded entity), the employer is going to essentially acquire the securites held in the ESOP. Once the exchange of cash for securities occurs, you would then follow the plan termination procedures of any qualified retirement plan.

Before the plan termination process, the following is a short and incomplete list of things for discussion:

Assuming the employer is a non publicly traded company you then have a Valuation/Appraisal issue:

The securities will have to be valued before the employer acquires them.

Plan Trustee Issue:

The Plan Trustee will have to work with the valuation/appraisal of the Securities. Is the Plan self trusteed in that some make up of the employees of the company are serving as the Plan Trustees. The issue of an outside trustee needs to be explored.

Documentation of the securities acquisition needs to be addressed.

As ESOP Guy noted: The employer needs to retain competent ERISA counsel that is knowledgeable about ESOP's.

Thanks. It is non-publicly traded and the plan is self trusteed.

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So freeze, pay participants as they become eligible to receive benefits(termination, NRA) and then terminate at a point when the repurchase liability is more manageable.

I have a few ESOPs that have done that. Don't forget to keep track of diversification rights for those people while the plan is frozen.

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  • 5 months later...

Instead of terminating, you might want to consider adding 401(k) and 401(m) provisions to the ESOP. After the company buys all the stock, it could be restated as a 401(k) plan.

We have a client who had a KSOP and sold the company to a private equity firm. After the stock was purchased, their plan was restated as a 401(k).

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To freeze a plan takes an amendment so I think the employees will be notified of the plan being frozen when they get the SMM.

Yes, if the plan is frozen (an odd term for any DC plan as frozen would seem to mean no more contributions will be given and maybe no one new will be allowed to enter the plan) there is no distributable event so I think all employees who are active have to leave their funds in the plan unless it allows for in-service distributions which is kind of rare in an ESOP.

I do think you need to think about if this is the type of event that requires you to vest everyone to 100%. If not, and you aren't allowing new people to enter the plan then you could have coverage testing issues as you would have to track people who count for the test and aren't allowed in the plan when you reallocate forfeitures. Making everyone 100% vested obviously means no forfeitures.

It is these kinds of issues that I hope you are going to run this by an ERISA lawyer before you implement this idea.

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