Anybody know of anything precedential re meaning of 10 years of partic

[Dave Baker]

The $64,000 question: is it 10 years since one became a participant in the plan, or ten years of service (1,000 hours or more?) for the employer while a participant?

401(a)(28) requires that an ESOP must grant a "qualified participant" the right to diversify 25% of his or her account into something other than employer stock in the year in which the employee has "completed at least 10 years of participation under the plan and has attained age 55."

ESOP is established in 1988. Some employees leave during the 90s, before being in the plan for 10 years. But their accounts in the plan now have been in the plan for 10 years (not yet distributed). Some of them are age 55 or more and want to exercise the diversification option (or a distribution right, in lieu of diversification). What result, assuming the plan document parrots the language of the tax code in this regard?

[This message has been edited by Dave Baker (edited 01-07-99).]

[Guest Larry Goldberg]

We use plan language that looks very much like Dawn Hafner's, and we also have received many favorable determination letters on this language. As for authority, the statue is ambiguous. Also, in IRS Notice 88-56, 1988-1 C.B. 540 (5/9/88)Guidance on ESOP Diversification Requirements, the IRS failed to address this issue. The Blue Book on the Tax Reform Act of 1986 makes clear that if an employee terminates after completing 10 years of participation but before he attains age 55, he can "age-in" to diversification when he reaches age 55. However, the Blue Book does not address the situation of a participant who terminates employment with less than 10 years of participation, and whether his "years of being a participant" would be treated as "years of participation."

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[Guest bswift]

dave, my recollection is that, for the 10 year rule, the irs requires actual participation and not just participant status by virtue of having an account balance. Dawn, re your question of what amounts to tacking participation, i know there is a private letter ruling in which the irs takes the position that where a profit sharing plan converts to an esop, the employer is required to take into account pre-esop participation. However, its only in a plr and i have a determination letter for an esop that was a profit sharing plan in which we specifically stated that the 10 year period began on the conversion date. the irs approved the language and if they change their mind i feel comfortable that we'd have 7805(B) relief. hope that helps.

[Guest Larry Goldberg]

On your second question, I think the IRS determination letter process is the answer. Prepare the plan language the way you wish and ask for a determiantion letter. From a policy standpoint, it would seem that if the assets of the former profit sharing plan will be used to buy company stock after the plan conversion, years of participation in the profit sharing plan should count. If the profit sharing assets will not be used to buy company stock, then a good policy argument could be made that years of participation in the profit sharing plan are unrelated to the acquisition of employer securities, and should not be counted towards the 10 year requirement. We have received favorable determination letters on both approaches.

However, see PLR 9213006, and the following statement made in the PLR: "H. R. Rep. No. 100-795, 100th Cong., 2nd Session 1, 196 (1988), which was followed by the Conference Report, states that, for purposes of the 10-year rule, participation in a predecessor plan is taken into account."

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[Dawn Hafner]

Great question Dave. The ESOP document we use (from PPD) gives the following definition relating to the 10 years of participation:

(i) "Qualified Participant" means a Participant who has attained age 55 and who has completed at least 10 years of participation in the Plan. A "year of participation" means a Plan Year in which the Participant was eligible for an allocation of Employer contributions, irrespective of whether the Employer actually contributed to the Plan for that Plan Year.

We have obtained favorable D-letters on these documents. So, in your situation, if they weren't working you would not count that year under this plan.

I have another question related to this topic though. How is the 10 year issue affected when a non-ESOP converts to an ESOP? Do I count all years of plan participation, even before an ESOP? Our ESOP document simply states 10 years of participation in the "Plan". The "Plan" was in existence prior to the ESOP conversion, so I would think we should count all years of participation even prior to the Plan being an ESOP. Thoughts?

[Guest ESOPwizard]

A determination letter only protects the plan from disqualification.

It doesn't protect the trustees from lawsuits. Congressional policy

is to allow employees nearing retirement age to diversify how their ESOP

accounts are invested. I recommend letting the terminated employees

either take distributions or diversify the investments in their accounts.

[Dave Baker]

The trouble with interpreting the plan in a way that would benefit the ex-employees more than the long-time employees is the liquidity problem ... there is still an exempt loan outstanding, and the finite cash available to the plan sponsor is needed for payments on the loan.

The usual exception to the put option rules, that payments from the plan sponsor to a participant who exercises a put option need not be made until an exempt loan is paid off, doesn't seem to apply to stock distributed per the age 55 diversification/distribution rights ... or does it?

[Guest bswift]

esopwiz - i could be wrong, but i didn't think that was an ERISA provision that corresponds to 401(a)(28). if that's so, what's the basis for a participant's lawsuit? The irs approved the language in the plan and the trustee's obligation is to administer the plan in accordance with its terms.

[Guest ESOPwizard]

I'm not a litigator, and I offer no opinion regarding what a court would

rule.

Take the case of a former employee with a high enough net worth to be able

to afford to litigate, a very high portion of his net worth in the ESOP, and

a belief that the company's management make the stock a poor investment. If

he can't be cashed out because his ten years of participation aren't all years

of active participation, will he be looking for a way to bring a lawsuit against

the plan administrator? Will he be able to survive a motion for summary

judgment? From the employer's point of view, is it worth litigating over?

Depending on the facts, could he have grounds for a wrongful discharge action

(especially if he was fired with nine years of active participation)?

I've seen the IRS grant determination letters to plans with provisions that clearly

conflict with the statute. I've seen determination letters given to prototype plans

that have provisions that conflict with 20 year old revenue rulings. All that the

determination letter means is that the IRS won't retroactively disqualify the plan

for violating a document (as opposed to an operation) requirement. It doesn't mean

that the document is correct.

[Guest Larry Goldberg]

Two additional responses:

First, the rule in Section 409(o)(1)(B) only applies " . . . for purposes of this subsection . . ." So, for purposes of Sec. 401(a)(28)(B) diversification, the leveraged shares are included in the participant's account and subject to diversification.

Second, Title I of ERISA would limit a participant who is suing on a benefits claim to collect only the benefit promised by the plan document. If the plan document does not, by its terms, permit diversification to the participant because of his failure to complete 10 years of participation as defined by the plan document, the participant would have no claim under ERISA.

[Guest benefitsrus]

Have there been any developments on this issue?

A participant had 8 years of active participation in the ESOP when she terminated employment (after age 55). Her account is still in the ESOP and now it's is 10 years since she began to participate.

The ESOP plan document provides that "each Participant who has attained the age of 55 years of age and who has at least 10 years of participation in the Plan" has the right to diversify.

Does this participant have the right to diversify her ESOP account?

[RLL]

Hi benefitsrus ---

If "participation in the plan" is interpreted as "active participation," the answer to your last question is "NO." See the earlier discussion in this thread.

This is an example of having a poorly drafted plan document which merely repeats the ambiguous statutory language and gives insufficent guidance as to how the provision is to be administered.

[Guest jsample]

If shares were purchased with funds from an ESOP loan, distributions of those shares do not need to begin until the plan year following the plan year in which the ESOP loan is paid in full. Does this apply to diversification requirements? In other words, can the plan delay offering diversification to eligible participants until after the ESOP loan is paid?

Thank you.

[RLL]

Hi jsample ---

The ESOP diversification election under IRC section 401(a)(28)(B) is not governed by the benefit distribution requirements of section 409(o). Accordingly, the deferral for leveraged shares which is permitted by section 409(o)(1)(B) is not applicable in connection with required diversification.

[Guest lworthington]

is there anything new with this topic.

does the rule of 10 years of participation still apply and age 55.

Is there any requirement of the additional investment choices?

thanks for the help

lerae

[RLL]

Hi lworthington ---

There has been no statutory change to the diversification requirement of IRC section 401(a)(28)(B), and I am unaware of any recent regulatory guidance. The 10-year participation and age 55 rule still applies, and I don't know of anything new regarding the requirement for having at least three investment options for ESOP diversification.