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Plan buy-back of ESOP shares


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I administer an ESOP plan that only holds Employer Shares.  When a participant terminates the participant sells his shares to the plan in exchange for cash.  The "cash" paid is a cash contribution to the plan and in turn paid out to the terminated participant.  The shares "sold" to the plan are allocated to the remaining participants eligible to receive a contribution to the plan for the year.

However, because of diversification the value of the shares sold this year exceeds the 415 limit for contribution allocation. 

What can be done? Does the value of the shares in excess of the 415 limit belong to the Employer Sponsor outside the plan?

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If the shares have not already been purchased by the plan, and plan terms allow, the employer can purchase enough to keep the plan purchase, and related contribution, for the year below the 415 limits. The employer can beef up the contribution next year by contributing shares if the idea is to keep a fixed number of shares in the plan. Not that I think that is a particularly good idea.

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The company is entirely owned by the ESOP (all Shares of the company are held in the ESOP)

So there are shares "sold" by those that diversified that cannot be allocated without exceeding 415.

Does this mean that the share that cannot be allocated are now owned by the Plan Sponsor outside the plan?

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Dennis G, you mean that the value of the shares of the single departing participant is so great that each other participant's share of the amount contributed to purchase those shares exceeds each of those other participants'  415 limit?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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The plan holds no cash, only Employer stock.  When a participant is eligible for distribution the Employer contributes money to the plan to buy the shares of those participants so that the shares remain in the plan.  The total distribution paid in cash from the Employer for the plan year exceeds the dollar amount that can be deducted as a contribution and allocated to participants to buy the shares of the participants who received distribution. There were a number of participants (more than one) who received cash distributions.

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There are other folks on these boards who are ESOP experts - I am not one of them! However, perhaps(???) one of the following methods might be a possibility? Ask the experts! 

Use excess company funds to repurchase shares; sell newly issued shares of company stock to meet an ESOP repurchase obligation; or leverage or re-leverage the ESOP by borrowing money to fund the obligation.

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Thanks Belgarath for your comments.  Yes I do need some expert advice.  Seems like the shares purchased in excess of the amount that can be absorbed by the participants in a contribution allocation would belong to the "buyer", e.g. the Employer.  If that is the case how to get those shares back into the plan.  Contribute those shares (at what market value?) back to the plan?

 

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Dennis G., I think what the Code anticipates is that the employer buy's back the stock from the employee or the IRA the employee rolls it to, after distribution. Then obviously there is no problem with deduction or 415 limits. The employer can then contribute stock to the plan, within the 404 and 415 limits.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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See my post above. It might make sense to you now.  

This might be a good opportunity for a full review of the ESOP and what it is meant to accomplish as well as how to accomplish it, since assistance of competent ESOP professionals is needed anyway to get over this bump in the road.

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The short term solutions are:

1)  Pay a dividend/S Corp distribution which can be added to the ESOP and isn't an annual addition to the plan so you can put as much cash into the plan as you need.  The down side to this is dividends are allocated to the people who have the stock.  So the people with the most stock will get the most dividends.   This to create in the long run a have/have not issue where those who have stock keep having most  of the stock and new people having not as much.  If this is an S Corp make sure this doesn't create a 409(p) testing issue.

2) Distribute the shares from the plan as part of the payments and have the company buy the shares.  It can be set up the sale of the stock to the company is mandatory.   Talk to your lawyers to make sure your plan document and other documents are set up to do this before you start distributing shares.  This will tend to make the problem of your stock price going up worse as there are less shares outstanding while your enterprise value is mostly unchanged.

Long run you need to work with your TPA, trustees and lawyers to releverage your plan. '

You start by doing #2 above.   You then have the company sell the shares to the ESOP on a long term note taken back by the company.  The goal is to move a good amount of your shares into suspense.  If the shares are in suspense they don't have to be repurchased.  This slows down the churn.  Currently, your problem is you are giving such rich benefits everyone has huge balances when they terminate  This helps slow down the growth of those balances.  

I think you will be stunned what doing this for 2 or 3 years in a row will do to reduce what your repurchase obligation will be over the next 15-20 years will be. 

A good repurchase obligations study ought to help you determine the right amount to releverage. 

If you stock price is really high there might not be much you can do but do some of all of the above and you will still have a rich benefit.   That happens in some ESOPs whose stock price has done very well. 

A good ESOP TPA ought to be able to guide you through all of this. 

I also recommend you start attending conferences put on by your local ESOP Association conference or listening to NCEO webinars and going to their conferences.  There breakout sessions on a regular basis on how to handle this issue.   Not trying to be mean but it sounds like you could use more information/education and you can find it on the cheap at these sources. 

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On 7/1/2019 at 7:42 PM, QDROphile said:

If the shares have not already been purchased by the plan, and plan terms allow, the employer can purchase enough to keep the plan purchase, and related contribution, for the year below the 415 limits. The employer can beef up the contribution next year by contributing shares if the idea is to keep a fixed number of shares in the plan. Not that I think that is a particularly good idea.

It is important here to have distribute the shares to the participants first then do the buy back. 

While it is legal to have the share to be bought back directly from the plan to fund the payments it is way more difficult to do it legally.  You have to make sure the purchase has to be at FMV.  You can't use the prior year end price if it is months old or you risk a Prohibited Transaction problem. 

If  you are going to have the shares bought directly from the plan to the sponsor please get a lawyer to help you. 

As I said in my previous comment a good TPA can guide you though this. 

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