Plan sponsor is 100% owned by an ESOP - who is a key employee?

[Tom]

I've been provided names of corporate officers and those who are on the ESOP Board of Directors.  The 5 corporate officers are also on the ESOP board of directors plus the ESOP board has another 9 individuals - so potentially 14 "officers."  I realize to be a key employee they must have wages of $200,000 for 2022.  That will eliminate most of them.  I assume both corporate officers and ESOP directors are considered "officers" for top heavy purposes?  

Top heavy testing for large clients like this (350 employees) who make no employer contribution is always very concerning.  They've been a long way from being top heavy but we certainly want to build in the correct data in this determination.  I'd normally want to push this client off to another TPA but they came from one of our best referral sources.

Thank you for your comments.

[Nate S]

The best way I get a client to determine "officer" status is to identify those executives who have the authority and capacity to enter into agreements that can change the course of the company or the way they do business.  This can take the form of:

-strategic partnerships or acquisitions

-establish or close divisions/plants/operational groups

-sales/services that would engage X% of capacity, or are worth $X

Corporate officer designations can be a trap if the Secretary is little more than the CEO's admin.  Likewise CFO/Controller/Treasurer are fraught because checkbook power doesn't equal contract authority.  But maybe the in-house attorney?

Inclusion of the ESOP Board members will depend upon the ESOP agreements and corporate bylaws regarding voting power.  Yes, 14 members of a 100% ESOP would each have more than 5% voting power, no wage test necessary.  Are all Board members also employees? What voting power do they actually possess?  Does the Trustee actually vote the ESOP shares?  Does the Board direct how the Trustee votes?

The three Key employee tests are not the simple thresholds that the HCE hurdles are.

[ESOPMomma]

Nate S has provided great guidance with regard to who truly is an "officer."  But in an ESOP company, the shares in a participant's ESOP account are NOT direct ownership.  In a 100% ESOP owned company, there could not be any "owners" other than the ESOP.  So you can essentially disregard the ownership test in determining Key Employees... you would simply base it on the officer and compensation thresholds.  Hope that helps. 

[Tom]

Thank you.  I will tell them in absence of other information or legal opinion, we will include all 14 as Key Employees to be conservative.  Fortunately they are far below 60% as some ESOP board members have no 401(k) plan balance.   Still, I am going to ask them to take this issue to an ERISA attorney.  We have no access to the ESOP agreements or bylaws (nor do we want to.)

[Nate S]

On 3/18/2023 at 12:47 PM, ESOPMomma said:

Nate S has provided great guidance with regard to who truly is an "officer."  But in an ESOP company, the shares in a participant's ESOP account are NOT direct ownership.  In a 100% ESOP owned company, there could not be any "owners" other than the ESOP.  So you can essentially disregard the ownership test in determining Key Employees... you would simply base it on the officer and compensation thresholds.  Hope that helps. 

Voting power of the Board/ESOP committee members cannot be ignored if the corporate bylaws or ESOT agreement grant them the ability to influence the Trustee, or if it is a Directed Trustee.

Warrants/Grants/Options must also be reviewed if there is outstanding treasury stock.  SAR's, Phantom Stock, and other forms of synthetic equity may also create effective ownership.