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Hey Tom - heard things might have gotten a little rough down there in Jacksonville - everything ok with you?

no

Probably moot. The CPA will certainly take the recommendation of an International Man of Mystery!

I have a question with regards to the application of an ESOP Valuation as is affects the share price paid to outgoing direct shareholders. My employer is roughly 70% ESOP owned and 30% owned by direct shareholders. When a valuation takes place a new enterprise value is reached by the weighted average of 3 different methods (DCF, CCF, & Guideline). A discount for lack of marketability is then applied for a final enterprise value. The final enterprise value is then divided by the number of outstanding shares to get the new share price. Assuming the new valuation is higher than the previous valuation (as is usually the case), the new share price is higher for two reasons: 1) the company is worth more, and 2) there are fewer outstanding shares than the previous year because there are always many more shares sold by departing employees than bought by existing employees. For example, in a recent year the share price went up 14%; 8% was due to an increase in the value of the company while 6% was due to fewer outstanding shares. Since all ESOP transactions take place on the last day of the year the new valuation is as of 12/31 as is the sale of the stock by outgoing employees. My question – if outgoing direct shareholders are paid using the new 14% higher valuation then they are getting the 6% benefit of fewer outstanding shares. This seems like faulty, circular logic to me – there aren’t fewer shares until AFTER they sell so in my opinion they should only be paid at an 8% premium not a 14% premium. But since it all happened on 12/31 the company paid them out at the full 14% premium. Am I correct in thinking this is a problem or am I not understanding something?

I haven't read the PTE in a while, but I believe the PTE you are referring too is to get Life Insurance out of the plan. I don't think it works in the opposite, to put the Life Insurance into the plan - and as was stated by Bird - why would you do that? It is just a big pain and for what purpose. I don't see any tax advantages, and in fact don't you lose tax advantage? As the money comes out of the plan, it is taxable, whereas in most cases Life Insurance payouts are tax free (from what I know - haven't actually cashed in a policy). So you are taking an asset without taxes and creating a taxable investment.

Simple question, unforgiving answer...but you may be able to allocate some of the money deposited in 2021 for 2020 - if you have deductibility and 415 limit room. That could reduce the owners allocation for 2021 and lessen the contribution required to the employee.

The plan document should specify what happens when a contribution cannot be allocated due to 415 limits. It will probably say that the remaining contribution is allocated to other eligible participants.

From the C&NDT answer book: Apparently either method is valid. It is the position of the IRS that a plan may use attained age (as of last birthday) or age nearest the testing date for purposes of the general test, as long as it is applied in a consistent manner from year to year. If nearest age is used, the equivalent benefit accrual rate (EBAR) for participants born in the first half of the plan year is reduced by one year's worth of interest when compared to using age last.

Why would anyone want to do such a thing? It makes no sense to me but maybe I'm missing something...anyway, the first thing I'd do is try to dissuade him from doing it. Having said that, "transfer" in a plan context really means "contribute" (as in a rollover) or "buy" (as in the plan buys it from him). There is no simple "transfer" (as in "let's just slide this asset into a plan"). The appropriate value is the interpolated terminal reserve - I doubt that is $0 - and as I see it the most likely scenario would be a purchase by the plan.

JHawk, this is very helpful. Definitely helps me think it through from another angle. QDROphile & ESOP Guy, thank you also so much for your thought-provoking responses. I appreciate everyone’s input. I realize that there is a side of this that I have not thought through. Although I have access to all the valuation documents I do not know the exact makeup of the share counts used pre-and post valuation. There is an element of information missing here which probably explains my confusion. I am waiting for various Board member summer vacations to pass and then intend to take this up with the group. At this point I think it is very likely there is a simple explanation for my confusion and I will posit my query as a simple point of clarification rather than an accusation or the like. Many thanks for your insight.

The Order used to allocate a FERS and CSRS annuity is called a Court Order Acceptable for Processing ("COAP"). It is not called a Qualified Domestic Relations Order ("QDRO") since that relates only to plans under the Federal law known as ERISA, and FERS and CSRS are not under ERISA. Yes it is is possible to award 100% of the Employee's retirement annuity to a Former Spouse but I have never seen that done in the 33 years that I have been preparing COAPs. 100% of the "marital share" is not necessarily the same as 100% of the retirement annuity since the marital share is determined by a taking the full and unreduced amount of the retirement annuity and multiplying it by a fraction, the numerator of which is the number of months during the marriage that the Employee accrued creditable service toward retirement, and the denominator of which is the total number of months of creditable service accrued by the Employee at the time of retirement. Only if all of the Employees service took place during the marriage is the marital portion equal to 100% of the retirement annuity. Note that in a Military retirement the maximum that can be awarded to a Former Spouse is 50% of the Members disposable retired pay. The 50% and 55% you mentioned relate to the survivor annuity payable to the Former Spouse after the death of the Employee, and not to the retirement annuity payable during his lifetime. The maximum survivor annuity under CSRS is 55% of the full and unreduced retirement annuity. The maximum survivor annuity under FERS is 50% of the full and unreduced retirement annuity. Note that the full and unreduced retirement annuity is known as the "self only" amount. When you deduct the cost of the survivor annuity you are left with the "gross" annuity. I hope this is helpful.

Thank you both for your feedback, I appreciate it. I do understand my fiduciary responsibility and will see this through. Just wanted to do as much research on my own as I could before taking the next step. I'm wondering if maybe this is a common issue since all ESOP transactions occur on 12/31 (I assume that's the same for all ESOPs that follow a calendar year?). Was hoping someone would say that since the share sale and the new valuation both take place on the same day, the "denominator" would reflect the reduced share count even though it pushes up the sale price for those same shares? Or do companies use the new enterprise value to determine two different share prices: 1. the sale price for the existing shares using a denominator that includes the count of those shares being sold 2. the new share price for future transactions for the new year using a denominator that reflects those sold shares removed? Meaning shares sold on 12/31 would be valued at a different share price than shares bought in the new year (even though the company enterprise value is the same). Does that make sense?

Because you appear to be a fiduciary in some capacity (maybe not the one with direct responsibility, but one with monitoring responsibility) you have a duty to follow ESOP Guy's advice. You have taken the first steps in discharging that duty -- informing yourself about what is going on as you step into your role, and then asking questions about what you do not understand or appears odd to you. The appraiser may not know or may misunderstand how the company is using the appraisal for non-ESOP transactions, e.g. believing that the valuation number is post-sale to to the company by departing employees. The questions of who "owns" the appraisal and permitted use of the appraisal is important to everyone, including the appraiser.

My advice to you is to get a conversation with the appraiser and trustee (especially if it is an outside trustee - bank or trust company). If there is an outside trustee they will have most likely have thought through this but mistakes happen. However, the idea they (both the trustee who is supposed to be reviewing the appraiser's work) have to defend their work is reasonable. Based on your description I agree the denominator sounds wrong. Those two should be able to defend their denominator. To be clear if I implied I thought someone did something wrong I did not intend to do so.

Yes I have the data. I am a new member to the Board of Directors and ESOP Plan Committee, and as such I am involved in the review of the valuation. Let me be clear – I don’t believe the valuators have done anything wrong – the enterprise value they derived seems appropriate and the new share price is accurate for the new year. Also, I don‘t believe anything willful or fraudulent has taken place; the Board and ESOP Committee are comprised of honest, hardworking, intelligent people. However, I think it is possible a mistake has been made. I have no accounting/finance background so the most likely scenario is that I am not understanding something but I’d like to get some feedback from seasoned ESOP professionals before I pose the question to the Board. I am questioning if the company has correctly applied the valuation to the outgoing shares. It doesn’t seem right to me that someone selling should get the benefit of the decreased outstanding share count. That just doesn't make sense to me. Any feedback by those familiar with with ESOP valuations and the setting of the share price is much appreciated.

The first line in bold: Do you know that is true? The second line in bold: Are you sure that is true? To know those are true would require you to know the inner workings of the ESOP and see the appraisal. If you have access to that data fine but the average participant wouldn't know this for sure. I am not an appraiser but I don't know of any appraiser that would do what you are saying if I am understanding your correctly. If you have the kind of access to know what you know do you have access to ask the appraiser questions? They tend to care very deeply about the denominator for the reasons you spell out. I have seen them do so pretty good math to account for the changes in outstanding shares for 12/31 transactions over the years.

you are correct

Because I posted Jokes like this...... Most people don't know that back in 1912, Hellmann's mayonnaise was manufactured in England. In fact, the Titanic was carrying 12,000 jars of the condiment scheduled for delivery in Vera Cruz, Mexico, which was to be the next port of call for the great ship after its stop in New York. This would have been the largest single shipment of mayonnaise ever delivered to Mexico. But as we know, the great ship did not make it to New York. The ship hit an iceberg and sank, and the cargo was forever lost. The people of Mexico, who were crazy about mayonnaise, and were eagerly awaiting its delivery, were disconsolate at the loss. Their anguish was so great, that they declared a National Day of Mourning, which they still observe to this day. The National Day of Mourning occurs each year on May 5th and is known, of course, as Sinko de Mayo.

One for Tom. Bear sees hunter, starts chasing hunter. Hunter finally runs out of breath, turns to bear. "Please -- please -- don't eat me!" Hunter closes his eyes and begins reciting the Rosary -- "Hail Mary, full of grace, the Lord is with you..." -- Bear then exclaims, "Peace be with you! I'm Catholic too!" -- Hunter's eyes open wide, and he breathes a sigh of relief. -- Bear, licking lips, says, "Bless us, O Lord, for these thy gifts which we are about to receive from thy bounty..."