BeckyMiller

The problem of whether or not ESOPs are subject to SFAS 150 is due to the language used in paragraph 17 of the pronouncement. This reads: This Statement does not apply to obligations under stock-based compensation arrangements if those obligations are accounted for under....AICPA Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans, or related guidance. However, this Statement does not apply to a freestanding financial instrument that was issued under a stock-based compensation arrangement but is no longer subject to.... SOP 93-6, or related guidance. So - the first sentence refers to accounted for under the standard, the second refers to subject to. All ESOP shares are subject to SOP 93-6 if you have GAAP statements. At this time, the FASB staff has given informal opinion, that this means that all ESOP shares are not subject to GAAP until such time as the shares leave the trust. (Once distributed, the shares are no longer subject to SOP 93-6). They are considering issuing additional FASB staff guidance on this matter.

You need to look at your plan's Summary Plan Description to find out what this means specifically. Generally, terminated means that you don't work there anymore. Break-in-service is a technical term that means that a plan year has passed in which you worked 500 or fewer hours. It is very common in ESOPs that you have at least one break in service year before you are eligible for a distribution and the plan may delay distributions even longer depending on many variables. You should be able to find that in the Summary.

Kirk - Are you saying that this is a significant detriment, as discussed in Rev. Rul. 96-47? I know Alan Tawshunsky discussed an ESOP type situation at a professional session. In his hypothetical, he suggested that if the participant had several investment options, including a company stock fund and former employees were allowed to stay in all options, but the company stock fund, he would not see it as a "significant detriment." In the question posed, the segregation went into a savings account. That could be a significant detriment as was discussed in the ruling if the shares have been doing very well and the interest rate on the segregated amounts are consistently lower. I can see lots of fiduciary issues, particularly in many plans where the fiduciary is permitted to segregate, but not required to segregate. So I am not a big fan of this provision. But, if this language is in the plan document and they have received a determination letter, does the sponsor have any protection? Does that protection change if the language was permissive, not mandatory?

If the goal is to add an ESOP to get tax-free character on the income, I don't know of anyway for your client to get there. I am assuming that the 2 family members are the only eligible employees.

I am uncertain which kind of bond you are referring to in your message? Is this the basic ERISA bond? If so, I have not heard anything about a problem getting this bonding and we work with many small ESOPs. If you mean fiduciary bonding, there may be an issue. I suggest that you check with the ESOP Assocation at www.esopassociation.org. They follow these issues. If you mean the fidelity bond for corporate officers and directors, I would be surprised if this was true. Again, I have not heard any problems on this matter from my clients.

You need to watch the attribution rules. IRC Section 1372 (the fringe benefit rule for S Corporations) uses the rules under IRC Section 318 which does not include any attribution out of the ESOP to plan participants. This is in contrast to IRC Section 267 which does include such attribution.

You are correct. The put language that you have described and the right of first refusal are the basic forms of such provisions as discussed in the IRC Section 4975 regulations and IRC Section 409(h). This potential must be recognized by the plan's fiduciaries.

Glad to hear that your stock has increased in value. If your plan provides for a lump-sum distribution in employer securities(certain plans can make cash distribution only), the taxable portion of the distribution is the cost basis of the stock to the plan. This amount would be reported to you on the Form 1099-R. It is a good idea to ask about this value, however, when you take the distribution. This is because that cost basis number is not always obvious from the activity that you have seen in your account. The stock may have dropped in value in the very first year, before you saw any allocation or your employer may be an S corporation (a special kind of tax entity) where the basis is recalculated every year for income tax purposes. Anyway, once you get through that, the information you received is correct. If you get to exclude the "Net unrealized appreciation" from taxable income, it is also excluded from the premature distribution penalty of 10%. This is GENERAL guidance, you should check with your tax advisor. There may be other reasons why it would be better to take a different approach on the distribution - installment payments, rollover to an IRA and take funds out as you need to make tuition payments, etc. Good luck!

I suggest that this is not an ESOP, but an ESPP - Employee Stock Purchase Plan under IRC Section 423. If it is you should check with the National Association of Stock Plan Professionals - NASPP.com

No threshold. The ESOP is intended to be invested primarily in qualified employer securities. There is an old DOL Advisory opinion that says that this is a life cycle determination, not a point in time. However, I recall a recent IRS action that said that there was some time limit on how long the ESOP could be in existence without ever having stock. It seems to me that it was a relatively short period - 2 years???? It was probably a PLR, since that seems to be where all the ESOP guidance is found. It may have been a case. Anyway, standard fiduciary conduct applies to the investment of the funds. So, if the fiduciary wants to hold them fairly liquid in anticipation of stock becoming available, they need to document that. Is there a reason why the employer won't contribute new stock to the plan? (I realize that is not always easy, but if the ESOP status is important to them, it may be advisable.)

The auditor's responsibility with regards to the tax attributes of a plan are outlined in Chapter 12 of the AICPA Audit and Accounting Guide - "Audits of Employee Benefit Plans." Paragraph 12.03 b encourages the auditor to "inquire" regarding the applicable tests. Since the Form 5500 can be extended to 9 1/2 months after year-end, the auditor may be justified in his or her questions regarding the plan's internal control procedures when the testing is not completed in sufficient time to allow the auditor to make these "inquiries." Typically, the auditor will require the plan administrator to sign a representation letter that the plan is substantially in compliance with the law and its terms. Getting that representation letter is typically requires before the audit report can be delivered. The failure of the ADP/ACP test may require correction that is either a distribution to high paids or an additional contribution. Either event would have impact on the financial statements and depending upon the nature of the plan, the impact may be material. So, though I agree that it is rare that plans are disqualified and the penalties fall on the plan sponsor, the auditor can't just issue a report when there are concerns regarding either internal control matters, receivables or disbursements.

Amazing - I have a similar situation. Individual can get the surgery done in the US for $80,000 at a hospital that has only done 3 or 4 such operations. That facility actually recommended that the person go to France where the same surgery is $3,000 and is done by the physicians who instructed the guys now doing it here in the US. These French physicians are board certified in the US. (This is a different guy with a different medical complaint.) So - now what do you think? I say - Yes. P.S. There is no vacation attribute to this trip. The individual involved is in constant pain at this time. His wife is accompanying him to help him through the stress of travel. But, they have young kids here at home, so they will come home as soon as they possibly can.

Kappel - I am sorry that you find yourself in this unhappy situation. As to your ESOP balance, you say you have been on long-term disability for 6 years. Has it been six years since you last worked for the company? If yes, I would check back with the employer to see if you now have a right to a distribution. The ESOP distribution rules are VERY complicated. But, if your employer's plan was established after 1986 or acquired shares after 1986 and IF the debt associated with those shares has been paid off, you may now be eligible to commence distributions. You need to find a copy of the Summary Plan Description. If you don't have a copy, send a written note to the employer requesting one. (You really need to do this in writing, sorry.) If your company's plan includes only stock purchased before 1987, they can make you wait until retirement age to get a distribution, so it is quite possible that this won't help. But, it is worth checking into. Good luck. Unfortunately, you can't offer your ESOP balance as collateral on a loan or otherwise assign it to get cash now.

I don't see that you are going to get clear advice on this. Several years ago, the IRS succeeded in a case called INDOPCO. (112 SCt 1039, 1992) Since then, there has been a ton of discussion over what items that have long standing value can be deducted currently, amortized, etc. The general rule is that costs incurred to establish a qualified retirement plan are currently deductible. Costs incurred to establish debt are generally amortized over the period of the loan. Costs related to capital structures, etc. are capitalized. Some can be amoritized. See IRC Section 263 for a general discussion of capital expenditures. Section 197 regarding amortization of goodwill. Section 195 regarding amortization of start-up costs. And Rev. Rul. 99-23 may be on point to your question.

Not enough information. Who owns the rest of Company A? What business relationship, if any, is there between the two entities? I would say that this is the kind of detailed question that shouldn't be answered through a discussion board. Too many technicalities. Start at 414 and work your way through (B), ©, (m), (n) and (o). I would either hire someone who works with affiliation or go to a technical resource that includes these rules as well as the regular tax code rules.

2(B)(4) is for direct ownership of assets (stocks, bonds, real estate, etc.), as opposed to indirect ownership through some pooling technique - pooled separate accounts, CCT, MTIA, mutual funds. I realize that mutual funds seem different from these other vehicles as they are traded. If you have been doing 5500's for a long time, you will have noticed how the trend in reporting is to allow more and more reporting at the entity level (CCT, MTIA, etc.) and less detail at the plan level. (I have been doing 5500's for so long, that I did plan reporting before there even was a 5500!) Hope that helps.

Not sure what the prospects are requesting? Is this a DB plan or a DC plan? For a DC plan where they just want to help the participant anticipate how much additional retirement income he or she could get out of increasing their savings, I LOVE http://www.smartmoney.com/retirement/401k/...m?story=planner It builds this cool visual. I haven't tested it under all fact patterns, but I have looked at it for the basic 401(k) savings impact and the results are predictable.

I agree with the auditor. If you look at the Form 5500 instructions to line b(10), it says to compute it in the same manner as for b(6)-(9). The instructions for those lines say to aggregate all types on income or expense, gain or loss associated with those investment types on this line.

This sounds trite, but you have to look at your plan document. The language about re-entry of former participants is frequently found at the end of the allocations section or in the vesting section. (Though it could be where ever the drafter chose to put it.) In my experience, eligibility to share in forfeitures generally follows the same rules as eligibility for an employer contribution. Note that if they terminated without a break-in-service many documents will treat them as if they never left for purposes of eligibility to share in allocations. This is kind of a weird result in today's world where distributions are processed so quickly. Theoretically, a participant can share in his or her own forfeiture. When processing this person, remember the payback rules.

Dawn, we found that doing ESOPs on Relius is frequently too complicated to justify the investment in special programing. You get too many different populations of eligible and ineligible employees, unique attributes for dividends, tracking basis on released shares at historical cost (not FMV on allocation date), measuring 415 under special ESOP rules, etc. For a non-leveraged plan, it works great. But after that, it needs to be manipulated.

What do you mean by a line of credit form? Do you want a lending relationship where the plan can draw down funds periodically to fund the purchase of shares that participants choose to put back to the ESOP and the trustees agree to honor the put?

The 80-120 rule was added to the regulations in 1980. (Sheesh - it seems like only yesterday....) It refers to an election, but not an irrevocable election. I am aware of at least one instance where an employer filed the form for a large plan when they passed through 100 participants because they were unfamiliar with this rule. They later amended that filing to file as a small plan and to take advantage of this rule for the entire period until they exceeded 120. Such amended filing was not rejected. BUT, if the plan was required to file the form for a large plan, because they were over 120 in the prior year or because they were over 100 in their first year, they do not come under this rule. They would have to fall below 100 to get the privilege of the small plan filing status.

But remember under the ERISA Reorganization Act of 1978, the IRS retained control over the prohibited transaction rules as they relate to statutory ESOPs.

Do you mean does a shift of funds from interest bearing cash to another investment choice have to be included on the more than 5% transactions? One of those questions that has been unanswered since the Form 5500 series first developed. A member of the DOL's chief accountant's office once told me that anything that is listed as an investment on Schedule H is considered in the reportable transaction disclosure. This is line 1© of schedule H and it includes interest bearing cash. If you look at the intent of the schedule, however, I think you get a good sense of the answer. The schedule is looking for major shifts in investments, churning, etc. As such, depositing funds into interest bearing cash that are then withdrawn and invested in a long-term vehicle shouldn't require 2 disclosures - the liquidation of the interest bearing cash and the purchase of the other investment. On the other hand, if your interest bearing cash is actually a money market fund and it is a long-term investment vehicle in today's chaotic market, maybe it should be. Sorry - non-response, response.

My recent conversations with the Chief Accountant's office at the PWBA would lead me to a different conclusion that what Katherine has outlined. However, the PWBA/DOL has been extremely cautious in issuing any guidance beyond the 1975 interpretive bulletin. They make many, negative public comments. The AICPA has specific guidance on these matters which can be found on their web site at http://www.aicpa.org/about/code/et101.htm#101-3 My current advice is that if the CPA firm provides any service to the plan that impacts items subject to the audit, at a minimum the auditor has to be absolutely scrupulous is the conduct of the audit - no short-changing of procedures, relying on representations from other members of his or her firm, etc.