A Shot in the Dark

Perhaps I am being dense about the question and the sort of transaction that is being discussed. The ESOP as a Qualified Retirement Plan is established the year prior to the year in which the Stock Transaction takes place. For the first plan year a cash contribution is declared, deposited and deducted. During the second plan year, the stock transaction takes place, As an example, let us use the following dates. Calendar year Plan year First Plan Year, 2013 Second Plan Year 2014 For Plan year 2013 a cash contribution of $250,000 is declared, deposited to the ESOP and deducted. April 22, 2014, the stock transaction is completed with correct documentation and appraisal. The stock purchase agreement outlines the terms the of sale of the stock. In conjunction with the Stock Purchase Agreement the the Seller Loan Note outlines the terms of the payments to seller. As part of the terms, the $250,000 is used a payment to the seller as part of the transaction. As part of the December 31, 2014 ESOP Plan Administration, the share release is computed based upon the terms of the Plan Document, the Stock Purchase Agreement and the Seller Loan Note. And, of course another appraisal is completed for the Plan Year End. For the first year of of an ESOP there are almost always two appraisals completed. The initial appraisal for the transaction and the standard appraisal for the plan year end. The initial cash contribution to the ESOP and the use of that cash as part of the Stock Transaction has nothing to do with Suspense Accounts, etc. and the cash contribution is not being used to purchase stock prior to the initial stock transaction.

B: I would like to answer your question in the form of explaining a very typical scenario that occurs: For purposes of the scenario the employer is an "S" Corp with a calendar year fiscal year and ESOP Plan Year. An employer is contemplating an ESOP transaction to take place in 2014, whereby the ESOP will acquire 100% of the outstanding shares of the employer stock from the shareholders. As way to create a 2013 tax deductible contribution and to come with some cash (probably to be used as a down payment) to be part of the 2014 stock transaction, the employer establishes the ESOP for 2013. The employer contributes cash to the ESOP for 2013. That cash is allocated to the Plan Participants and the plan administration is completed. In 2014, the Stock transaction takes place. As part of the transaction, I am assuming you will find a Stock Purchase Agreement Seller Notes Loan Administration Agreement Initial Stock Appraisal - Fairness Opinion The transaction calls for the 2013 cash contribution to be a down payment to the seller as part of the overall transaction. The day of or shortly thereafter, the ESOP issues a check to the Seller in the amount of the 2013 cash contribution. For the 2014 Plan Year Administration, a transfer from the cash account to the Stock account whereby the amount of shares is based upon the computed share release along with any other contributions made during 2014 that were used to satisfy the seller note payments, etc. This sort of sequence of events occurs all of the time.

I concur with Jim. Our firm has also used Sterling Trust out of Waco Texas.

A couple of our clients received these notices as well. As a TPA, we submitted a number of 5558 extensions for our clients. They were sent in a batch and for one reason or another the IRS sent late notices to the clients included in the batch stating the late filing or not timely filed extensions. We had record that the extensions were filed timely and we responded on behalf of our clients. The first few clients received the more standard late filing notice. The last few received the CP 220 notice. On behalf of our clients we filed the same explanation letter as we had with the other late filings. In time we received the same removal of penalty notice from the IRS.

It is more common place today in ESOP's that that the terms of the inside loan (the loan between the Plan Sponsor and the ESOP) are different that the terms of the outside loan (the loan between the Plan Sponsor and a Financial Institution). Yes, on my occasions, we will see the inside loan have a more favorable interest rate and a longer amortization period than the outside loan. I assume you/or the client have retained a good ERISA attorney with ESOP expertise for the transaction.

B: I am not very good ( I do not know how) at linking old topics on Benefits Link but you will find this topic discussed in the recent past. As usual you will find varying opinions. The analysis is something like this: Additonal Securites Law Issues Potential Additional Diversification issues One Plan One 5500 Versus Two Plans Two 5500's Also there is no volume submitter/prototype status for a KSOP. For our firm, we seek individual determination letters for all of our ESOP clients, so we see less issue with the Plan Document status. All in all I think most ESOP professionsals see it easier to have two plans. The National Center for Employee Ownership has authored a paper/book on the subject.

B: The shares are released pursuant to the share release formula. The share release formula (principal and interest or principal only) will be stipulated either in your plan document or possibly in the Stock Purchase Agrement associated with the transaction that was completed when the ESOP acquired the shares. The formula will dictate the share release price. The release price is not based upon the current valuation/appraisal (unless dividends are being used).

B: The plan documents of the ESOP's that I work with define: An Allocation Date - Valuation Date Employer Contributions and Forfeitures and Dividends Define Financed Shares and the manner in which the shares are to be released and allocated The ESOP's that I work with define that Employer Contributions, Forfeitures and Dividends are allocated on the allocation date. The shares purchased and paid for with Employer Contributions, Forfeitures and Dividends will be released pursuant to the share release and allocated on the Allocation - Valuation Date. In all, the Share Release occurs once a year on the allocation date regarlesss of when contributions are deposited, based upon the cummulative contributions made for the year. You need to check your plan document. By the way, there can be several legitmate reasons why an interest only payment is due.

Andy: We mailed our 5558 batch in one envelpe via certifed return receipt requested. The envelope to Ogden Utah was mailed and post marked on July 29, 2013. We received in our mail on September 3, 2013 a stamped copy (It was a stamp that stated Received Deparment of Treasury) with no signature of the return receipt.

By Davis Bacon Plan, I assume you mean a qualified retirement plan (like a profit sharing plan) that has prevailing wage provisions in the Plan. If the above is true, you could amend the 401(k) Plan to allow for prevailing wage contributions and any other requirements and then merge the two plans. Davis Bacon/Prevailing Wage is not a plan type. It is one source of employer contributions. To have a plan provide for prevailing wage contributions, a plan is not required to have immediate eligibility, although the plan can certainly provide for that. A plan can certainly have differing eligibility requirements for that particular source of contribution than other types of contributions.

I would make sure that you and your client have a very good understanding of the provisions American Jobs Creation Act of 2004. Since the passage, most of the community banks that we provide ESOP services to, have chosen to elect "S" status.

B: I can not speak to any form of conversion from Relius to FT William. Nor can I speak to, or offer a comparative analysis to Relius. However, I am very pleased with the FT William document software. We use FT William to draft the bulk of our documents, including DB Plans, DC Plans, 403(b) and from time to time non qualified plans. I am also very pleased with their level of support and repsonse to not only use of software issues, but also technical issues as it relates to document language, etc. I think their amendment program works well. And yes, they offer a good Pension Library.

ESOP Guy: We use FT William exlcusively for our 5500 package. Once you get familiar with the system you are going to love it. At least I do. You do receive confirmation regarding the filing. They system will inform you that the filing has been accepted by EFAST. On the main page of the 5500 for the specific client, you will find a line called "Acceptance Status". That line will tell you the status of the filing. You can also click on the "Details" button. You will be given the details of the filing along with a confirmation of said filing.

We have a few plans that use Guardian for the investment platform. Speaking to their administrative processes and capabilities, I find them no different than most others. They are on par with Principal, Transamerica, Lincoln, ING and many others.

ESOP Guy is correct. Regardless of the voting rights, the shares are owned by the trust and not the individual participants. Attribution rules do not apply.

I agree with Marcus and ESOP guy. To blatanly state there has been some level of fiduciary breach is not a factual statement.

B: There has been extensive discussions on this topic at both the NCEO and ESOP Annual Conference. Several law firms that work extensively with ESOP's have published articles on this subject as well. The same is true for ESOP consultants and appraisal firms. I am also aware of a few PLR's. In June 2011 there were comments on this issue by the Department of Treasury. Unfortunately, I do not have handy any sort of electronic version of said documents. Using your favorite search engine, if you type in the words "ESOP Price Protection" I believe some of that stuff will be available.

Just as a formal distribution policy does not have to be part of the plan document, but is formally approved, adopted and operated by by the Plan Trustee or Plan Administrative Committee, so can the price protection guarantee be operated. In B's example, I believe ABC Trust Services is serving as the Independent or Outside Trustee for the Plan. So the agreement is a written agreement with the Trustee. Or at least it should be. Any dollars flowing to the Trust must either be a contribution or a dividend as ESOP guy has stated. Also in this debate, (the part about this program being complicated) I am assuming the appraissal was completed correctly with the appraisers having knowledge of the the price protection, the stock purchase or redemption agreement was executed correctly (which would probably include the price protection language, etc.)

I might add that that National Center of Employee Ownership (NCEO) produces a publication on this topic. www.nceo.org/Floor-Price-Protection-ESOP-Transactions/pub.php/id/476

B: I have seen the price protection guarantee in a few transactions. Mostly in the manner that you illustrate. They do occur and they are complicated. To say that they are routine is a bit much. There is a fair amount of debate in the ESOP community regarding these strategies. The price protection guarantee, serves as protection for those participants near a disribution event whereby the share price is affected by some sort of financial transaction, that would cause a short term (period of months to a short amount of years) negative impact. For example: ESOP owns 70% of outstanding shares and enters into an agreement to purchase the remaining or outstanding 30%, in a levaraged deal. The acquistion/the debt causes a drop in appraised value and share price. This guarantee process sort of replaces tle old days when an "floor" price structure would be built in. Our firm provides administration services for many ESOP's. In completing a few (very few) recent transactions, we have seen this sort of structure.

K: Typically the beneficiary for life insurance held by the plan on behalf of a plan participant is the plan trust/trustee. In the case of the death of the plan participant, the death benefit proceeds would be paid to the trust. The trust would then pay the death benefits along with any other plan balance to the beneficiary of the plan participant. The PS 58 costs and reporting or non reporting, becomes part of the income tax calculation.

If it were my project: Create the 5500 Filings Mail a signed printed copy of each 5500 along with a cover letter and the DFVCP Filing Fee to the Department of Labor (Certified Return Receipt) Make sure you mark on the 5500 the filing is under the DFVCP program Electronically File the Returns

We recently (last 24 months) assisted a takeover client with prepration of 6 years of prior years' Form 5500's. The client used the DFVCP program, paid the fee, etc. It went well, other than the continuous IRS late notices. Over a period of months we responded to individual year late notices from the IRS. Each and every late notice was responded to with the same formatted cover letter (changed for the specific year) stating that the return had been filed under the DFVCP program, with a copy of the cover letter for the original DFVCP filing and a copy of the cancelled check. In response to our responses to the original late notices, the IRS sent a communication citing the removal of the penalty for each and every year. So, over a few months of correspondence with the IRS, it was all taken care. As a hint, build in your time to deal with the IRS responses as part of project fee quote to prepare the 5500's and assit with the DFVCP filing.

Another choice is Fireman's Fund. We have used them for years.

You do not give enough information to answer your question. For example: What are the eligibility provisions stated in the Plan Document? What are the allocation provisions stated in the Plan Document?