Marcus R Piquet

GMK, I whole-heartedly agree that the sooner distributions can be paid the better. Diversification distributions need to be paid out in Q2 to be timely, so our goal is to help all of our calendar year-end clients complete the annual recordkeeping by April 30. That said, it's tough to make that kind of schedule when you have to wait for the appraisal and the plan audit. Best regards, Marcus

GMK,I'm a little puzzled. It is exceedingly common (in fact the norm) for non-publiclytraded ESOPs to make distributions in the third or fourth quarter of the planyear, and those distributions are always valued at the most recent valuationdate (i.e., the previous plan yearend) no matter how much the stock value mayhave changed during the plan year. See IRC Regs §54.4975-11(d)(5). This wouldapply to any distribution, not just one that was offered under thecircumstances that Pennysaver brought up.

Pennysaver, We typically do NOT take advantage of the 60-day window, rather we accelerate the distribution offer to at least 30 days BEFORE the end of the plan year so that we don't have to revalue the account. Marcus

Dear Pennysaver, Whichever provisions results in the earliest distribution wins. Generally §409(o) wins out, but if you have a participant terminate between the ages of 60 and 65 §401(a)(14) often wins. To further complicate matters, remember that §409(o) applies only to shares acquired post-1986, so for the older ESOP's you have to check the plan document to see if §409(o) applies to all shares or only the post-1986. Lots of fun for TPAs. Best regards, Marcus

Not to beat this to death, but I think that an ESOP that distributes shares and then repurchases those shares would never issue a 1099-B. Again, 29 CFR 1.6045-1(a)(1) states "A broker includes an obligor that regularly issues and retires its own debt or a corporation that regularly redeems its own stock." I would argue that an ESOP trust that repurchases shares from a participant is not the same as a corporation redeeming its own stock. Therefore, I would only consider issuing a 1099-B in the very specific case ofan ESOP that distributes shares that are regularly redeemed by the Company. As an aside, it's not unheard of for an ESOP trust to distribute shares in a lump sum and then repurchase those same shares – this would be done in order to secure net unrealized appreciation ("NUA") treatment for the participant. Refer to box 6 of the 1099-R, where the amount of NUA would be reported. (of course NUA treatment can also be accomplished by a lump-sum distribution in shares followed by a repurchase/redemption by the Company, which could require both a 1099-B and 1099-R) Of course the whole issue is ridiculous - if it were up to me I'd never issue a 1099-B, as I'm sure mistakes are made on 1040's as a result. Common sense would dictate that ESOP-sponsoring companies that issue 1099-R's should never have to issue a 1099-B for the same transaction. It serves no purpose but to confuse. I've never heard of a single case where an employer was penalized for failing to issue 1099-B's in this situation. Even if the IRS stupidly attempted to assess such a penalty, perhaps the company could argue that these are not true "redemptions" but rather a very specific §409(h)(1)(B)"repurchase" transaction.

If the ESOP "assumes the repurchase obligation" then I take that to mean that distributions are paid in the form of cash, not stock. In this case the company is not redeeming the shares, and the 1099-B requirement would clearly not apply.

tm3333 - It would be great if you could give us some more details. What exactly is the current benefit, and what is the proposed change to that benefit? Kevin points out that §411(d)(6)© provides an exception for ESOPs that allows it to modify distribution options in a nondiscriminatory manner. At that point I would ask if this is a blanket exception that applies to all features of the distribution options (timing, form, manner, etc). Regs 1.411(d)-4 Q&A-2(d) expand the discussion to say that the following explicit modifications are allowed: 1) lump-sum or installment options with respect to unmarketable employer securities 2) distributing cash instead of stock when the company becomes substantially employee-owned or is an S corporation 3) modifications because the employer securities become readily tradable 4) modifications because the employer securities cease to become readily tradable 5) modifications because there is a sale of substantially all the stock of the employer; or 6) modifications because there is a sale of substantially all of the assets of the employer's trade or business It has been my understanding that the distribution policy may clearly be revised to change between installment distributions or lump-sum (i.e., the "manner"). Also, if the company is an S corporation or if the corporate "charter or bylaws restrict the ownership of substantially all outstanding employer securities to employees or to a trust described in section 401(a)" (§409(h)(2)(B)(ii)(I)) (i.e., the "form"). However, what about timing? For example, if the Plan accelerates the timing of non-retirement distributions to the year after the year of termination, can it later go back to the fifth year following? I've received conflicting answers from different ESOP attorneys. I see no support for deferring the timing. One ESOP attorney told me that you can do this if the plan maintains the fifth-year following provision, but you have a separate policy that temporarily allows for the first-year following provision. I think they're relying on the statement in 1.411(d)-4 Q&A-1© that states that there is no protected benefit if the benefit is not "provided under the terms of a plan." In other words, if it's part of the separate distribution policy and not part of the plan document, there is no protected benefit. I find this logic troubling, however, since many ESOP attorneys believe that the distribution policy is effectively part of the plan document. We are extremely careful about advising clients to limit any acceleration of benefits in a distribution policy. If there is to be an acceleration, we generally suggest that they limit it to small balances (e.g., if the balance is less than $10K distributions commence the year following the year of termination. Otherwise it's the fifth year following the year of termination). Then, so long as we don't reduce that threshold in the future I don't think we have a cutback. I'd love to hear anyone else's input on the timing of benefits! Marcus

I would say yes to both. I see no distinction between an employer contribution in the form of a match vs. the more typical discretionary, profit-sharing contribution. Dividends on unallocated/suspense shares are always considered compensation expense, as opposed to those paid on allocated/released shares which are charged to retained earnings. Since dividends on unallocated shares are compensation expense, I treat them the same was as contributions when used by the ESOP to service debt - that is, they are adjusted to the average FMV of released shares. Attached is a hand-out we've used at the ESOP Association conferences on this topic. Originally it came from Becky Miller, who co-authored SOP 93-6. I've since modified it (with her permission). Here's the relevant FASB guidance: FASB ASC 718-40-25-16: "Because employers control the use of dividends on unallocated shares, dividends on unallocated shares shall not be considered dividends for financial reporting purposes. Dividends on unallocated shares used to pay debt service shall be reported as a reduction of debt or of accrued interest payable. Dividends on unallocated shares paid to participants or added to participant accounts shall be reported as compensation cost." Compensation cost, FASB ASC 718-40-30-2: "For employee stock ownership plan shares committed to be released to compensate employees directly, the employer shall recognize compensation cost equal to the fair value of the shares committed to be released. The shares generally shall be deemed to be committed to be released ratably during an accounting period as the employees perform services, and, accordingly, average fair values shall be used to determine the amount of compensation cost to recognize each reporting period (interim or annual)." Let me know if you have any more questions. Marcus Piquet, CPA Journal_Entries_2011_11_02.doc

I'm not exactly sure what you mean by "re-amotization of the note." When the trust makes a prepayment on the note, you simply update the amortization schedule to reflect the prepayment. Usually (but not always) this does not affect the amount or timing of future payments; you simply continue making the previously scheduled payments. The result will be a shortened term - the loan will be paid off sooner. This is just like paying on a home or auto loan; just because you make a prepayment, your future payments are not effected other than there will be fewer of them. I do have a few clients, however, whose stock acquisition notes allow prepayments to cancel future payments, as long as the principal is amortized at least as quickly as the original schedule.

Tom, I don't know the answer to your questions for sure, but I can tell you how we've handle them. #1 - Yes. ERISA attorneys have instructed us this way. #2 - Yes. Why not? #3 - Yes, I think so. Not terribly difficult to find that kind of trustee though, just more expensive. #4 - No. We've used the same logic - the entire thing has already been reported on a 1099-R, so a 1099-B seems redundant. I'm not terribly confident on this one though. Let me know if you find out anything authoritative! Marcus

I've faced this exact problem a few times this year. And I think you're already on the right track. Here's what I suggest: 1) Check the plan document to see if you can simply forego the deduction. The "FMV rule" here is with respect to the deductibility of dividends, §404(k)(2)(B). If you don't deduct the dividend, does that take care of the problem? As ESOP Guy mentioned, most plan documents I see implement the "FMV rule" no matter whether the sponsor is seeking a deduction or not, so that would be a problem. I wonder if it would be a PT even if you're willing to forego the deduction, but note that the version of the "FMV rule" found in §4975(f)(7) applies only to S corps. No mention there of PT problems for C corps that might forego the dividend. I'd consider this, but only if the plan document allows for it and you've discussed it with an attorney. 2) Review the articles of incorporation. I've found that often the there's no serious consequences for skipping a year. We've had to do this a few times this year for this very reason. As an example, here's a quote from the Articles of one of my clients: "Accumulated, but unpaid, Preferred Dividends, shall cumulate as of the Dividend Payment Date on which they first became payable, but no interest shall accrue on accumulated but unpaid Preferred Dividends. In the event that full cumulative preferred dividends on the Preferred Stock have not been declared and paid, or set apart for payment when due, the corporation shall not declare or pay or set apart for payment any dividends or make any other distribution on, or make any payment on account of purchase, redemption or other retirement of the Common Stock until full cumulative preferred dividends on the Preferred Stock have been paid or declared or set apart for payment; . . . . " 3) This doesn't work as well for C Corps with preferred dividends and may not fit your fact pattern at all, but there is a work-around for §4975(f)(7) for S Corp sponsors that are forced to pay dividends (distributions of earnings) because they can't service the debt within 25% of eligible compensation limit of §404(a)(3). We've had a couple of clients with "inside" ESOP loans do a "write down" of the inside loan. Lender (Company) and borrower (ESOT) agree to reduce the principal balance of the loan to the current FMV of unreleased shares. With the lower principal balance, the loan is easily serviced with employer contributions only. Take a look at PLRs 8612081, 9447057, and 9237037. Very powerful tool for the S corps in light of the current recession. For the record, I have latent concerns about "stealing" from the shares released as a result of dividends on unallocated shares and allocating them as if they were shares released as a result of dividends on allocated shares. Dividends on allocated shares are allocated on the basis of relative account balances, while dividends on unallocated shares are usually allocated on the basis of eligible compensation. By forcing the allocation in this way, there are winners and losers. Those with lower account balances and/or higher compensation lose, and those with higher account balances and/or lower compensation win. Sounds like a fiduciary decision to me that has some risks. That said, several attorneys have told me they're OK with it so I usually go along with it and hope I don't ever have to explain it to the DOL or IRS.

Sometimes companies will obtain a standby letter of credit from their bank to serve as collateral for this purpose.

Sounds like Company B is offering to buy the assets (and liabilities) of Company A, so we have an asset sale not a stock sale. In that case nothing happens to the ESOP as a result of the transaction. Post transaction, Company B has no assets or liabilities, so its independent appraiser will probably arrive at a value of zero for the stock of Company B. The ESOP is then worthless. I'm guessing Company B would then simply terminate the ESOP. There'd be nothing to distribute to paricipants as the value is zero. In an asset sale, a pass-through vote would be required. ESOP participants would vote and would have to approve the sale. I suppose you could do a stock sale also. Company A could make an offer to the shareholders of Company B for minimal value, if any. At that point ESOP receives its share of the proceeds (zero or close to it) and Company B (now a subsidiarly of Company A) terminates the ESOP.

Hello, I'm not an attorney, but I'll briefly describe an ESOP transaction that we were just involved in because it might be somewhat similar to what you are considering. Two companies had a common history but currently no common ownership; legally they were completely independent of each other although they both supported each other informally in many ways. The owners of both companies were interested in forming an ESOP and decided that it would be best to do so as a group. A new parent/holding company was formed, and the shareholders of the two operating companies exchanged their shares for shares of the new holding company. At this point the operating companies are subsidiaries of a common parent. The Parent formed the ESOP and the shareholders sold their shares to the Parent ESOP. The employees of both operating subsidiaries are participants of the Parent ESOP. It is a single-employer plan. The Parent corporation filed an S Election post transaction, as well as QSUB elections for the subsidiaries. As a result, there is only one tax return (1120S) filed. For various reasons, the subsidiaries are audited separately and issue separate audited financial statements. There are a lot of details I left out, but perhaps it helps you a bit. Best, Marcus

Caveat - it is possible for some of the reallocated forfeitures to be excluded from Annual Additions. See IRC §415©(6), the "one-third rule," pasted below: (6) Special rule for employee stock ownership plans. If no more than one-third of the employer contributions to an employee stock ownership plan (as described in section 4975(e)(7) ) for a year which are deductible under paragraph (9) of section 404(a) are allocated to highly compensated employees (within the meaning of section 414(q) ), the limitations imposed by this section shall not apply to— (A) forfeitures of employer securities (within the meaning of section 409 ) under such an employee stock ownership plan if such securities were acquired with the proceeds of a loan (as described in section 404(a)(9)(A) ), or (B) employer contributions to such an employee stock ownership plan which are deductible under section 404(a)(9)(B) and charged against the participant's account. The amount of any qualified gratuitous transfer (as defined in section 664(g)(1) ) allocated to a participant for any limitation year shall not exceed the limitations imposed by this section , but such amount shall not be taken into account in determining whether any other amount exceeds the limitations imposed by this section.

tmills - there is no 3 day limit to PTE 80-26 in its current form. Please see the amendment that I posted earlier. The limit is 60 days, or no explicit maximum duration if there is written documentation of the loan. Also, the "recontribution" of shares can be done on the same date as the valuation date, so the regular annual appraisal can do double duty. As for your other points - I agree, I have the same questions. Best regards, Marcus

I believe that RLL is referring to PTE 80-26, the latest version of which was published in Federal Register Volume 71 Number 67, April 7, 2006. I'll attach a copy. I have a couple of concerns with vsaper's approach, and I'd love to hear a response. Any time the ESOP is acquiring shares with a loan you've got to have a fairness opinion. At least with the professionals that I work with, the extra valuation and legal fees to do a new transaction potentially every year would get very expensive. Also, every additional leveraged purchase adds more recordkeeping complexity and therefore more opportunity for errors. That's why I like to see corporate redemptions followed by recontributions by the company to the trust. Very simple, no fiduciary risk, no transaction fees, no fairness opinion. Most appraisers I've worked with are willing to "smooth out" the antidilutive/dilutive effect of the changing number of shares oustanding when they understand that the transactions are part of a long-term plan to return all shares to the ESOT. PTE_80_26.pdf

Under the minimum participation standards of IRC §410, both nonresident aliens and (generally) union employees are excluded from consideration. We handle several ESOP's that exclude their union employees from participation, but nevertheless selectively allow certain union employees to participate. For example, one such ESOP is sponsored by a construction contractor, and they feel that their job foremen are crucial to the success of their jobs and have accordingly allowed them to participate in the ESOP despite being covered by a collective bargaining agreement. I have other plans the name individual union employees as being specifically eligible. I have still others that allow all union employees to participate, but carve out a very small portion of the overal employer contribution to be allocated among the BU group - thus pumping up their eligible compenation and maximum contribution per §404(a)(3) or (9), while giving very little actual benefit to the BU group. Take a look at PLR 8144028 which seems to address your exact situation. I'll attach a copy to this post. And yes, you are able to disallow stock distributions in order to protect your S Election. PLR_8144028.pdf

Thinking out loud here - I've seen this sort of "releveraging" transaction done in the past, with a light difference. I've seen the shares distributed to the terminated participants, redeemed by the Company, and then sold by the Company to the Trust. In this case it seems clear that the Trust is indeed "acquiring" employer stock. Variation: rather then selling the treasury shares to the Trust, the Company could make its annual contribution to the Trust in the form of these treasury shares at whatever rate it desires, which may lower the transaction cost and reduce fiduciary liability. Thoughts?

CitationSquirrel, This happens all the time, in fact more often than not. It's sometimes referred to as the "post-transaction drop in value." It is perfectly acceptable to report negative equity on the Schedule I/H. The plan's liabilities do, in fact, exceed its assets. Within a few years, as the debt is paid down and the company grows, the stock will hopefully recover in value and the plan's net assets will become positive again. Best, Marcus

Here are a few more thoughts: 1) I'm more surprised there hasn't been a revision to the preliminary valuation in the past. There's a reason it's called "preliminary" - it's the fiduciary's duty to review the data and assumptions used in the valuation and vigorously question the same. In my experience, this process leads to a revision as often as not. The fact that there was a revision to a preliminary value proves nothing in and of itself. 2) If the value really is too low, it should correct itself over time. 3) Participants can always opt to postpone their distribution if their vested balance is more than $5000. If they think the current value is too low, they may be willing to risk deferring payout. 4) Any experienced/reputable ESOP appraiser is very sensitive to influence from management. It would be almost inconceivable for them to reach a conclusion regarding value that they would not feel comfortable defending in court. This process is subjective, so I doubt you could find a "smoking gun." Despite all of the above, if you have reason to believe that there has been some foul play, the first step would be to contact the DOL's Employee Benefits Security Administration. I don't know that this is true for a fact, but I've been told that if the DOL receives more than two complaints for the same issue for the same plan, they have to investigate. Call them at 1-866-444-3272. Before you do, make sure you have something more concrete. A DOL audit can be a big, costly distraction for management.

I know this topic is old, but the following quote from the 2006 version of the 5500 Preparer's Manual from Janice Wegesin, §6.03 may be of use: “It is recommended that the number reported at line 7i match the number of individuals reported on Schedule SSA, whether the individuals are additions, corrections, or deletions to the record; however, it should be noted that there is no EFAST edit check comparing the information reported here to the total number of individuals reported on Schedule SSA.” The 5500 software publishers have been told to count D's. Wegesin says it is recommended to count D's. That's good enough for me.

No, not since EGTRRA. See IRC §401(a)(31) (pasted in part below): (31) Direct transfer of eligible rollover distributions. (A) In general. A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution— (i) elects to have such distribution paid directly to an eligible retirement plan, and (ii) specifies the eligible retirement plan to which such distribution is to be paid (in such form and at such time as the plan administrator may prescribe), such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified. (B) Certain mandatory distributions. (i) In general. In case of a trust which is part of an eligible plan, such trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if— (I) a distribution described in clause (ii) in excess of $1,000 is made, and (II) the distributee does not make an election under subparagraph (A) and does not elect to receive the distribution directly, the plan administrator shall make such transfer to an individual retirement plan of a designated trustee or issuer and shall notify the distributee in writing (either separately or as part of the notice under section 402(f) ) that the distribution may be transferred to another individual retirement plan. (ii) <A name=TCODE:8467.14>Eligible plan. For purposes of clause (i) the term “eligible plan” means a plan which provides that any nonforfeitable accrued benefit for which the present value (as determined under section 411(a)(11) ) does not exceed $5,000 shall be immediately distributed to the participant. Document Header: Internal Revenue Code Current Code Subtitle A Income Taxes §§1-1564 Chapter 1 NORMAL TAXES AND SURTAXES §§1-1400T Subchapter D Deferred Compensation, Etc. §§401-436 Part I PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC. §§401-420 Subpart A General Rules §§401-409A §401 Qualified pension, profit-sharing, and stock bonus plans. Selected Text Starting At: 401(a)(31) Here's RIA's analysis of this provision of EGTRRA: New Law. Congress believed that pre-2001 Act law law did not adequately encourage rollovers of involuntary distribution amounts. Failure to roll over these amounts can significantly reduce the retirement income that would otherwise be accumulated by workers who change jobs frequently, Congress said. By making a direct rollover the default option for involuntary distributions, Congress hopes to increase retirement savings. (Com Rept, see ¶5074) Thus, under the 2001 Act, in order to remain qualified, an “eligible plan” (defined below) will have to provide that if: (1) a distribution of a nonforfeitable accrued benefit of less than $5,000 but more than $1,000 is made, and (2) the distributee does not make an election to have the distribution paid directly to another qualified plan or IRA, and does not elect to receive the distribution directly, the plan administrator will make the transfer to an IRA of a designated trustee or issuer, and notify the distributee in writing, either separately or as part of the section 402(f) notice, that the distribution may be transferred without cost or penalty to another IRA. (Code Sec. 401(a)(31)(B)(i) as amended by 2001 Act §657(a)(1)) For this purpose, an “eligible plan” is a qualified plan which provides that any nonforfeitable accrued benefit for which the present value (determined under Code Sec. 411(a)(11) ) does not exceed $5,000 shall be immediately distributed to the participant. (Code Sec. 401(a)(31)(B)(ii) ) In other words, the 2001 Act makes a direct rollover the default option for involuntary distributions that exceed $1,000 and that are eligible rollover distributions from qualified retirement plans. The distribution must be rolled over automatically to a designated IRA, unless the participant affirmatively elects to have the distribution transferred to a different IRA or a qualified plan, or to receive it directly. (Com Rept, see ¶5074) RIA viewpoint: Pamela D. Perdue, author of WG&L's Qualified Pension and Profit Sharing Plans, Second Edition, and a counsel to the firm of Summers, Compton, Wells & Hamburg in St. Louis, MO, specializing in the taxation of pension and profit-sharing plans, cautions that some plans will find compliance with this provision easier said than done. To date, many employers find that financial institutions are not particularly eager to establish IRAs for missing or otherwise non-cooperative individuals. Document Header: Checkpoint Contents Federal Library Tax Legislation Complete Analysis of the Economic Growth and Tax Relief Reconciliation Act of 2001 Organization of the Complete Analysis Analysis Chapter 400 Pension and IRA Provisions 422 Qualified plans must provide that involuntary cash-outs of more than $1,000 (but less than $5,000) will be automatically rolled over to IRA unless distributee elects otherwise © Copyright 2008 Thomson/RIA. All rights reserved.

Dear LAT, The Sponsor's GAAP accounting for the ESOP is very unique. The accounting is governed by the AICPA's Statement of Position 93-6. In a nutshell: 1) The debt of the Trust is booked as a liability (credit) on the sponsor's books and the offsetting entry is a debit to a contra-equity account called Unearned ESOP Shares; 2) The annual contributions are "redefined" as the average fair market value of shares released from suspense in a given year; this adjustment is made by plugging your ESOP Compensation Expense (could be DR or CR) with an offsetting entry to APIC (could result in negative APIC). That being said, that is just the beginning of the potential complexities. Your client should consider consulting a CPA firm that has significant experience with GAAP ESOP accounting. At the least they could make sure that the transaction is booked properly and teach them how to account for the plan on an ongoing basis. Most CPA firms do not have that kind of experience. Please email me or give me a call if you need more specifics on the accounting, as it would take far too long to explain it all here. As for your next question, as the employer makes contributions to the plan (which the plan returns to the employer in the form of debt service), the shares purchased with that debt are released from collateral and allocated to the participants. The participants effectively see annual employer contributions as an increase in the number of shares in their stock account. Furthermore, shares allocated in previous years are revalued annually in accordance with an independent appraisal of company shares, so the participants will also see an increase (or decrease) in the value of previously-allocated shares. I'm not sure I understand your final question. What do you mean by "outside" investments? Are you referring to investments made outside the ESOT? If the sponsoring company makes investments which perform poorly and is forced to incur debt to cover that poor performance, this will negatively affect the appraised value of the company stock which will impact the ESOP participants because their stock is subject to annual valuation. When you refer to "covering" the debt, the ESOT is not legally obligated to service the employer's debt, and using plan assets to service the employer's debt would be a prohibited transaction. Please clarify this question a bit. Best regards, Marcus Piquet ProfESOP Group LLC Roorda, Piquet & Bessee, Inc. CPA's

FAS 150 does not apply to the sponsors of ESOPs IF they report in accordance with SOP 93-6.