a. Div Deduction; b. Share Allocation

[Guest gkaley]

2 things I'm not clear on with ESOPs...

(1) Is the dividend deduction under 404(k) available to Non-leveraged ESOPs?

(2) Loan Amortization calls for 150 shares to be released at year end, but the actual contribution amount (based on compensation) compared to the present share price only calls for 140 shares to be allocated to participant accounts, what can be done with the unallocated shares? Conversely, if the share price falters and there is a shortfall of shares released from encumberance, does the employer need to contribute the additional shares required to allocate the contribution to participant accounts?

[RLL]

Hi gkaley ---

(1) The dividend deduction under IRC section 404(k) is available to any ESOP which qualifies as such under IRC section 4975(e)(7)....leveraged or non-leveraged....or to a tax credit ESOP under IRC section 409(a). It is not available to a non-ESOP stock bonus plan.

(2) Shares in an ESOP loan suspense account are "released" for allocation to participants' accounts based on loan payments actually made. If the shares are worth less than the amount of contribution used for loan payments, the participants' allocations are worth less as of the allocation date...there is no requirement that the employer make up the difference (unless the plan document provides otherwise). If the employer contribution would be less than the amount needed to make current loan payments, there will be a default....unless the loan and/or plan documents require the employer to make contributions in amounts sufficient to allow the ESOP make scheduled loan payments. It depends on what the documents say.

[Guest gkaley]

I get most of what you are saying here. Part 1 - what I thought, but I couldn't specifically find that answer.

Part II - follow-up: I'm still a little confused. What if the loan amortization dictates that 1000 shares are released annually, but at the end of the year, 5% of total eligible compensation (based on the profit sharing formula) = 900 shares (based on the current value of the stock)? What happend to the 100 outstanding shares?

[RLL]

gkaley ---

The 1,000 shares would be released (and allocable) only if the full scheduled ESOP loan payment due at that time is made by the ESOP. Loan payments are specified in dollar amounts....but shares are released proportionately (under one of the two formulae in the ESOP loan regs) only as actual loan payments are made, without regard to the then value of the shares.

You've confused me.....I don't understand the arrangement that you're describing.

If the employer contibutes less than the ESOP needs to make the loan payment due (and the ESOP then pays a lesser amount on the loan), a lesser number of shares is released for allocation to participants' accounts. And if the shares have declined in value, the value of the shares allocated will be less than the dollar amount contributed by the employer. If the value of the shares has increased since the shares were purchased with the loan proceeds, the value of the shares allocated may be greater than the dollar amount contributed by the employer.