Can ESOP administrators exclude a group of Individuals from participat

[Guest kenw]

Approximately five years ago my employer purchased a book of business from a party and hired approximately 25 people to service that book of business. The location of the servicing group was different from the original company (two branch offices.) We are employees of the same company, not a subsidary.

Our employer advised us that they decided that we would not be eligible for the ESOP because they were not sure of the viability of the new business activity. They continued to distribute shares to the other employees who were employed in the home office and not involved in this new business activity although some did provide some support, i.e. management, accounting ect.

It is my feeling that this is unfair discrminiation and there was no basis for excluding us from the program. We were told that the regulations were researched and it is permissable to exclude employees.

I am looking for specific information, regulations or citations about the basis on which the trustees can decide to exclude an employee or group of employees from participation.

[RLL]

Hi kenw ---

The Internal Revenue Code and ERISA, the federal laws which prescribe the rules for ESOPs and other retirement plans, allow an ESOP to exclude specified groups of employees, so long as certain minimum participation/coverage requirements are met and the terms of the written plan documents provide for such exclusion. See IRC section 410(B) and the IRS regulations thereunder.

If the ESOP plan documents (adopted by the employer) do provide for the exclusion of a group of employees, the ESOP trustees must administer the ESOP in accordance with such exclusion. See ERISA section 404(a)(1)(D).

I suggest that you take a look at the ESOP plan documents (and the summary plan description for the ESOP).

[Guest kenw]

Many thanks for the response. I will look into 410b

Two questions, what constitutes a group of employees, it there some specifc language? also, do the plan documents need to provide for such an exclusion upon adoption or can they be amended just prior to a transaction or after a transaction?

[RLL]

kenw ---

You asked "what constitutes a group of employees" ? I can't define it, but I know it when I see it.

You described a group of employees which is servicing a separately identifiable book of business in two branch offices in different locations from the rest of the company. It seems to me that this would likely be a "group of employees" that could be defined in a plan document as being ineligible to participate in an ESOP.

I think that such an exclusion (from ESOP participation) could have been effected through a valid amendment to the ESOP adopted either before the transaction or before such employees became eligible to receive ESOP allocations.

[Guest kenw]

I need a bit more help.

I understand that if the administrator excludes a group from the plan they need to make some sort of filing or plan amendment. Is this something where they need permission from a government agency to make the change? What happens if they don't file a plan amendment? Is their a penalty? Is the exclusion void? This is a situation which happened about five years ago when there was sloppy adminstration of our plan and I was one of the victums.

I appreciate any information anyone can provide.