Allocation of Released Shares

[Guest DBolling]

An S-Corp maintains a leveraged ESOP with a set % contribution (set up as a money purchase plan). According to the plan document, the shares to be released at the end of each plan year are allocated based on compensation to the same participants who are eligible for an employer contribution. However, it nowhere mentions that this allocation counts as a contribution or towards the annual additions.

Should this allocation of released shares count toward the set % contribution (to in effect reduce the employer's deposit), or is it just a gains allocation based on compensation?

[Guest stryan]

The available released shares would be allocated to the participants based on compensation and applied towards the contribution (subject to 415). The stock allocation would be based on the most recent valuation of the stock, which presumably would be the last day of the plan year. If this allocation did not meet the MP%, then an additional cash contribution would be necessary.

[Guest DBolling]

More info - For 2001, there were no principal payments on the loan. The calculation of shares to release was based entirely on interest payments made toward the loan. The interest payments were paid entirely with S-Corp distributions on the unallocated shares. Since the interest payments were not technically made with "employer contribution" should these shares be allocated to participants as a contribution or a "gain" based on comp, or simply shown as a transfer from the unallocated account to the participants' accounts?

I'm also concerned that in future years if the employer only deposits the amount needed to get to the set % contribution after the released shares are allocated, that there won't be enough cash to pay the annual principal payment. (The January principal payments are made with the contrib receivable for the prior plan year end 12/31)

[RLL]

Hi DBolling ---

If the interest payments were made from S corporation distributions on the suspense account shares, the shares released thereby should be allocated in the manner provided (in the ESOP plan document) for the allocation of dividends on unallocated shares. Sometimes this is done in proportion to account balances (as trust income); sometimes it's done in proportion to current compensation (the same as employer contributions). Check the plan document!

Also, in a money purchase plan, the contribution formula amount sets the required employer contribution, without regard to the current value of any released shares. Look at the amount the employer contributes, not the value of the released shares that get allocated to participants' accounts. Appreciation in value of the leveraged shares should inure to the benefit of participants and should not be used to reduce the employer's contribution obligation.

The section 415© annual additions are based on the lesser of (a) the amount that the employer contributes, and (B) the value of the released shares allocated to participants' accounts (so long as the ESOP plan document so provides). If the released shares have appreciated in value, such increase is not included under 415©.