Esop

[Guest Dion Brockway]

A client of ours has asked me how they should be handling their S-Corp shareholder recordkeeping. The ESOP's leveraged shares were issued in one certificate, and they issue a new certificate to the ESOP each time they purchase additional non-leveraged shares. From what I can see, the ESOP holds 5 certificates in total. The question concerns how to reflect the distribution/ re-issue of shares when a participant is paid out.

In the past, when a participant was paid out, the client issued a company check to purchase the whole shares which they deposited to treasury stock. They did not re-issue certificates to reflect the shares going from the ESOP to the participant to the company. On the shareholder log they entered a negative entry, netted against the leveraged certificate, to reflect the repurchased shares. The shares that were repurchased were from both leveraged and non-leveraged participant accounts.

We are in the process of making a distribution and I advised the client that if the participant takes a lump sum distribution, they should issue him a certificate for x # shares. The client thinks he would have to issue the participant 5 certificates and re-issue 5 certificates to the ESOP - one for each purchase.

I can see the ESOP needing to have at least two certificates -- one representing the leveraged shares that are pledged as collateral for the ESOP loan and another certificate reflecting the non-leveraged shares. When distributions are processed and the company buys stock from the plan, each certificate should be re-issued to reflect the respective decrease in plan assets. If they want to continue to issue new certificates for each non-lev. purchase, then only one of those certs would need to be re-issued. The participant would receive, at most, two certificates -- one for their leveraged shares and one for their non-leveraged shares.

I'm surprised that the lending institution didn't put a covenant in the loan agreement that no shares could be sold/distributed until the loan was paid in full. We have requested but not yet recd a copy of the latest loan agreements. If such a covenant does exist, then how should lump sum distributions be processed? Can the participant be paid out entirely in non-leveraged shares and the shares inside the ESOP be "rebalanced".

In an audit, wouldn't it be necessary to tie the stock certificates to the plan assets? Does anyone have any experience with this? I think the requirements for shareholder recordkeeping are probably governed by the State business code -- any thoughts?

[BeckyMiller]

I wanted to advise you that we have two ESOP clients going through DOL examinations right now where specific attention is being paid to the maintenance of the ESOP's share records. My advice to your client is to straighten out their records. They need to decide whether it is more cost effective to issue the ESOP a bunch of individual certificates that can be sold back as treasury stock or to reissue certificates whenever there is a transaction.

[Kirk Maldonado]

Becky:

Could you tell us what are some of the issues relating to stock certificates that are of concernt to the DOL?

I am curious because I've never seen them raise any issues relating to stock certificates when they audited any of my ESOP clients in the past.