Share Release and Matching Contribution

[Disco Stu]

I have a leveraged ESOP client with a matching contribution feature. I'm hoping that someone can consider my thinking about the scenario below and tell me if I'm going about this in an appropriate manner. The facts are as follows:

The matching contribution (50% of salary deferrals) for the year is $50,000.

During the plan year, cash contributions of $50,000 were made to the plan.

Of the $50,000 contributed, $40,000 was used to make the payment on the ESOP loan.

There were 1,000 shares released from suspense by the loan payment.

The share price at the end of the year was determined to be $35/sh.

The end of year allocation will be $10,000 in cash and the 1,000 shares.

Because the FMV of the allocation at the end of the year is only $45,000, has the employer satisfied it's matching formula? I know that as far as their deduction goes, they've contributed $50,000, but how do I reconcille the fact that the FMV of what was allocated is $5,000 less than this?

Thanks for any input.

[Kirk Maldonado]

Does the plan document or SPD address this situation?

[QDROphile]

Depends on what the plan documents says. The contribution is probably OK because the plan probably says that the contribution is used to pay the loan to the extent necessary and the allocation formula is based on the ESOP requirement to allocate by units (shares) rather than dollars. Participants often get miffed when the value allocated to the accounts is less than the nominal value of the contribution (which they can measure because they know the match rate), but that is life with a leveraged ESOP. If the share value appreciates, the value added to the accounts can be higher than the nominal value of the match at the time of allocation.

Some plans avoid having to explain this to miffed participants by assuring that the value allocated is not less then the nominal amount based on the match rate. The employer has to make additional contributions to get there. You could have one of those plan designs, but it should be pretty obvious if you do.

[Disco Stu]

Thx, QDROphile

The portion of the document dealing with the match doesn't deal with the fact that this is an ESOP. It reads just like any other plan. It just says that the match is a discretionary percentage and that deferrals in excess of 6% of comp won't be matched.

There is language in the "Allocation To Accounts" section of the doc that says "The comapany stock account of each participant will be credited with the participant's allocated share of company stock purchased and paid for by the trust or contributed in kind by company..."

Is this the type of language you were referring to in your first paragraph?

[QDROphile]

That could work. I would want to step back and see how everthing is put together in the plan. Lots of dots have to be connected properly. How the contribution is determined is not necessarily how it is allocated. The document should say what is done with the contribution, although it may not say it in the section that describes how to determine the amount of the contribution. Does it say allocate to accounts or use to pay the ESOP loan? If it does not say what to do with the contribution, then someone is in a pickle and will have to rely on an interpretation of the document to fill in the missing terms.

The real problem may lie in the SPD. It may say that the participants "get" the match and describe the match as the amount contributed. This issue applies in every leveraged ESOP. The amount contributed is not the same as the value of what is allocated to accounts.

[RLL]

There are quite a few leveraged KSOPs that provide for a matching allocation of employer stock equal in value (as of the allocation date) to a specified % of participants' elective contributions. Once the required matching allocation has been calculated, you work backwards to determine the amount of employer contribution needed to make a loan payment that will "release" the number of shares required to satisfy the defined matching allocation.

In such a case, participants will know the exact amount of the stock match that they'll receive (as of each allocation date). If the stock value has declined, a larger employer contribution is required. The negative for participants is that they won't receive the benefit of any appreciation in stock value from the time of the leveraged stock acquisition until the allocation date.