valuation of closely held stock in ESOP

[k man]

the sponsor got an independent appraisal last year and the value of the stock was 0. they are not doing any transactions ie. buying or selling stock. are they required to obtain a valuation each year. i don't see a valuation requirement in erisa unless you are buying or selling the stock.

[imchipbrown]

Well, I suppose the value could change. Does anyone have the right under the Plan to "put" their stock back to the company? Maybe this gets the stock out of the Plan. No stock, no appraisal.

Just my two cents.

[ljr]

I agree it does not make sense, but I think you need annual valuation for 5500 reporting purposes and for participant statements.

[k man]

the code only requires you to get a valuation if there has been a transaction involving the stock. the only question question on Form 5500 asks whether the plan purchased or received any nonpublicly traded securities that were not appraised by an independent third-party appraiser. i dont think you need to get an independent appraisal.

[Guest Degrandville]

If you only needed to value the stock during a transaction, then how would you deal with contributions, distributions, forfeitures, and diversifications?

[RLL]

IRC section 401(a)(28)© by its terms requires an independent appraisal of closely-held stock held by an ESOP only "with respect to activities carried on by the plan..." Such activities would include transactions (such as purchases or sales of stock), contributions of stock, and benefit distributions (including diversification); but would not include reporting on Form 5500 or participant account statements. In most cases, forfeitures of stock under an ESOP are reallocated in shares (not dollars) and an independent appraisal would not be required solely for that purpose.

[Guest heidiann]

When must the appraisal be completed? We have a plan with a 12/31 year-end. It's a leveraged ESOP with no employee contributions, no benefit payments and the only receipts from employer used to pay debt service. They did an appraisal in 8/03 for other purposes. Do they need an appraisal? If so, can they just use the 8/03 appraisal for year-end valuations

[Lori Foresz]

Hi,

I just want to clarify what I think this thread is saying. If a leveraged ESOP allocates shares via the contribution/note payment for the year and pays no distributions or otherwise contributes stock to the plan for the plan year, then a valuation would not be required solely for purposes of participant statements and Form 5500. We could just use the price as initially valued at the note date.

However, the quesiton on the Form 5500 asks if the plan HOLDS any assets whose value was not set by a third party appraiser. In that case, it would seem that if no valuation was done for the year, we would have to answer YES and enter the most recently appraised value of the stock (both unallocated and allocated) held by the ESOP. Or does the initital valuation cover us?

Many thanks!

[Kirk Maldonado]

RLL:

In Announcement 94-101, the IRS seems to take a broader view of when an appraisal is required that you posited in your posting. Here is the relevant language:

A valuation of employer securities by an independent appraiser is required with respect to any activities carried on by the plan. * * * Plan activities requiring valuations also include * * * the allocation of assets to participants' accounts.

Thus, under the position of the IRS, it would appear that a reallocation of forfeitures would require an appraisal.

What are your thoughts on this point?

[Lori Foresz]

Hi,

I'm hoping to get this thread started again because I can't seem to find a good research source for ESOPs. Small company established a leverage ESOP in 2003 and to date has made 2 principal payments on a three year note. An initial valation was done at the time of the note issuance. The first plan year has ended (9/30/03) and we're not sure if we really need to pay for another valuation. The company is dissolving this year, all employees will be terminated next month, and the company is now worthless due to loss of a management contract. I'm wondering what the steps are. Can we use the original stock value for the Form 5500 for the PYE 9/30/03 and then file a final return with a zero value, zero distribution, and a large loss? Or do we only need a final valuation reporting zero value and pass on the 9/30/03 val? If anyone can help me sort through this, I would greatly appreciate it.

[Kirk Maldonado]

My recommendation is to get competent ESOP counsel involved in these issues. There are undoubtedly other issues to be considered also.

[Lori Foresz]

Hi,

Agreed. I will ask the attorney. On a side note. By reading the definition of activities for which an independent appraisal is required, one of the activities is the allocation of assets to participants' accounts. If shares are allocated to participants accounts each year (based on compensation), does that then require an annual appraisal, am I reading too much into that, or what does that really mean. Any help is appreciated.

[BeckyMiller]

You are reading the IRS position properly.

Also, be advised that responding on Form 5500 that the plan has non-traded assets whose value was not set as of year-end using an independent appraisal is one of the items that triggers an inquiry by the DOL. I am not saying that is always trouble. But, I don't know any sponsors who really want to have to deal with the DOL. In this case, your plan is so new and the value disappeared so quickly, that I sure wouldn't want to have to explain it to the DOL....

But, with the share price going to zero in such a short time, your client stands a good chance of seeing the DOL show up anyway. So, get competent counsel and make sure that all documents are in good order.

[Kirk Maldonado]

In my experience, you don't even have to have the price of the employer stock drop to zero to get a visit from the DOL. I've had substantial declines in price precipitate an audit. However, the audit was confined to that one issue.

[Lori Foresz]

Does the indepepent value really need to be an end of plan year value? The instructions to the Form 5500 say enter the value of assets that were not independently valued IN the plan year. So, if an appraisal was done as of 3/1/03, and the plan year is 1/1-9/30/03, then it would appear that you could still answer this question no since they were appraised IN the plan year.

Also, the ERISA attorney told us that the allocation of the released stock to the participants does not necessarily mean the plan would require a valuation. I guess he takes the position that a cash contribution is allocated and then shares are purchased at the leverage price.

Just a thought.

Thanks for all your comments.

[RLL]

lgolden ---

Your ERISA attorney is correct. It is very common for ESOPs to make allocations of company stock to participants' accounts in shares rather than in dollars. In such a situation, there may be no need to use a valuation for the shares in effecting the allocations. Accordingly, an independent appraisal would not be required for that purpose.