Basic ESOP Allocation Questoin

[Lori Foresz]

Hi,

It's been a while since I've done a leveraged ESOP allocation and I was hoping someone could confirm how the allocation is run.

Company makes contribution to the Plan to cover the note payment for the year.

ESOP makes scheduled note payment consisting of principal and interest. Encumbered shares are released based on prin/total principal at the encumbered price.

Participants receive cash contribuition then purchase stock at the encumbered price? The encumbered price is higher than the current market value, so they pay more for the stock then it is currently worth. Is this correct?

The interest payments on the note go out of each participant's account as an interest expense? Is that correct?

No one was paid so there is no stock to buy back from terms.

Any help is greatly appreciated.

[QDROphile]

This part of your message confuses me:

"Participants receive cash contribuition then purchase stock at the encumbered price? The encumbered price is higher than the current market value, so they pay more for the stock then it is currently worth. Is this correct?

The interest payments on the note go out of each participant's account as an interest expense? Is that correct?

No one was paid so there is no stock to buy back from terms."

If the employer contribution is sufficient to cover the debt service payment, the shares that are released because of that payment are allocated as provided in the plan document, usually in proportion to pay or to cover a match.

The allocation does not involve participant accounts except for the ultimate credit.

If the plan uses cash from a participant's account to pay debt service, some special rules apply, but that cash does not come from the employer contribution that you mentioned. That cash might come from dividends on employer stock already in the participant's account.

[Lori Foresz]

Thank you so much.

What confuses me is that money can only get into the plan via employer contributions at this point (i.e. no dividends and no cash accont generating income).

So, if the ESOP is to make the note payment via employer contribuitons the employer contribution has to include the interest due on the note for the year (around $110,000) correct?

So I am thinking that we have to somehow reflect the interest portion of the employer contribution and then the interest payment to the bank. I presume that would run through their OIA account.

The Form 5500 will show an ER contribution in the amount of the total note payment, so I presume that also has to agree to the employer contribution allocation reflected on participant statements. Am I making this too difficult?

Thanks again for your help.