(2 Questions) Receivable-all interest ?/ Cash contrib for Distributions ?

[Guest Deanna Mosier]

I'm new to ESOPs. This is the plan's 2nd year -Leveraged S-Corp ESOP.

1. Working on plan year 2003. Corp did not make all its payments in 2003. We did have some principal paid during 2003, so we have allocated contribution based on the normal formula for releasing shares. Corp also decided on a contribution receivable of $550,000 to max their tax deduction. Accrued interest at 12/31/03 was $475,000. I was going to post a dollar amount receivable on participants' statements for the assumed principal of $75,000, and allocate the shares in 2004 when loan payments were actually made. However, the loan payments made in 2004 have yet to touch principal, they are all interest payments. So, in 2003, do I then NOT post the receivable, because there will not be any principal payments to release shares with?

2. In 2003, we have now had several terminees who are 20% vested. We are not allowed to pay them out in stock. All of them have under $5,000. Let's say there is $15,000 total distributions to be made. Can corp make a cash contribution that does not go to loan payments in order to pay them out? These will be our first distributions, and I just don't have any idea how these happen. We are trying to pay them out before 12/31 so we don't keep them on books another year.

PLEASE HELP! THANK YOU!

[stephen]

1. What I have done in this instance is set up another account (Debt Service) for all of the participants and allocate the receivable contribution to this account. Then in the following year when you calculate the release you can use this account to show the debt being repaid and the shares being released.

Make sure you are following the release method between the ESOP and the company.

Often with S-Corp loans they do not meet the requirements to be a principal only release and are released on principal and interest. Thus, there would be some shares released on the interest portion of the debt payment.

2. Yes, you can make a contribution to the plan that will be allocated based on the plans allocation formula (usually based on prorata share of eligible compensation). Then use this cash to repurchase the shares from the terminated employees and then pay them out.