Paying the valuation fee from the dividend prior to allocation

[Guest tas]

The document allows for the plan to pay "reasonable administrative expenses" from the plan. The employer contributes shares each year. They would like to deduct the share valuation fee from the ESOP's portion of the annual dividend (actually the s-corp "distribution") prior to allocating the dividend to participants. The ESOP is a minority owner of the company. Is it appropriate for the participant's to pay this expense? The client says that they have no other use for this valuation, it is only done for purposes of the ESOP. I appreciate your thoughts.

[Demosthenes]

Who benefits from the valuation?

It would seem that the primary purpose of perfoming the valuation is to determine the market value of the Company and the value of each shareholder's interest. An equally important use, with a tangible benefit to the employer, is so the employer can compute the value of the contribution for their corporate tax returns.

On the one hand, I don't have any cites. On the other, I've never seen a privately held corporation charge off the cost of the valuation to the plan.

This one feels wrong, I'd ask for a letter of instruction along with hold harmless and indemnification language in case it ever comes back on you.

[BeckyMiller]

I have seen the plan pay for this expense and I think there is a legitimate argument for many companies that the simple annual valuation update is a normal administrative cost of the plan.

BUT, first you need to make sure that the document authorizes this use. Then the appropriate party needs to decide that the purpose of the valuation is for the plan's operations and not for some other corporate or shareholder purpose.

Second, you need to make sure that the cost is born by the correct employees under the plan. The plan may, for example, allocate trust expenses based upon total account balance but dividend income is allocated based upon share accounts only. Though it may be rational to say this expense is attributable to the shares, if that is not what the trust language says, you can't just pick to pay it out of the dividends and allocate the net dividend based upon shares. That result would be to allocate this expense based upon shares and that is not what my hypothetical plan document provided.