Required timing of transfer ESOP with 401k Provisions (KSOP) to ex-employees

[Guest xtremehabits]

I have run into a situation in which I am somewhat stumped from a legal standpoint. As of 4/1/06 I resigned from a Bank officer position in which the Bank was organized as a Sub Chapter S Corporation and therefore provided to it's employees an “ESOP with 401k Provisions (KSOP)”.

I had worked for this Bank for nearly five years and upon departure, I inquired with the HR department who administrates the plan as to how I could roll my vested balance from the plan into my existing IRA with Fidelity Investments. Their response was that I would have to wait until after the end of the company's (Bank) fiscal year end (12/31/06) before I could begin the process of accessing my balance. They claim that distributions based on roll-overs not made as part of fiscal management procedures and that they are acting within the laws and boundaries to do so.

I have no concerns that the Bank is whole and that my benefits are safe but I would rather control my own financial affairs than continue to allow an ex-employer to keep what is rightfully mine and distribute at their convenience.

Therefore, my questions is….Are they in fact acting under the law by stating that they can withhold my vested balances until after their fiscal year end based on their organizational status or are they obligated to roll over upon my request?

[WDIK]

Are they in fact acting under the law by stating that they can withhold my vested balances until after their fiscal year end based on their organizational status or are they obligated to roll over upon my request?

Such a scenario as you describe is certainly possible. The Summary Plan Description you should have received as a participant should explain the timing issues related to receiving a distribution.

[Guest tmills]

It actually could be worse. Code Section 409(o) allows an employer to wait not later than 1 year after the close of the 5th plan year following termination (not due to retirement, death, or disability) to begin distributions. If the plan is leveraged, it could be even longer. However, your plan could be more generous which is why WDIK's answer about checking the SPD is important. That will also tell you what the normal and optional forms of payment are. It's possible that installments are the only form and you will be paid over 5 years.

[Guest xtremehabits]

Are they in fact acting under the law by stating that they can withhold my vested balances until after their fiscal year end based on their organizational status or are they obligated to roll over upon my request?

Such a scenario as you describe is certainly possible. The Summary Plan Description you should have received as a participant should explain the timing issues related to receiving a distribution.

Is there a distinct difference in plan distributions from a C-Corp to an S- Corp?

[A Shot in the Dark]

The only difference may be in the form of distribution of employer stock. Most if not all "S" Corporations that sponsor ESOP's generally limit the distribution of employer stock and simply offer the distribution of the value of the stock in the form of cash.

Many "C" Corporations that sponsor ESOP's allow distributions in the form of actual stock and then the ESOP Participant is given the right to "Put" the stock (sell) the stock back to the ESOP or the Plan Sponsor.

[Guest Doug Johnston]

It sounds like the concern is that the HR department's explanation associates the distribution of the ESOP account with the Bank's own fiscal management. That is probably something of a misstatement.

The trigger for the distribution is most likely NOT the end of the Bank's fiscal year, but the end of the ESOP plan year. It just happens that the plan year and the fiscal year are the same and the HR personnel used the wrong terminology.

Having said that, there could be a number of good reasons that you have to wait that DO relate to the Bank's fiscal management. For example:

• Depending on the plan provisions and various testing issues, you may or may not be eligible for a contribution allocation at year-end.
  
• Even if you are in fact eligible for a contribution allocation, the Bank might not decide how much to contribute until after year-end.
  
• As an S-Corporation, the Bank must be closely held (non-public). It is possible that the valuation of the Bank stock (and consequently the value of your account) is only determined once each year.
  
• The Bank may distribute earnings (similar to C corporation dividends) at some point between now and tax time to which you may entitled - but the amount has probably not been determined yet.
  
• To minimize administrative costs (which the Bank is probably paying), the Bank may choose to "batch" process distributions in one or more cycles each year.
  

As previous posts have indicated, the employer would be within the boundaries of the law to defer the distribution even more. Waiting until year-end is customary and reasonable.