PPA and ESOP vesting

[Guest tmills]

904 of PPA required earlier vesting for plans except ESOPs with loans outstanding on 9/26/05. Such plans do not have to change their vesting until the earlier of the loan payoff or the date the loan was scheduled to be paid off at 9/26/05. What about plans that have loans that were taken out before and after 9/26/05? Do we think that having one loan outstanding prior to that date would allow share allocations from loans taken out after that date to continue on a pre-PPA vesting schedule until the old loan is paid off (or scheduled to be)? Seems like quite a potential loophole, especially if the old loan has a really long amortization period. However, requiring different schedules for shares acquired with different loans would be messy at best.

I've seen no guidance, maybe because the IRS thinks it is clear. I'm interested in what the members of this board think.

[Guest Judy S]

I have an ESOP with a current outstanding loan (initiated in 2000 and scheduled to be paid off in 2008). Participants have 2 stock accounts-1 with shares allocated from a previous loan paid off before 2000, and another with the shares purchased with the current loan. When I read PPA, it doesn't seem to limit the vesting change deferral to just the shares purchased with the second loan. The current vesting schedule is a 5-year cliff. I guess I have the same question as tmills-do they have to adopt a new schedule in 2007, or can they keep the 5-year cliff in 2007 and adopt a new schedule in 2008 that would apply to all plan assets?

Of course, they can choose to adopt a new compliant schedule in 2007, but I'd like to know what their options are before contacting them.

I join tmills in soliciting your opinions.

[Guest tmills]

I have an ESOP with a current outstanding loan (initiated in 2000 and scheduled to be paid off in 2008). Participants have 2 stock accounts-1 with shares allocated from a previous loan paid off before 2000, and another with the shares purchased with the current loan. When I read PPA, it doesn't seem to limit the vesting change deferral to just the shares purchased with the second loan. The current vesting schedule is a 5-year cliff. I guess I have the same question as tmills-do they have to adopt a new schedule in 2007, or can they keep the 5-year cliff in 2007 and adopt a new schedule in 2008 that would apply to all plan assets?

Of course, they can choose to adopt a new compliant schedule in 2007, but I'd like to know what their options are before contacting them.

I join tmills in soliciting your opinions.

In your case you don't have any loans after 9/26/05, so I think it is clear there is no requirement to change the schedule until that old loan is paid. Therefore unless they want to do it quicker, I see no reason why they shouldn't be good until 2008.

My original scenario is a little different because of the new loan, but either way we aren't getting answers.

[Guest John Nelson]

I think the PPA provision is pretty clear. Quoting from the Committee Report: " . . . the provision does not apply to any plan year beginning before the earlier of (1) the date on which the loan is fully repaid, or (2) the date on which the loan was, as of September 26, 2005, scheduled to be fully repaid." So, if the pre-PPA ESOP Loan was scheduled to be paid off on, say, December 31, 2008, the new vesting requirements would apply to the plan year beginning on or after December 31, 2008. I think the special effective date provision applies to the Plan as a whole. I don't see how the provision can be read to apply differently to, in effect, employer contributions before PPA and employer contributions after PPA.

[Guest tmills]

Thanks for the reply John. I'm thinking that way too. The only thing stopping me is given IRS hostility toward ESOPs, it almost seems too generous. I guess they can surprise you sometimes.

Does anyone think if an ESOP, or for that matter a KSOP, had a discretionary contribution provision that couldn't be invested in stock, used to pay loans, or anything else to do with stock, and also had an old loan, the vesting on that money source could stay under the old schedule until the old loan is gone?

I had a discussion about this with colleagues this morning, most of whom thought the discretionary source would have to have PPA vesting, regardless of the presence of an old loan in the plan. I don't agree, mainly because of the PPA language. As always, thoughts are appreciated.