Unreleased shares after loan is paid off

[Guest SuzieQNEC]

An ESOP loan was taken in 1997 with a ten year term of payment.

The initial share price was $150.

The methodology used to release shares was to divide the annual principal payment by the original share price.

At some point during the ten year term, additional shares were purchased. Later the loan was reamortized (into a variable interest rate loan). Through all of this, the methodology of releasing shares stayed the same, as well as the end date of loan payments.

I have been asked to work on the 2007 allocation, which reflected the final loan payment. Unfortunately, due to the way shares were released, not all shares will be released for 2007 by continuing the same method. Shares released in 2007 are 1000 and remaining shares are 500.

I feel like prior plan years need to be revised to reflect correct methodology of share release, but I hope to find another option available out there. Is it possible to release those remaining shares in later years, even though there will be no additional payment on the loan? Or, can we go ahead and add those shares to the 2007 release since that was the last payment? Or, it appears that there may be an additional sale in 2009 of more shares to the plan, can those remaining shares not be allocated for 2008 and start to be allocated in 2009 with payments on the brand new loan? Any other idea?

[Guest tmills]

You have lots of issues. I would recommend the sponsor consult a good attorney.

As you know there are 2 approved methods for calculating share release, principal and interest, or principal. They are detailed in 54.4975-7(b)(8). Your loan sounds like it would qualify for the principal method, but from what you said that is not what was being done. The document would had to have detailed the method, but it was not being followed, so there is one of the first issues, failure to follow the plan document.

It's not clear from what you said whether the additional shares were purchased with borrowed funds. If they were, there would have to be a separate loan and share release calculation just for them. If they weren't, they should not have been put in the suspense account for the first loan, they had nothing to do with it. They should have been allocated as a contribution in the year of purchase. Another failure to follow the document. Do those additional shares possibly represent the shares you have left? We won't get into fiduciary issues involved w/ paying fmv, etc. for those shares.

Assuming the sponsor has any interest in following the Code, your ideas about releasing the shares later will not work. Re-doing the prior allocations the right way seems like the only possibility to me. Then you get into issues like participants who have been improperly paid, and on it goes. The sponsor needs good legal advice, and you are going to have a heck of a time trying to get out of this mess.

[Guest SuzieQNEC]

Thank you for the response. After some additional research, I do have more details on what happened.

Loan 1 - 1997 - for 5 years, purchasing 10,000 shares

Loan 2 - 2000 - for 2 1/2 years, purchasing an additional 3,000 shares

Loan 3 - 2002 - reamortization of both loans above for 5 years

All loans are at variable interest rates. I am able to separate all contributions by loan. However, in reviewing both the original and revised plan documents, the share release method is based on both principal and interest. There is a note in file that the intention was to base it only on principal but I cannot find any amendment to that affect.

Seems to me that a complete revision of all share release and recordkeeping back to start date in 1997. I would have to recreate all amortization tables for future payments based on the current interest rate at the end of each plan year. Current share price has fallen by about half from previous year to all time low. Distributions have been relatively minimal, though there are 5-6 participants waiting for distributions or diversification since starting 1/1/07 that are very anxious.

[Guest tmills]

I'll add a few things but I hope those who are smarter than me will add more.

The first thing that catches my eye is loan 3. There are all kinds of fiduciary issues involved w/ such an extension. You aren't asking about those, but I hope they were dealt w/ at the time.

You are saying the document says to use P&I but in reality only P was used to calculate the share release, and therefore you think the entire release back to 1997 will have to be redone. Sounds right to me. Tell the client that, tell them how much it will cost, and tell them the only way around it is a legal opinion saying what you propose is not necessary. That opinion should also address what to do w/ the remaining unallocated shares that should have been previously allocated. That ought to get some movement out of the client. Might get you fired, but that's not all bad. If you can't get a legal opinion or approval to reallocate, resignation sounds like the best option.

I still don't see why you have shares left in suspense. However, if you reallocate, that issue will go away. If the attorney comes up with something, you will at least have a road to follow.

Good luck