Leveraged ESOP

[Guest pensionadmin406]

With a leveraged ESOP can a SH matching contribution be made to the ESOP and still meet the SH requirements even though only the principal will be the amount allocated to the participants? Plan uses an ehanced formula so it is possible that the amount that is allocated to the participants would exceed the basic match but would not be the entire match as stated in the enhanced formula. Any cites or references that could send me in the right direction would be GREAT!

[Guest Sieve]

SH match only applies to a 401(k), so I assume you are talking about an ESOP with a 401(k) feature. And the match is just that--it is based on elective deferrals made to the 401(k) component (& not based on any ESOP allocation). Since the ESOP allocation must be based on a formula relating to compensation, and not based on the elective deferrals to the 401(k) side of the plan, you would still have to make a SH contribution (if the plan required it) along with the allocation of the employer's ESOP contribution paid that year--and that SH contribution/match would eliminate the need to perform certain 401(k) non-discrimination tests (but would not eliminate the need to properly allocate the contribution to the ESOP).

If I didn't answer your question, that's because I could not really understand the question and answered what I thought you were asking. So, if necessary, give more info.

[Guest pensionadmin406]

This ESOP does have a 401(k) piece. I know from my research that a contribution made to an ESOP will satisfy the SH requirements if it isn't a leveraged ESOP. My questions is - if the SH match for the 401(k) piece of the plan is made into the ESOP is the SH requirement still met even though the entire match is not allocated to participants as some of it is applied to interest to pay on the levearged piece of the plan?

[QDROphile]

The match is the match is the match. You don't look at the contribution. You look at the allocation. The value of the shares allocated must meet the safe harbor amount.

[Guest pensionadmin406]

If the plan uses an enhanced match and the amount that is actually allocated is equal or greater to the basic match would the SH requirements be met?

[Guest Sieve]

Explain how a match--i.e., an employer contribution that varies depending on how much is deferred into the 401(k) poprtion by individual participants--can be contributed and allocated on that basis into the ESOP portion of the plan, and used to pay off varying portions of the loan. The allocation requirement in the ESOP portion of the plan certainly cannot be based on the amount of deferrals.

Employer contributions to pay off the ESOP loan are independent of any 401(k) match. How do you connect those dots and cause the match to be sued to repay the loan? Normally, the match would be used to buy employer stock--in the K-SOPs I've seen--rather than be used to pay off a portion of the loan.

[QDROphile]

You are picturing a direct connection between the contribution and the value of the allocation. The amount of contribution and the value of the allocation are almost never the same amount. They are related by (i) the formula that determines release of shares from the suspense account, and (ii) the value of the shares at the time of allocation.

To illustrate, the employer may have to increase the contribution that relates to the match simply because the value of the shares declines in order to deliver a match with the appropriate value. The match is a promise of what gets allocated based on a particpant deferral amount. If you are not dealing with a leveraged ESOP, the promise is executed by contributing the promised amount. The promise is executed in a leveraged ESOP by contributing what is required in order to produce the match value. Heady stuff.

[QDROphile]

In case you are wondering, the plan can be designed to work around the leveraging if the employer does not want to be prepaying the loan to make up for value shortfalls. Additional contributions (cash, stock, or cash to buy stock) can go straight to the match to make up any shortfall. Planning not to cover the entire match through the regular debt service for the leveraged ESOP is good planning. Most employers would not want an excess from the suspense account to allocate.

And don't forget that an ESOP can be designed to operate on dividends to some degree, so the analysis in not confined to contributions -- another reason not to be locked into thinking about a direct link between contribution rate and allocation requirements.

[Guest tmills]

The match is the match is the match. You don't look at the contribution. You look at the allocation. The value of the shares allocated must meet the safe harbor amount.

Sorry to be joing this late, but can you give a cite for the above? Is the question that started all that much different from a situation where you have a 401(k) with no participant direction, the match contribution is made quarterly, but what it is invested in immediately goes down in value? Would it matter if safe harbor match is actually allocated on participant statements in year 1 as cash, so the match would be the match, but in year 2 is used to make loan payments?