Reallocating distributed shares

[Guest SuzieQNEC]

ESOP loan has been fully paid off for years. Is it correct then that participants who have joined since the loan was paid off will never receive stock shares in their account? Each time a participant terminates and is distributed the cash value, those shares will be reallocated back only to those participants who are already holding shares based on their share balance, with their cash accounts covering the cost. Newer participants will only receive allocations from cash contributions. Is that correct?

[jpod]

That does not sound correct at all. It appears that distributions from this ESOP are self-funded by the ESOP. In other words, instead of the employer buying back the shares held in a participant's account to fund a distribution to that participant, the ESOP pays him with spare cash held by the ESOP, or with the cash proceeds from the sale of other assets held by the ESOP. Thus, the ESOP trustees are making an investment decision to hold the stock. The non-stock assets are held for the benefit of all ESOP participants, both the participants who happened to be around when the stock was released from suspense, as well as newer participants. Under what theory and/or plan provision could those shares then be allocated only to people who have shares allocated to their accounts?

[A Shot in the Dark]

I don't believe that is correct, if:

cash is being contributed to the plan to purchase the shares of those participants who are receiving distributions.

Contributions are being allocated to all eligible participants.

I would think your participant allocation report would be cash contribution to the account, with a transfer of cash for stock prorata among all of the participants who are eligible for the contribution.

[Guest tmills]

I agree with jpod. If you are using cash to fund distributions, which it sounds like you are, absent some strange provision in the plan, you exchange shares of participants being paid for cash using the cash accounts of all participants on a pro-rata basis. Granted the newer participants still won't get much, but it is not correct to say they will never receive shares.

[Guest SuzieQNEC]

I guess I'm not clear then how I would reallocate those shares of stock. Would it be based on compensation even though it is not a contribution (in which case participants would not get an addition to their account, but their cash accounts would be reduced by an equal amount to the value of the shares that are allocated to them). This would be different to what I was thinking which was that the shares are reallocated based on shares outstanding.

There is no cash coming into the plan to cover the value of the shares of stock. Correct that it is being paid by the Other Investments account. So basically, rather than reallocating based on shares held by remaining participants, you are suggesting to reallocate based on total account value of other participants? I really was unable to find this clearly stated in the plandoc but this way all participants could receive shares.

[GMK]

I agree with the previous posts.

I would have expected that the distributed shares are reallocated based on the "Other Assets account" balances (not the total account balances) of the other participants, because the money to pay the distributions comes from the Other Assets accounts. But that may not be what the Plan Document requires.

This is not something to guess at. The Plan Document rules the day, so dig into it again, or get an expert to read it and explain it.

[Guest tmills]

I guess I'm not clear then how I would reallocate those shares of stock. Would it be based on compensation even though it is not a contribution (in which case participants would not get an addition to their account, but their cash accounts would be reduced by an equal amount to the value of the shares that are allocated to them). This would be different to what I was thinking which was that the shares are reallocated based on shares outstanding.

There is no cash coming into the plan to cover the value of the shares of stock. Correct that it is being paid by the Other Investments account. So basically, rather than reallocating based on shares held by remaining participants, you are suggesting to reallocate based on total account value of other participants? I really was unable to find this clearly stated in the plandoc but this way all participants could receive shares.

Participants have cash in their OIA. That cash is being used to fund distributions to former participants by buying their shares which remain in the plan. At its simplest, you use the OIA of all participants on a pro-rata basis to buy the shares of participants being paid out and replace the amount of cash taken from each participant with an equivalent value of shares. The result is those with the largest OIA get the most shares, but everyone should get a least a fractional share. When done, participants should have the same account value before and after the share buyback. Note it probably does not make sense to use the OIA of those being paid out to fund distributions. You would end up going in circles. If the document doesen't address this, the plan administrator certainly has the ability to make common sense interpretations. A distribution policy would also be a good idea.