ESOP and Change in Distribution Policy After Required Forms Signed/Completed/Submitted

[Guest Grecco]

Our ESOP has always paid out a lump sum when an employee leaves the company.

The company’s ESOP plan does contain provisions for a 5 year installment of distributions.

An employee was terminated. A few months after this termination he received his ESOP statement indicating how many shares were in his account.

He was instructed by a member of the ESOP committee (and also the company’s benefit/plan administrator) to come to the company’s office to sign the required documents for the ESOP payout.

Three forms were presented to the terminated employee and signed:

1. “Participant election & Authorization Form”

Completed and signed by ex-employee. (No section for company/ ESOP representative to sign.)

Form indicated a direct rollover to an IRA.

2. “Distribution Consent Form”

Completed and signed by ex-employee and signed by company/ ESOP representative.

Form indicated to receive payment prior to normal retirement age.

3. “Stock Power Form”

Completed and signed by ex-employee. (No section for company/ ESOP representative to sign.)

Form indicates that ALL the ex-employee’s ESOP shares (actual number of shares listed on form) were to be transferred to the company.

(Form read as follows: “FOR VALUE RECEIVED, the undersigned hereby, sell, assign, and transfer unto” the Company. )

The form also indicated the following: “The undersigned hereby irrevocably constitute and appoints the Secretary of the Corporation as attorney to transfer the said stock on the books within named Corporation with full power of substitution in the premises.”

These completed forms were left with the company’s benefit/plan administrator and ESOP committee member.

Copies were given to the ex-employee.

Six weeks after these forms were completed the company has amended the ESOP’s distribution policy.

The ex-employee is no longer being offered the lump sum payout and is only being offered a 5 year distribution payout. (Note: No form of payout has actually occurred.)

The ex-employee is being requested to complete the same 3 forms again, this time indicating a 5 year distribution.

The ex-employee contests that he has already sold ALL of his ESOP stock to the corporation is expecting his lump sum distribution.

Is the company required to pay this ex-employee his lump sum distribution?

Thank you for your time and any help you can provide.

Lisa

(email: lisa_grecco@yahoo.com )

[ESOP Guy]

I think so-- They have to pay this person a lump sum.

I just don't see how you can change the policy for this person after they have signed the forms.

[Guest Grecco]

Thank you ESOP Guy.

Does anyone else have any thoughts on this topic?

Lisa

lisa_grecco@yahoo.com

[GMK]

I agree with ESOP Guy.

If the participant was eligible for a lump sum distribution when he accepted it (signed the forms), then the plan can't take it away after the fact.

And unless it's typical for the company to take six weeks to process a proper distribution request, they shouldn't delay further with the direct rollover to the IRA.

[Guest Grecco]

Thank you for your responses.

Our company may want to litigate and stop the ex-employee from receiving his lump sum payout.

I'm not quite sure what legal grounds or thoughts our company has....

Lisa

lisa_grecco@yahoo.com

[Guest Grecco]

If the employee’s forms requesting a lump sum distribution are valid and binding…

How long can the company wait until paying this employee his full lump sum?

(note: The employee is not of retirement age.)

Thanks,

Lisa

[rcline46]

_{The distribution policy should be clearly spelled out in the plan document, especially since it is a protected benefit. Failure to follow the policy is not a good thing.}

[Belgarath]

Your company may want to litigate to prevent this? One has to wonder what is really going on behind the scenes here. Financial difficulties, or did the employee steal from them, or some other grudge issue?

I'd love to be a fly on the wall when they present that to their ERISA attorney.

What's your position in all this? Are you the HR person, or a union rep, etc.? The company might want to consider that the participant can complain to the Department of Labor. Many current employees don't complain when they ligitimately could because they fear employer retaliation, but an ex-employee typically feels no such constraint.

[ESOP Guy]

Without seeing all the documents including the distribution policy and the plan document it seems like the most likely answer is "as soon as administrativerly feasible".

Not trying to be rude here but given the date of the first question if this guy hasn't benn paid that would seem problematic.

If you don't mind me asking what is the real issue here? Is it the company doesn't have the money to pay or is it something about this guy that makes them not want to pay? (Belgarath kind of beat me to this last question but I thought I would ask it otherwise becuase there really does seem like we aren't seeing the real issue here. And if it is shared maybe ideas to help solve the real issue can bre made.)

[Guest Grecco]

The ESOP Plan Documents do not explicitly state the timeframe that a lump-sum distribution must be paid.

The Plan Documents state the following:

“unless you elect further deferral in writing, distribution will be made or will begin not later than the end of the fifth Plan Year after the Plan Year in which your service terminates”

But, two of the forms that were completed and submitted to the company include the following :

#1. From the “Distribution Consent Form”:

“I wish to have my distribution paid or rolled over as soon as practicable“

#2. From the “Participant election & Authorization Form”:

“I elect to waive the thirty day waiting period and have the Trustee process my distribution request as soon as administratively possible”

The company is now claiming that they do not have the funds for this distribution request.

(There is no "bad blood" between the ex-employee and the company.)

How long can the company wait until paying this ex-employee his full lump sum?

(Can the company wait 5 years...even though the required forms have been already been submitted/accepted?)

Also, must the company pay the entire lump-sum in One Payment?

Thank you in advance,

Lisa

(lisa_grecco@yahoo.com)

[ESOP Guy]

How long can the company wait until paying this ex-employee his full lump sum?

(Can the company wait 5 years...even though the required forms have been already been submitted/accepted?)

Also, must the company pay the entire lump-sum in One Payment?

I think it is

No

Yes

[Guest Grecco]

Thank you ESOP Guy!

If the company states that they just don’t have the money to pay the distribution and refuses to pay….

What would be the next step for the ex-employee?

[GMK]

Again I agree with ESOP guy.

Based on what's been posted, the company has to get the money (may need to borrow it) for this distribution now.

Presumably the plan's ERISA lawyer thinks the plan can be amended to make current participants have to wait an extra 5 years for their benefits, but even if it is OK, that amendment came after this employee filed a benefit claim under the pre-amendment rules.

The number for the Employee Benefits Security Administration is 1-866-444-3272.

[Guest Grecco]

The Plan always contained the phase:

“unless you elect further deferral in writing, distribution will be made or will begin not later than the end of the fifth Plan Year after the Plan Year in which your service terminates”

Before and after the ex-employee submitted his forms.

It seems that the company is bound by the forms the ex-employee submitted.

Therefore the company must follow through and do what the forms indicate. – Distribute a Lump-Sum Payout.

But…

The problem is the company states they do not have sufficient funds for this distribution.

The company’s position is that they do not have to distribute the funds until 5 years have lapsed.

The ex-employee’s position is that distribution should be done quickly as the submitted forms indicated (i.e. “as soon as practicable” and “as soon as administratively possible”).

Who is correct?

Can the ex-employee force the company to distribute the funds?

[GMK]

The Plan always contained the phase:

“unless you elect further deferral in writing, distribution will be made or will begin not later than the end of the fifth Plan Year after the Plan Year in which your service terminates”

Before and after the ex-employee submitted his forms.

It says not later than the end of the 5th year (unless the participant elects further deferral of the payment in writing). This looks like a way to get inactive participants off the books within 5 years unless they request to stay in the plan.

But what we don't see is the rest of the paragraph. Does it say that payment can be delayed at the discretion of the employer in the section where this phrase is or in another section of the Plan Doc? Is this in regard to a Put Option (which may have terms that allow partial payments)?

You can request to see the Plan Document (or request a copy if you pay a copying fee), and you can ask the plan administrator to show you the section that allowed (before the amendment) the employer to delay the distribution.

Edit: Look in the Plan Document for a section on Commencement of Benefits and Limits on Time of Commencement of Benefits.

[Guest Grecco]

The Plan Document does not contain any section titled Commencement of Benefits and Limits on Time of Commencement of Benefits.

But the Plan Document does contain a section called: When Your Plan Benefit will be Distributed.

Table of Contents for Plan

(1st attached file)

(sorry I can't embed the picture...get error:"Sorry, but you have posted more images than you are allowed to")

Here is the section discussing distribution timeframes:

(2,3 & 4 attached file)

(section b -omitted ...Concerns Death & N/A...yet)

(Note: There are no put options for this ESOP.)

The Issue

The problem is the company states they do not have sufficient funds for this distribution.

The companys position is that they do not have to distribute the funds until 5 years have lapsed.

The ex-employees position is that distribution should be done quickly as the submitted forms indicated (i.e. as soon as practicable and as soon as administratively possible).

Who is correct?

Can the ex-employee force the company to distribute the funds?

[ESOP Guy]

I don't disagree that the plan may have allowed them at one point to delay the payment for up to 5 years. I just don't think the plan document is relevant to this situation. They gave him forms that talked about making a payment as soon as practical and so forth. To me that means the plan administrator made a decision to not delay it. The company's positon makes no sense. We gave you forms to elect a payment as soon as practical but that means when we have enough money in the next five years.

If this person goes to the DOL I think the DOL simply isn't going to buy the company's positon. Can I quote law or part of the document? No. The reality is if the company wanted to delay it should not have put the forms out and it should have had its policy and document be clear on that issue of the delay.

You keep asking the same question and I just don't see how the answer is going to change.

I think the company needs a good lawyer at this point. I realize if they can't pay this guy they don't think they can afford a lawyer but to have the DOL come knocking on their door will get expensive quickly.

[Guest Grecco]

Thank you ESOP Guy.

Could you please expand upon your statement that you made awhile ago:

"ESOPs do have a well known exception to the general rule that stops a company from changing its form of payment."

(Source: http://benefitslink.com/boards/index.php?/topic/49168-change-from-lump-sum-to-installment/?p=212393)

What is “this well known exception” for ESOPS?

Thanks

[ESOP Guy]

Thank you ESOP Guy.

Could you please expand upon your statement that you made awhile ago:

"ESOPs do have a well known exception to the general rule that stops a company from changing its form of payment."

(Source: http://benefitslink.com/boards/index.php?/topic/49168-change-from-lump-sum-to-installment/?p=212393)

What is “this well known exception” for ESOPS?

Thanks

As a general rule amending a plan to change forms of distributions can have problems with the anti-cut back rules. ESOPs have this broadly written exception in the law that the IRS narrows in the regs.

See See 411(d)(6)

http://www.law.cornell.edu/uscode/text/26/411

which says:

© Special rule for ESOPS

For purposes of this paragraph, any—

(i) tax credit employee stock ownership plan (as defined in section 409 (a)), or

(ii) employee stock ownership plan (as defined in section 4975 (e)(7)),

shall not be treated as failing to meet the requirements of this paragraph merely because it modifies distribution options in a nondiscriminatory manner.

I can't stress enough you have to study the related regulations. The way congress wrote this seems very open ended. The regulations seem to narrow this down.

Here is the reg link (search for the word ESOP)

http://www.law.cornell.edu/cfr/text/26/1.411%28d%29-4

I didn't mention it before because I have my doubts this will help because this allows you to amend a plan's distirubtion section of the plan document. In your case I am hard pressed to see how one amends the plan document to say they can ignore the forms. But I am happy to be told I am wrong.

At this point you have me curious enough that when you come to a resolution please give us an update.

[ESOP Guy]

Follow up comment regarding 411(d)(6).

I have had conversations with ERISA lawyers regarding the following situatuion. (This might be relveant to this conversation)

There was a plan that had 3 year installments. It needed to change to 5 year installments because it was having what they thought were short term cash flow problems. The lawyer had no problem with the amendment changing the plan for people who hadn't terminated. But for the people who had already started the 3 year intallments he would not let those change to 5 year installments. The company could only apply the 5 years to people who terminated and started payments after the amendment was in place.

[BG5150]

The Plan Document does not contain any section titled “Commencement of Benefits and Limits on Time of Commencement of Benefits”.

But the Plan Document does contain a section called: “When Your Plan Benefit will be Distributed”.

"When Your Plan Benefit will be Distributed" sounds like a section title for the SPD, not the plan document.

[GMK]

I agree with BG5150 that this is probably from the Summary Plan Description, not the Plan Document. Even so, if the wording in the thumbnail on post #16 is pre-amendment, then the company appears to be able to delay payment up to 5 years unless the termination is normal retirement, deferred retirement, or disability retirement.

That said, I think that ESOP Guy is correct that the company has to follow what its forms say. A question would be does "as soon as practicable" mean 'as soon as we have enough money' (I'd get a lawyer to answer that).

And as to the present case, ESOP Guy's post #20, above, is very relevant. You can't change the rules on someone who has already retired and filed a proper claim for benefits.

BTW, if the ESOP can make distributions in shares of stock, then the ESOP has a put option.

Really need to look at (or have your lawyer look at) the Plan Document to get your answers.

edit: typo

[Guest Grecco]

Thank you all for your replies.

This pictures I posted are definitely from the Plan Document and not the Summary Plan Document.

The ex-employee is currently awaiting a response back from the company from a “Claim for Benefit” Request.

I will keep this board updated on this topic.

Once again....thank you.

Lisa

(lisa_grecco@yahoo.com)

[Guest Grecco]

UPDATE:

The company has reviewed the ex-employee’s Claim for Benefit.

The company concluded that this person is ineligible for a lump sum distribution and the claim is denied.

The company states they will payout in a 5 year installment.

The company claims that even though all proper lump sum distribution forms were completed and submitted properly (see 1st post), this person does NOT qualify for a lump sum distribution…Because:

- The ESOP Plan had been amended. This amendment eliminated the lump sum distribution option.

- The amendment occurred AFTER the distribution forms were submitted but BEFORE any distributions had commenced.

Any Thoughts or Recommendations?

Thanks, Lisa

(my edits added the images)

[Guest Grecco]

Does anyone know of any regulations or case law that are applicable here?

[ESOP Guy]

Does anyone know of any regulations or case law that are applicable here?

At this point I would focus on case law. I think the regulations that could apply here have been covered. I would add I think the company simply has taken a very agressive stand. I wish you luck but this is going to be a tough one to defend. I am unaware of any cases but have to admit I haven't gone looking to defend something like this ever.

[Guest MsLisaJones]

Your Answer can be found here - http://esop-rules.blogspot.com/

What was the final outcome?