Release of shares on cash basis?

[Belgarath]

C-corporation has leveraged ESOP. Say 2012 is the first plan year. Under their repayment schedule (and don't ask me how they arrived at it, 'cause I don't know) they make a December payment of interest only. Let's say that this requires the release of 1,000 shares, valued at $10.00 per share. Now they make a principal payment in September of 2013, and DEDUCT AND ALLOCATE it for the 2012 plan year.

They want to release shares as of the date the contribution was made in September of 2013.

So just for ease of illustration, suppose there are 10 participants, and they all receive an allocation of 100 shares in December of 2012. In addition, they all receive an additional $30,000 allocation for the 2012 plan year, based upon the September 2013 contribution.

Is there any problem with only allocating the shares released in December of 2012, on the 2012 valuation, showing each person with an account balance of $31,000 (100 shares @ $10.00/share = $1,000, plus the $30,000 allocation) and then in September of 2013, assuming no change in stock price, everyone will receive a share release of 3,000 shares which will be reflected in their statement of 12/31/2013?

It appears from 54.4975-7(b)(8)(i) that this is acceptable, I guess depending upon how you interpret the "For each plan year"- does that phrase allow cash accounting such as I have specified, or does it require accrual accounting?

Thanks!

[A Shot in the Dark]

B:

The plan documents of the ESOP's that I work with define:

1. An Allocation Date - Valuation Date
2. Employer Contributions and Forfeitures and Dividends
3. Define Financed Shares and the manner in which the shares are to be released and allocated

The ESOP's that I work with define that Employer Contributions, Forfeitures and Dividends are allocated on the allocation date. The shares purchased and paid for with Employer Contributions, Forfeitures and Dividends will be released pursuant to the share release and allocated on the Allocation - Valuation Date.

In all, the Share Release occurs once a year on the allocation date regarlesss of when contributions are deposited, based upon the cummulative contributions made for the year.

You need to check your plan document.

By the way, there can be several legitmate reasons why an interest only payment is due.

[ESOP Guy]

If they deducted the Sept 2013 payment in 2012 why wouldn't you allocate that part of the release at 12/31/2012?

Check the document but that seems like the most likely thing it is going to say.

[Belgarath]

Thank you! I'll get a copy of the document and take a look at it. I should have thought of this in the first place...

[Marcus R Piquet]

Belgarath,

I've seen it done both ways, and I've also seen plenty of plan documents that aren't explicit on this point.

If you allocate the accrued contribution as cash/OIA, then you'll need a rebalancing/reshuffling transaction in 2013 to replace the accrued cash with the released shares.

If you allocate the accrued contribution in the form of the committed-to-be-relesed shares, then you avoid the rebalancing transaction in the following year.

Where there is the ability to exercise discretion, I typically suggest the latter approach for two reasons:

1) Easier for participants to understand - avoids the need to explain a rebalancing/reshuffling transaction; and

2) It mirrors the GAAP concept of doing this on an accrual basis from the sponsor's financial reporting perspective. Your 3,000 shares would be disclosed by the sponsor as "committed-to-be-released shares" in their ESOP footnote disclosure. Review SOP 93-6 / FASB ASC 718-40.

Good luck!

[Belgarath]

Thanks Marcus.

Their plan language is, IMHO, unclear on this point. Perhaps unclear on a lot of points...

Assuming one takes the approach that doing on a cash basis is ok, then there's another piece that's unclear. When the shares are released on September (pick a day - say the 10th) of 2013, are they released at the share price on September 10th (which is unknown, as they aren't publicly traded) which would require a special valuation, or are they released at the value on 12/31/12?

To me, it seems like the document is lacking in some respects.

[A Shot in the Dark]

B:

The shares are released pursuant to the share release formula. The share release formula (principal and interest or principal only) will be stipulated either in your plan document or possibly in the Stock Purchase Agrement associated with the transaction that was completed when the ESOP acquired the shares.

The formula will dictate the share release price. The release price is not based upon the current valuation/appraisal (unless dividends are being used).

[Belgarath]

Thank you. Yes, I had finally figured this out. (And they use the principal and interest method, as an aside.)

The comments have been very helpful!