Esop combined with 401(k) or use separate plans

[Belgarath]

Just wondering what, if any, experience anyone has had with this question. Probably dependent upon the old facts and circumstances, but have you encountered any particular pros or cons to either keeping the plans separate or having the ESOP/401(k) combined?

[GMK]

FWIW, we run them separately.

One reason is that our 401(k) is plain, so we can use a check-the-boxes Plan Doc, and updates are easy to track. In contrast, ESOP's have some unique rules and a lawyer-maintained plan doc, so it has been easier to maintain separate documents for the plans. We don't have to worry about whether or not an amendment to one plan affects (or should or shouldn't affect) the other one. And it's easy enough to amend both plan docs if a rule change requires it.

In our plans, there are many differences in the details of eligibility, vesting, contributions, and distributions, so it is easier to watch over them in separate documents. It is also easier for participants to find the information they want by having a separate SPD for each plan.

We have the ESOP audited every year (for self-protection if not required). If the plans were combined, we'd have to include the 401(k) in the audit (meaning more audit expenses). Depends, of course, on the number of participants. I don't know if the audit of a combined plan would be less expensive than 2 audits for 2 separate plans.

We had the ESOP when we started the 401(k), so we looked at combining them. We decided against it, because ESOP's are so unique. And I'm glad that's what we did.

[A Shot in the Dark]

B:

I am not very good ( I do not know how) at linking old topics on Benefits Link but you will find this topic discussed in the recent past.

As usual you will find varying opinions.

The analysis is something like this:

Additonal Securites Law Issues

Potential Additional Diversification issues

One Plan One 5500

Versus Two Plans Two 5500's

Also there is no volume submitter/prototype status for a KSOP.

For our firm, we seek individual determination letters for all of our ESOP clients, so we see less issue with the Plan Document status.

All in all I think most ESOP professionsals see it easier to have two plans.

The National Center for Employee Ownership has authored a paper/book on the subject.

[ESOP Guy]

Beside what is above most find it easier to have two seperate becasue very few 401(k) providers run ESOPs well. There are some ESOP providers that will do the 401(k) and do it well. But if it is one plan you either need to find a firm that can do it all or you have two firms helping you run one plan.

I would add now with all the fee disclosure rules if they are seperate there is a good chance you don't have to figure our how to disclose the ESOP part. It seems like the few KSOPs we have we put a fair amount of work in getting the ESOP portion properly disclosed.

I think there are good reasons most are two plans.

[QDROphile]

We encountered an IRS reviewer who challenges a single plan that has both a money purchase aspect and a CODA. There is a basis for that, but the design passed through two rounds of determination letters before encountering resistance.

[Bill Presson]

I definitely wouldn't do it if there was any leveraging in the ESOP. But we've got a few KSOPs where the employer stock was more of a stock bonus component and it's worked pretty well.

[Belgarath]

Thank you for the opinions!