Why would employer terminate Esop?

[Guest camneely]

Just notified that plan was terminated as of 10/1/2013. Company has recently been doing very well. Why would employer terminate ESOP plan? Greed? ( I'm sure it is financial.)

Fairly small company, less than 100 employees. Maybe 20 % of the 100 are fully vested. Vesting is vary "top-heavy", if that matters.

Still offering 401k plan.

Thanks for any input.

[Lou S.]

If they are terminating the ESOP that will make everyone 100% vested.

I'm sure there are a number of reasons why someone would terminate an ESOP. One might be that the company is being put up for sale.

[ESOP Guy]

There are a lot of reasons but something is going to happen to the stock. If they aren't distributing to everyone that means someone is buying it. Not that is a bad thing per say. I mean somone coming in and buying the stock most often times mean they offered a really good price for it.

I would add even though the stock is owned by the employees via the ESOP the board and the trustees have to do what is in the best interest of the stockholders as stockholders. It is hard to justify not selling the company for a good price because the employees fear what might happen after a sale.

Most likely they will tell you what is going on in time. But the reasons are so many one can't really speculate as to the specific reasons.

[david rigby]

Someone buying the company (ie, purchase all the stock) is not the same as terminating the plan.

As stated above, there could be many different (and valid) reasons for the company management deciding to terminate the plan. Answering that question here is blind speculation.

[masteff]

The other likely reason: repurchase liability. If the company is doing well, that liability is growing quickly.

http://esoppartners.com/blog/bid/139462/ESOP-Repurchase-Obligation-What-is-the-ESOP-Repurchase-Liability

[Guest camneely]

Thanks to all for the input.

Quick question. Say the payment I get is around 40,000 dollars. Will I be able to roll the entire amount into an IRA? Could i cash out about 10% of it and roll the rest? I thought I read somewhere that the company must impose a 10% tax on the distribution? I also have 60 days from the day I receive the distribution to fund the IRA? I am only in my 30's and no where near retirement.( If age matters). I really want to make sure I don't mess this up.

Sorry for being such a newb, I've looked at many threads in this site, but can't seem to find the info I need and my company most likely doesn't care that most are clueless about ESOP rules and regs..

Thanks again everyone....

[GMK]

From what's posted, you should be able to rollover the entire 40,000. If you do a direct rollover, there is no withholding and no tax due at this time (except a rollover to a Roth IRA would be taxable).

Any cash you receive (do not roll over) is taxable as ordinary income and is subject to mandatory 20% federal withholding. In addition, since you have not reached age 59-1/2, it is likely that you would also have to pay (when you file your 1040) a penalty tax equal to 10% of the amount not rolled over. Yes, the amount withheld is included in the amount not rolled over and is subject to income tax and the penalty.

You can rollover cash that you receive in the distribution to an IRA yourself if you do it within 60 days, but if you wanted to rollover the entire 40,000, you would have to come up with the amount that was withheld from other sources, like other savings.

[ESOP Guy]

Before you get your payment you will get some distribution paper work. One of the items in that package has to be a tax notice. Most everyone uses the IRS approved language. It seems like it is 6 or 7 pages long. That tend to cause people to not read it fully and carefully. It actually does a really good job of explaining your options from a tax perspective. It gives you a good idea which options will cause you to pay taxes and which ones won't.

For example if you take the full $40,000 as a cash distribution to yourself. You do have 60 days to put it in an IRA. Here is the difficulty. As GMK said the plan would have to withhold 20% so you will have only recieved a check for $32,000 (maybe less if state taxes are withheld). So you would have to find $8,000 within 60 days to roll all of it over into an IRA in addition to the $32,000 check you recieved.

Little traps like that are explained in mostly plain English in that IRS notice.

So what I am saying is take some time and read through that notice carefully. That is a large enough sum of money it might not hurt to find a good tax person to give you some solid advice. The few hudred spent up front might be worth it on the long run.

[Guest camneely]

Thanks you so much GMK and ESOP Guy.

Very helpful info.I am going to do the direct rollover for certain. I don't want any tax liability for 2014, and this route appears to be the best solution. I now have to find somewhere to setup the IRA, but I am headed in the right direction thanks to you guys.

If anyone has any suggestions feel free to respond or private message me.( Good IRA options)

Once again, thank You guys very much. Great website with very kind and intelligent people.