Does the ESOP Have Pay for Legal Support or Can that be Paid for by the Company?

[redrobin]

Our ESOP has hired a number of attorneys to assist in resolving legal issues with some of our ESOP plan participants.

Does this legal cost have to be paid by the ESOP or can the company (who sponsoring the ESOP) pay for these legal costs?

If the ESOP must pay – Then, would these legal costs need to be reported in the 5500 form?

Thank you.

[QDROphile]

The plan document should say that the sponsor may elect to cover administrative costs. Sometimes the sponsor is required to cover certain admimistrative costs.

[ESOP Guy]

If the ESOP does end up paying then "yes" these costs would need to be reported on the Form 5500.

I would add there are some costs that the DOL says can only be paid by the plan sponsor although this doesn't sound like any of those types of costs.

[jpod]

Just for giggles if ESOP's sole asset is company stock and the company is not publicly traded how is the payment of expenses by the ESOP financed?

[GBurns]

jpod,

What difference does it make? Both publicly traded stocks and privately held stocks are paid for by the stockholder.

[ESOP Guy]

jpod everyone understands the issue but the IRS and DOL seem to take the issue seriously. You have to pay the expenses by the rules.

Although it should be pointed out that in total you are right. It doesn't make a difference. Every dollar spend at the corporate level would reduce the stock price a bit.

It could make a difference in the by person breakdown however. How you allocate expenses per the document might not lead to the same account balances if you paid the expense via the company and the stock price went down.

Where this comes up the most (or it is the most obvious) is when the company is sold and you are working through the issue of getting the final proceeds to the participants. Since the company is no longer functioning and bringing in revenue every dollar spent at the corporate level is one less dollar that goes to the stockholders. Which as you say if that is the ESOP and the stock is the ESOP's only assets they tend to be one and the same in total. Like I said it might not be the same on a by person split although.

[jpod]

My motivation for asking the question was sincere. I don't recall seeing any situation where legitimate plan administration expenses were paid with plan assets in a non-public ESOP with no assets other than employer securities. The ESOP would have to raise the cash somehow, presumably through a redemption of shares by the corporation. I guess that is the way to do it if you don't wish to dilute the non-ESOP shareholders, if any, but typically I just see the corporation paying all ESOP expenses and leaving the share allocations alone.

[redrobin]

I would add there are some costs that the DOL says can only be paid by the plan sponsor although this doesn't sound like any of those types of costs.

What costs are required to be paid by the plan sponser and what cost are required to be paid by the ESOP?

[ESOP Guy]

My motivation for asking the question was sincere. I don't recall seeing any situation where legitimate plan administration expenses were paid with plan assets in a non-public ESOP with no assets other than employer securities. The ESOP would have to raise the cash somehow, presumably through a redemption of shares by the corporation. I guess that is the way to do it if you don't wish to dilute the non-ESOP shareholders, if any, but typically I just see the corporation paying all ESOP expenses and leaving the share allocations alone.

It would have to be a redemption of shares-- cash from the company.

or

A contribution from the company-- obviously cash from the company

or

A dividend from the company-- cash from the company

So you are correct you rarely see in ESOP pay the expenses in you fact pattern because it will tend to always really be the company that pays. It is just how will the expense be "allocated".

[ESOP Guy]

I would add there are some costs that the DOL says can only be paid by the plan sponsor although this doesn't sound like any of those types of costs.

What costs are required to be paid by the plan sponser and what cost are required to be paid by the ESOP?

This is the good old settlor expenses vs plan expenses question.

Here is a good start

http://www.dol.gov/ebsa/regs/aos/settlor_guidance.html

Another:

http://benefitslink.com/articles/expenses001213.html