ESOP allocation and employees on military leave

[tghooper]

Suppose you have an 100% leverage esop in which the same number of shares are released and allocated each year; there are no forfeitures available and there are no shares available for purchase.

If USERRA doesn't apply until the employee returns from leave, would it appropriate to allocate the shares on the imputed compensation and placed into a suspense account? The employee would then be credited with the shares upon return. Or do you have multiple years of imputed compensation in the year of rehire?

[ESOP Guy]

The firm I work for would tend to compute the amount of shares this person would have gotten in each year after they get back and you knew USERRA applied. To get the shares you would take them from the current release. There really isn't any other source at that point as you are setting up the facts. (Are there no terms whose shares need to be repurchased? If so, the sponsor could put in the cash to fund the payments and call that the USERRA cont and that person repurchases enough shares to make him whole. That would be first choice if the facts allow for it to happen.)

I realize that The people whose share released in the current year aren't exactly the same group and the ratios of the years they got "extra" by the person on military leave being out of the allocation in prior years. But if that is your only source it is your only option and most likely the effect is not very material.

I for one don't care for the yearly suspense account. I see no support for it in the rules.

This is one of those situations where the section of a plan document that allows plan administrators broad discretion in implementing plan provisions in a reasonable nondiscriminatory manner applies. So once you set precedent I would document and make sure you do it the same way going forward.

This is the type of situation when a little money spent on getting the plan's ERISA attorney's blessing is wise in my opinion.

The company could put treasury stock into the plan to make the person whole if you really don't like the idea of using the current release. Obviously increasing the total shares outstanding would have a dilutive effect on the share price. But unless this person made a large wage that wouldn't be that material would be my guess. I don't think I have ever seen the treasury stock idea used vs the current release or using the repurchases. Then again you don't see the fact pattern as described very often.

[QDROphile]

I do not subscribe to your proposed suspense account approach. The USERRA make-up should work like any other nonelective make-up except the employer should have the option to contribute more to cover it. Otherwise, in a leveraged ESOP, it comes out of the regular allocation, and thus distorts the allocation. The plan terms should provide for the special allocation, but do not count on the drafter cabal to have taken care of the matter. It is just so much easier to say the plan will comply with USERRA requirements than figure out how that will work.

[tghooper]

My proposal is for discussion only. The plan document is not specific and only states that it will comply with USERRA. There are no special provision for a special allocation so it would not be possible to make an additional contribution. As you stated QDROphile, it would distort the allocation. I wanted to see what other practitioners are doing. At this point, we may have the client discuss this with counsel.

[QDROphile]

"Distortion" is not a bad thing if the plan amendment provides for it. Even if the employer wants to contribute more to cover the make-up, the plan will need provisions to account for it and the special allocation because the employer will probably want to apply the contribution to the ESOP loan and that will require a special allocation for the extra shares released for allocation. Distortion of some sort cannot be avoided.

If you used extra contributions, an interesting question is whether you measure the make up by the value of the contribution or the value of what is ultimately allocated because of the contribution. I cannot recall without a refresh. I think it is the value of the allocation.

[ESOP Guy]

If the document says it will comply with USERRA then doesn't that mean you can put in a contribution to make this person whole? That is how you comply with that law. You give them their missed contribution.

Maybe I am misunderstanding by what you mean by special allocation.

[QDROphile]

I suppose you could rely on the compliance language to make a special contribution and then specially allocate the results of the contribution to the participant. But you would still have to figure out the number of shares that should be allocated to the returned participant and what contribution would produce the correct number of shares depending on how the shares are ultimately sourced and delivered . You may not need the the detailed directions in the plan document, but the terms of the plan document would have to be figured into the figuring. One way or another, the path has to be charted and followed, but your point is valid.