Change in Distribution Policy

[ERISA-Bubs]

We have some employees that are already terminated and being paid over a five year schedule.  Once payments have begun, is it too late to change the payment schedule.  In other words, if we have a participant being paid over a five year schedule, can we change payment timing to delay payments until retirement / diversification?

What about non-terminated employees?  If our current policy calls for payments over 5 years, can we change the policy to change payment timing to be at retirement / diversification, or do we have to stick with the policy that was in place when they accrued their benefits?

[ERISAAPPLE]

We need a lot more information.  Let's start with whether this arrangement is a qualified plan, a nonqualified plan, or something else, like an annual bonus or long-term incentive plan paid on a short-term deferral basis.   If the plan is a qualified plan, what does it say now?

[ERISA-Bubs]

It's an ESOP.  

The Plan just includes all the typical ESOP rules.  The SPD says the distribution policy can change at any time and will apply to all distributions thereafter, even if the participant is already retired.

[A Shot in the Dark]

If the trustees of an ESOP have adopted a repurchase policy that is more liberal than the law requires and if the language of the repurchase policy was drafted in a manner that allows the Policy to be amended, then yes the policy can be amended.  Generally  a distribution policy becomes an exhibit to the SPD. The ESOP trustee(s) should take great care in analyzing the need to amend the existing policy, keep written records as to the process of their decision and the reasons why.

The Department of Treasury and the Department of Labor are not keen on such amendments and upon any potential audit they will review the Trustee's decision(s) quite closely.

Your comment about delaying distributions till retirement or diversification  does not make sense.  ESOP distribution rules require the timing of distributions to occur over certain time periods following the triggering of certain events. 

[ERISA-Bubs]

Thank you, A Shot in the Dark.  What are some good reasons to amend the policy?  We are wanting to do it for cashflow reasons -- is that an appropriate reason?  

[A Shot in the Dark]

Employer's Cash flow distress would be a valid reason.  Perhaps the employer is in violation (or potential violation) of the certain bank loan covenants, etc. 

Perhaps the ESOP trustee(s) working with the board of directors of the company would determine that necessary contributions to the ESOP for funding the Repurchase could jeopardize the business operations.

The appropriate analysis would be made and documented and the change (amendment to) in policy would be communicated to the ESOP Participants.

Again, none of this should be done without review of all facts.  I believe the facts relating to the interest of the ESOP Participants should be considered as well. Participants who are in death. disability or retirement status, perhaps the policy does not change for them. Maybe the policy is amended for only those in the "all others" category.

[ESOP Guy]

I am more concerned by the idea you aren't going to pay anyone until NRA, death, disability or diversification.  Unless there is a loan that purchased all the shares in the plan don't you have to offer a distribution after the 5th year after termination?  https://www.nceo.org/articles/esop-vesting-distribution-diversification

 

[ERISA-Bubs]

That makes sense.  One other practical consideration.  Say we have an "all other" person (termed but not for retirement, death, or disability) who has already terminated and has received two installments beginning one year following termination.  Now we have a new policy that says the "all other" people are to receive 5 installments beginning on the last day of the 6th year following the year of termination. 

How does the new policy apply to that person?  Since they have already received 2 installments, do we just do 3 installments beginning on the last day of the 6th year?  Or do we start 3 installments two years following the last day of the 6th year, since he's already received 2 installments?  Or can we not change the payment schedule once the first installment has been paid?

[ERISA-Bubs]

Yes, thanks ESOP guy!  You're absolutely right, and I'll make sure to include those requirements.  Thanks!