ESOP Questions

[klrhoades1024]

My husband worked for a company 2 years ago and has a 40% vested balance in said ESOP account. He hasn't been with the employer for 2 years and never go the option to withdraw or rollover the esop balance. I have read that you cannot do anything for 5 years with some places but per their plan document it doesn't state that. I have uploaded their plan summary. if you decide to look at it refer to page 11 and reference employee termination for balances exceeding 5,000 and before retirement age. As I know nothing about these types of accounts any insight would be appreciated. 

Summary Plan Description Randy.pdf

[Paul I]

The first steps your husband should take is to ask the plan administrator for information about taking a distribution from the plan.  The plan administrator's contact information including the phone number appears on page 20.  The name of the company that does the plan accounting also appears on that page.

I expect either contact will be able to answer your questions and provide detailed instructions on how your husband can request any benefits due to him.  Most plan administrators are very helpful.

If, for any reason this is not the case, then your husband can follow the steps for filing a claim.  The procedures for filing a claim begin on page 15.

May everything work as it should and your husband timely receives the benefits due to him under the terms of the plan provisions.

[ESOPMomma]

The SPD provided DOES STATE there is a 6-year delay for vested balances in excess of $5k for terminations due to reasons other than age 59½, death or disability.

[ESOP Guy]

Also note if the account's vested balance is >$265,000 the payment will be in the form of installments. 

 

But ESOPMomma nailed it. 

[Paul I]

Interestingly, the cite says "the Participant may elect to begin distribution of his/her Vested Interest as follows: (1) from his/her ESOP Account no later than the end of the sixth Plan Year follow the Plan Year of the separation from service"

If there is a 6-year delay, one would expect this to read no earlier than.

[EBECatty]

Maybe I have not had enough coffee yet, but this SPD seems somewhat different than what I typically see for ESOP distributions. It looks like this is from a pre-approved document, which I have found to be less-than-ideal for ESOPs.

As noted above, the SPD appears to allow the employee an election to take a full distribution of his or her ESOP balance during the six-year period. As Paul I notes, typically if the employer wants to impose a mandatory six-year waiting period, it would be more clearly stated. Forcing an employee to elect a full distribution within six years also seems to contradict the typical deferral election and distribution consent rules for vested accounts over $5,000 (see p. 13).  

I'm also curious about the installment provisions. They apply only if an account balance is over $265,000, suggesting that anything under $265,000 is paid in a lump sum. But each installment payment is the greater of $265,000 or the otherwise-applicable installment (vested account balance over remaining installments), so a participant with a $266,000 balance would get a $265,000 installment in year 1 and a $1,000 installment in year 2. I would usually expect to see this stated as the lesser of.

I'm not sure I follow the interaction with the permitted installment extensions, as the formula would always give you a maximum five-year installment (i.e., if the account was over $1,325,000 [$265,000 * 5] each installment would be the greater of $265,000 or the one-fifth installment, so the one-fifth installment would be paid, and the account would be empty within five years). 

[ESOP Guy]

55 minutes ago, EBECatty said:

Maybe I have not had enough coffee yet, but this SPD seems somewhat different than what I typically see for ESOP distributions. It looks like this is from a pre-approved document, which I have found to be less-than-ideal for ESOPs.

As noted above, the SPD appears to allow the employee an election to take a full distribution of his or her ESOP balance during the six-year period. As Paul I notes, typically if the employer wants to impose a mandatory six-year waiting period, it would be more clearly stated. Forcing an employee to elect a full distribution within six years also seems to contradict the typical deferral election and distribution consent rules for vested accounts over $5,000 (see p. 13).  

I'm also curious about the installment provisions. They apply only if an account balance is over $265,000, suggesting that anything under $265,000 is paid in a lump sum. But each installment payment is the greater of $265,000 or the otherwise-applicable installment (vested account balance over remaining installments), so a participant with a $266,000 balance would get a $265,000 installment in year 1 and a $1,000 installment in year 2. I would usually expect to see this stated as the lesser of.

I'm not sure I follow the interaction with the permitted installment extensions, as the formula would always give you a maximum five-year installment (i.e., if the account was over $1,325,000 [$265,000 * 5] each installment would be the greater of $265,000 or the one-fifth installment, so the one-fifth installment would be paid, and the account would be empty within five years). 

We aren't helping the poor person who asked the original question now but....

The no later provision is pretty common and when you get into the document and/or distribution policy it is pretty clear the sponsor gets to decide when the first election will be offered.  Once the offer is made the employee then elects.

 

You seem to understand the installment provision correctly.  Your example of a $266,000 balance is correct.   The reason it says greater is because until you get to the very large balances you must pay within 5 years.  So if an balance is $1,350,000 you would get 5 installments of $270,000 and that would be paid instead of the $265,000.  

In the extreme if a person had for example a $10,000,000 balance you could pay $1,000,000 over 10 years.   It meets the law and is greater than $265,000. 

[ESOP Guy]

On 6/10/2024 at 5:33 PM, klrhoades1024 said:

My husband worked for a company 2 years ago and has a 40% vested balance in said ESOP account. He hasn't been with the employer for 2 years and never go the option to withdraw or rollover the esop balance. I have read that you cannot do anything for 5 years with some places but per their plan document it doesn't state that. I have uploaded their plan summary. if you decide to look at it refer to page 11 and reference employee termination for balances exceeding 5,000 and before retirement age. As I know nothing about these types of accounts any insight would be appreciated. 

Summary Plan Description Randy.pdf 341.77 kB · 11 downloads

This group, myself included, can be a bit of retirement plan geeks so let us know if our academic discussions aren't answering your questions.  We will focus on your specific questions more in that case. 

[EBECatty]

18 minutes ago, ESOP Guy said:

We aren't helping the poor person who asked the original question now but....

The no later provision is pretty common and when you get into the document and/or distribution policy it is pretty clear the sponsor gets to decide when the first election will be offered.  Once the offer is made the employee then elects.

 

You seem to understand the installment provision correctly.  Your example of a $266,000 balance is correct.   The reason it says greater is because until you get to the very large balances you must pay within 5 years.  So if an balance is $1,350,000 you would get 5 installments of $270,000 and that would be paid instead of the $265,000.  

In the extreme if a person had for example a $10,000,000 balance you could pay $1,000,000 over 10 years.   It meets the law and is greater than $265,000. 

Completely agree the "no later than" provision is fairly common as it's restating the law, and many ESOP documents are not perfectly clear on distribution timing. But the SPD and is supposed to inform the participant of their rights in plain language. I don't work with pre-approved ESOP documents very often (usually IDP), but do they typically have separate distribution policies? If so, and this person's does, it seems like we're all looking at the wrong document in any event. 

On the extended installments (p. 13), the SPD says that each installment will be the greater of the regular installment or $265,000. In your extreme example, the $10,000,000 balance would still be paid over five years, which seems at odds with the extension for large balances. For example, in year 1, the greater of $265,000 or 1/5 of the $10,000,000 account would be $2,000,000, so $2,000,000 would be paid in year 1. In year 2, the greater of $265,000 or 1/4 of the $8,000,000 account would be $2,000,000, so $2,000,000 would be paid in year 2. And so on.

If they wanted to use the extended installments, I would think it would read the lesser of $265,000 (or the adjusted limit) or the regular installment. The lesser of would also (in my experience) make more sense as it would spread out a $266,000 account balance over five years at $53,200 each, instead of $265,000 and $1,000. Of course, this is all plan design and voluntary, but it strikes me as backwards, at least if you are trying to extend installments under the large account rules. Maybe that's not the goal, and they are just choosing a five-year limit on all distributions, regardless of account balance, with the caveat that accounts under $265,000 will be paid in a lump sum. (But then the last sentence of that paragraph wouldn't make sense as they are not using the 5+ years permitted under 409(o)....)