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ESOPs


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Measuring a 'Year of Participation' for ESOP Diversification
"Diversification is required to be offered to ESOP participants who have attained age 55 and have ten years of participation in the plan.... Does 'year' mean an entire plan year or any fraction of a plan year? 'Participation' begins at the entry date, but when does participation end? Date of termination, last plan year in which the participant received a contribution, distribution of vested account balance, or something else? Variations in the definition of participation can change when a participant is eligible to diversify." (Principal Financial Group)
ESOP Trends in the Marketplace (PDF)
17 presentation slides. "[1] Sophisticated pre-transaction structure analysis. [2] Investigation of an ESOP transaction in connection with other events. [3] Allowing a 'market' process to include an ESOP transaction alternative. [4] Exploration of tax planning opportunities. [5] Development of sophisticated economic transactions. [6] Post transaction planning. [7] ESOP-owned S corporations beginning acquisition strategy (typically 'mature' ESOP situation). [8] ESOP-owned companies increasing attractiveness to strategic buyers (end of ESOP lifecycle)." (McDermott Will & Emery)
Communicating Your ESOP
"Here are three practical ideas to make more of your annual statements: [1] Include ownership information and a 'how to read the statement' handout with your mailing.... [2] Hold a webinar to review the annual statement and ESOP results.... [3] Hold live meetings to build ESOP and business knowledge." (Blue Ridge ESOP Associates)
[Discussion] 'Small Amount' Exception to Right of Distribution in Form of Stock from an ESOP?
"ESOP plan document of a C-corp provides for automatic distributions under $1,000 and automatic rollovers between $1,000 and $5,000. Is anyone aware of any 'small amount' exception to the rule that ESOP participants are entitled to receive distributions in the form of stock, with respect to their company stock account? It appears that the company is making automatic rollovers of amounts under $5,000 in cash, and automatic distributions of amounts under $1,000 in cash." (BenefitsLink Message Boards)
Will DOL Continue to Make ESOPs a Compliance Priority?
"A recently filed case ... suggests that the DOL may continue to make a priority out of investigating potential abuses in ESOP transactions.... [E]mployers who are considering the adoption of the ESOP should be mindful of putting together an experienced team to guide them through the fiduciary issues. In particular, it is critical for the trustee of an ESOP to hire an independent appraiser that has not performed a preliminary ESOP feasibility study for the company, and the trustee and other fiduciaries of the ESOP should be engaged with the due diligence process." (Porter Wright Morris & Arthur LLP)
What Is Your Strategic Vision for Your ESOP?
"After the ESOP loan is repaid and all the shares have been allocated new issues arise.... [T]he first questions that need to be answered are: What are your long-term plans for your ESOP? Is it short-term ownership strategies to help with ownership transition on a tax-favored basis? ... If employee ownership using your ESOP is your long-term ownership strategy, there are several strategies available to make shares available for allocation after your ESOP loan is paid off." (Principal Financial Group)
District Court Awards ESOP $9.4 Million After Fiduciary Caused Participants to Overpay for Company Stock
"A federal judge, presiding over a U.S. [DOL] lawsuit, has found that First Bankers Trust Services Inc. breached its duties of prudence and loyalty to the participants of an [ESOP] when it caused the plan to overpay for shares of the company's stock.... [The judge] awarded to the plan $9,485,000 (plus interest), subject to the reduction in a 2016 consent order against SJP Group Inc.'s CEO Vincent DiPano. SJP Group, the plan's sponsor, hired First Bankers as an independent fiduciary to advise the company's plan on whether, and at what price, to purchase company stock from its majority shareholder DiPano." [Perez v. First Bankers Trust Serv. Inc., No. 12-4450 (D.N.J. Mar. 31, 2017)] (PLANSPONSOR)
Communicating Your ESOP Distribution Policy
"Many companies [find] that a key challenge facing their ESOP participants is understanding the distribution policy.... Live meetings are the best way to answer any immediate questions participants may have. A short recorded webinar can be developed to provide an overview of the distribution policy, including the process and timeline.... Print materials are useful because participants can refer to them at a later date and can share them with spouses or financial advisors." (Principal Financial Group)
DOL, First Bankers Move Closer to Trial Over ESOP Transaction
"A federal judge in New York March 29 denied motions for summary judgment by the department and First Bankers, holding that there were disputed issues of fact that couldn't be resolved at this stage. The issues to be resolved at trial include whether First Bankers failed to investigate the financial adviser's independence, whether it properly reviewed the valuation and if it negotiated the $15.5 million the ESOP paid for Rembar's stock." [Hugler v. First Bankers Trust Services, No. 12-8649, (S.D.N.Y. Mar. 29, 2017)] (Bloomberg BNA)
Employee Stock Ownership Plans 101
"There are three main reasons to consider an ESOP. [1] Succession planning ... [2] Borrowing money on a tax-favored basis ... [3] Organizations that support employee ownership frequently tout the higher profitability of employee-owned companies and offer supporting statistics." (Findley Davies | BPS&M)
ESOPs: A Powerful Tool for Closely Held Banks
"For shareholders in a closely held bank, an ESOP can be used as a succession planning or liquidity vehicle. For the bank's employees, it can provide enhanced benefits useful in attracting, motivating and retaining employees. For the sponsoring bank or bank holding company, an ESOP can facilitate tax-efficient capital enhancement.... An ESOP is not an isolated, stand-alone vehicle. To be successful, it must be integrated into the bank's overall strategic plan." (Holland & Knight)
Seventy Seven Energy Sued Over Chesapeake Stock in 401(k)
"The lawsuit is quite different from other stock drop challenges insofar as it aims not at Seventy Seven Energy stock, but at the stock of its previous parent company -- Chesapeake.... The plan included an employee stock ownership plan component, which only allowed 'employer securities.' The fiduciaries allowed Chesapeake stock in the ESOP component, an action that was prohibited under ERISA, according to the lawsuit.... Between July 2014 and December 2014, the plan's interest in Chesapeake stock dropped in value by $23.7 million, and yet it remained by far the plan's largest investment, the complaint said." (Bloomberg BNA)
Importance of Accuracy in ESOP Data Collection
"Reviewing and understanding your plan's definition of compensation is the key to making sure that all the right elements of compensation ... are recorded properly in your census data file.... It is important to review your plan document and understand which method is used for determining Hours of Service (hours worked or elapsed time).... Each year it is important to provide your recordkeeper with any company changes as those changes could impact the allocation and compliance testing process for the plan year." (Principal Financial Group)
Timing of Refunds Due to 415 Limitation Violations: What Every 401(k) Plan Sponsor Should Know
"The 415 limitation tests gross salary deferrals, match, ESOP discretionary contributions and plan forfeitures. If there are refunds needed for failing the 415 limit, these refunds must be processed prior to any ADP/ACP refunds. The ADP/ACP test must take the post-415 refund deferrals and match into account." (Principal Financial Group)
Employee Stock Ownership Plans: Do the Benefits Outweigh the Risks?
"Corporations with ESOPs invested in privately held company stock that is not readily tradeable on an established market face a unique cash flow risk that can quickly escalate.... Leveraging can be a useful tool to battle the repurchase obligation, but can also be a source of abuse if the employer does not adhere to its intended purposes.... Recordkeeping for ESOPs is complex, as are the rules governing ESOPs. There are many areas of ESOP design and administration that can be risky.... [M]any business owners see ESOPs as a more attractive option than selling to a competitor or attempting a company buyout." (Findley Davies | BPS&M)
Study Shows Great Success with ESOP Acquisitions
"[A]ll 20 ESOP executives had completed a total of 442 acquisitions and only 12 were unsuccessful, which is a 97.5% success rate. In addition, every ESOP acquirer hired 90-95% of all of the target company employees ... The strongest effect was the relationship of a Shared Vision to Organizational Empowerment. This indicates that for a successful acquisition to occur, both the acquiring and target companies need to have a common shared vision for their future together[.]" (Blue Ridge ESOP Associates)
ESOP 'Light' -- A Creative Succession Strategy for the Small Business
"In the case of an ESOP 'light,' the goal of the pension plan is to favor only the owner. Other key employees are excluded from the plan by design. In other words, the plan is designed to favor only the owner and minimize benefits for all others. In doing so, the plan and its assets can be used for the primary purpose of 'buying out' the owner's interest in the company." (Fox Rothschild LLP)
ESOP Loans: Internal vs. External
"Having separate loan transaction documents allows the Plan Sponsor more repayment and refinancing flexibility.... In addition, the company can have a much shorter loan term on the external loan in order to remove debt from the company's books and, in a seller financed transaction, pay off a selling shareholder without impacting the share allocation in the ESOP. It is common, for example, to see internal ESOP loans with terms of 15 to 30 years while external loans have terms of 5 to 7 years." (Blue Ridge ESOP Associates)
Fiduciary Must Surrender Luxury Cars Over Plan Mismanagement
"The owner of a DirecTV installation company accused of mismanaging an ESOP must turn over three vehicles, including two Lexuses, to cover a multimillion-dollar judgment in favor of participants and the Labor Department.... Herbert C. Bruister must also cooperate with participants and the DOL in the sale of his multimillion-dollar life insurance policies, which he offered as security pending an appeal[.]" [Perez v. Bruister, No. 13-1001 (S.D. Miss. Jan. 4, 2017)] (Bloomberg BNA)
Using a PTE 80-26 Loan to Convert ESOP Terminated Participant Accounts
"The decision to redeem, recycle or re-leverage shares from terminated participants' accounts can have a significant effect on future participant benefit level, stock price and repurchase liability. For many mature ESOPs, the value of stock in terminated participants' accounts is increasing due to the number of baby boomers who will retire over the next five to ten years.... In order to convert terminated participants' balances within the ESOP, it may make sense for the plan sponsor to loan money to the plan ... If a PTE 80-26 loan is used to make distributions or convert terminated participants' accounts, the loan can be repaid as of the next annual valuation date. One option for the repayment of the loan would be to redeem the number of shares equal in value to the loan amount at the new share price." (Principal Financial Group)
Valuation for Purchase of Former Employee's ESOP Stock Did Not Violate ERISA
"Under the terms of the ESOP, [the company] was authorized to purchase the shares allocated to [the employee]. Before the plan amendment was passed, the shares needed to be purchased at fair market value. However, after passage of the amendment, the value of shares was determined by the value set by the most recent stock valuation, which was in 2012." [Lee v. Holden Industries, Inc., No. 15-6405 (N.D. Ill. Nov. 21, 2016). (Society for Human Resource Management [SHRM])
Tax Incentives for ESOPs
"Tax incentives enacted by Congress to promote increased use of employee stock ownership plans include advantages for the sponsoring company and the participating employees. This article reviews some key incentives." (Jackson Lewis P.C.)
The Benefits of an ESOP for Construction Companies
"For many owners of construction companies, succession planning for the business usually takes a back seat to the daily task of running the business.... There are a number of ways an owner can transition their business ... [One] way that an owner could liquidate his holdings and unleash the potential value of his interest is consider selling his interests to an employee stock ownership plan (ESOP)." (WithumSmith+Brown, PC)
Cash Flow Required to Fund an Internal ESOP Note
"With an ESOP Note payment, the Company makes a contribution to the ESOP for the ESOP Note payment. The ESOP then makes the internal loan payment by transferring that money back to the Company.... [A] 2010 Technical Advice Memorandum states that this cannot be handled with a journal entry and cash must be transferred to facilitate the ESOP Note payments. What this means is that the ESOP Note payment schedule must be designed so that it does not conflict with cash necessary to make the Company Note payments or other cash flow requirements." (Blue Ridge ESOP Associates)
ESOP Fiduciaries Held Personally Liable in Bungled Plan Termination
"Fiduciaries of an employee stock ownership plan are personally liable for more than $874,705 in losses resulting from their mishandling of the plan's termination, the U.S. District Court for the Northern District of California ruled ... Following a one-day bench trial on damages, Judge James Donato held that the losses suffered by the participants in the plan sponsored by California Pacific Bank were also losses to the plan for which the fiduciaries are personally responsible." [Perez v. California Pacific Bank, No. 13-3792 (N.D. Cal. Oct. 24, 2016)] (Bloomberg BNA)
Employee Stock Ownership Plan Participant Cannot Pursue Fiduciary Breach and Bad Faith Claim Against Insurer of Plan Fiduciaries (PDF)
"Applying Mississippi law, a federal district court has held that a participant in an employee stock ownership plan cannot pursue his claims against the insurer of the plan fiduciaries because those claims were previously released in a settlement agreement between the plan fiduciaries and the insurer.... In so deciding, the court explained that the dispute was whether the agreement actually released the plan fiduciaries' claims, whether the agreement constitutes an unenforceable anticipatory release, and whether the agreement is unconscionable." [Sealey v. Beazley Ins. Co., Inc., No. 15-768 (S.D. Miss. Aug. 16, 2016)] (Wiley Rein LLP)
Growing Number of Employees Rank a Company Stock Plan as Their Top Workplace Benefit
"16 percent of employees say company stock is their most important benefit, up from 10 percent in 2014.... Almost two-thirds of employees (63 percent) said that participating in their company stock plan gives them a sense of ownership of the company, and 53 percent said it makes them feel more loyal to their employer. Nearly half of employees (49 percent) said that a company stock plan was an important factor when considering a new job." (Fidelity)
How to Prevent a Section 409(p) Failure by an S-Corp ESOP
"[1] Reduc[e] the level of synthetic equity by cancelling or distributing part or all of the synthetic equity.... [2] Rebalanc[e] participants' accounts ... [3] Allow for in-service withdrawals that could reduce the share balance of a disqualified person or potential disqualified person.... [4] Transfer shares from a participant's ESOP account to a non-ESOP account.... [5] Change the provisions of the ESOP to relax eligibility and delay the reallocation of forfeitures to ... dilute the percentage owned by potential disqualified persons. [6] Revoke the S election." (National Center for Employee Ownership [NCEO])
District Court Rules on ERISA Liability of Board and ESOP Advisory Committee Members in ESOP Transactions
"The lengthy decision ... not only provides a detailed view of the inner workings of an ESOP transaction, evaluated by testimony from numerous expert witnesses, but also gives validation to the importance of using thorough, well-documented processes at every step in an ESOP transaction." [Fish v. GreatBanc Trust Co., No. 09-01668 (N.D. Ill. Sept. 1, 2016)] (Holland & Knight)
How States Can Save Jobs and Address the Wealth Inequality Gap Through ESOPs (PDF)
10 pages. "In order to increase the effectiveness and penetration of local outreach and education, states can: [1] Create an Office of Employee Ownership with a dedicated staff person; [2] Provide grants to one or more nonprofits to run an outreach program; [3] Hold seminars statewide in conjunction with professional, business, and trade publications and organizations; [4] Publish and disseminate brochures and other material; and [5] Work with the media to encourage stories on local ESOP companies." (National Center for Employee Ownership [NCEO] and Employee-Owned S Corporations of America [ESCA])
Communicating Plan Changes (PDF)
"Communicating change is a delicate thing, walking a fine line between success and failure. There are three categories of pitfalls: campaign pitfalls, employee pitfalls, and manager pitfalls.... When companies introduce an employee stock ownership plan (ESOP), they face a double challenge: our natural resistance to change coupled with a general lack of familiarity with ESOPs." (Bryan, Pendleton, Swats & McAllister, PLLC)
Text of Seventh Circuit Opinion: ESOP Participants Not Required to Plead Inadequate Consideration in Claim of Prohibited Transaction (PDF)
18 pages. "The complaint alleges a purchase of employer stock by the Plan and a loan by the employer to the Plan, both of which are indisputably prohibited transactions ... GreatBanc [as Plan Trustee] can prevail only if it can take advantage of one of [ERISA] section 408's exemptions. It never raised any such affirmative defense, however; it took the position instead that the plaintiffs have the burden of pleading facts that would negate the applicability of section 408's exemptions and that they failed to do so.... [This Court finds that] section 408 exemptions are affirmative defenses for pleading purposes, and so the plaintiff has no duty to negate any or all of them." [Allen v. GreatBanc Trust Co., No. 15-3569 (7th Cir. Aug. 25, 2016)] (United Sates Court of Appeal for the Seventh Circuit)
Fifth Circuit Focuses on Process in ESOP Valuations (PDF)
"[A recent] case stressed the importance of 'process' in valuation determinations being utilized for acquisitions of a corporation's stock by an ESOP.... [T]his article provides a detail of the process that should be followed to ensure consideration of the appropriate factors by fiduciaries in reviewing valuations for ESOP transactions. The article concludes with a discussion of guidance provided by the court ... that may be instructive as to best practices for ESOP fiduciaries charged with establishing the value to be used by an ESOP holding shares of stock of a private company." [Perez v. Bruister, No. 14-60811 (5th Cir. May 3, 2016)] (McDermott Will & Emery)
Seventh Circuit: ERISA Permits Indemnification or Contribution Among Fiduciaries
"The Seventh Circuit's opinion indicates that when multiple fiduciaries are accused of breaching their fiduciary duties, contribution and indemnification claims among them are permitted, and as a matter of equity, the allocation of recovery on such claims as among the respective fiduciaries depends on the degree each had responsibility and their relative knowledge, experience, control, and authority." [Chesemore v. Fenkell, Case Nos. 14-3181, 14-3215, and 15-3740 (7th Cir. July 21, 2016)] (Drinker Biddle)
Court Prohibits ESOP Participants From Selling Company Stock
"[The chief judge of the U.S. District Court for the Western District of Kentucky] said that the bankruptcy court exercised its equitable powers to breathe life into the provisions of Conco's reorganization plan by holding that a purchase of the equity interest by a third party before completion of the repayment terms would cause the company to stop operations and creditors wouldn't get paid. As such, under the reorganization plan the participants can't sell their interest in Conco's stock until 2019." [Harper v. Conco ESOP Trustees, No. 3:16-00125 (W.D. Ky. July 7, 2016) ] (Bloomberg BNA)
ESOPs Have Risks: What Participants Can Do
"This fact sheet describes the types of ESOPs, outlines risks associated with them, and suggests steps that people with ESOPs can take to reduce those risks." (Pension Rights Center)
[Opinion] Employee Stock Ownership Plans: Are They Worth the Risks? (PDF)
10 pages. "[S]imple yet modest measures could protect employees whose retirement savings are held in ESOPs.... [1] Direct a study of ESOPs by the [GAO] investigating, among other things, the rate of failure among ESOPs. [2] Require that participants in all ESOPs have the same right to diversify out of employer stock as participants in ESOPs that hold publicly-traded stock as part of a 401(k) plan. [3] Encourage participants to elect out of employer stock if they have the right to do so." (William K. Bortz, for Pension Rights Center)
OECD Focus on Pensions: ESOPs Acknowledged, Social Investing Promoted (PDF)
"The Organisation for Economic Cooperation and Development (OECD) Working Party on Private Pensions (WPPP) ... [final version of] its Core Principles of Private Pension Regulation... added, following comments by numerous US and European stakeholders, acknowledgement of US-style ESOPs.... This [article focuses] on the new ESOP provisions in the Core Principles, the beginning of apparent advocacy of ESG investing by pension funds, and a few of the other areas that are beginning to attract the attention of the WPPP." (Groom Law Group)
ESOPs: More Than a Retirement Plan
" 'It is such a missed opportunity if an ESOP is only a retirement plan,' says Suzanne McDowell, [of King Arthur Flour] ... 'It is so much more significant to invite people to the table to participate in creating an organization we are all really proud of.' ... The company makes it clear that while employee ownership offers benefits, it also comes with responsibilities. All three co-CEOs actively look for feedback -- and get it." (The ESOP Association)
DOL Keeps Fighting for Plan Participants in Its 2016 Amicus Briefs
"The Office of the Solicitor has filed three amicus curiae briefs in the first half of 2016 concerning the responsibility of plan fiduciaries to plan participants.... [1] a class action in a case alleging misrepresentation, [2] what is required to allege breach of fiduciary duty in a case of fraud, and [3] what circumstances are required to prove fiduciary breach in a privately-held corporation as opposed to a publicly held one." (Bloomberg BNA)
Missouri ESOPs Bill Could Lift Business Environment
"A bill that would encourage corporations in Missouri to sponsor employee stock ownership plans could help turn around the discouraging business environment in the state, lawmakers and business leaders said ... The bill, H.B. 2030, would allow a 50 percent tax deduction of the net capital gain from the sale or exchange of a company to an ESOP if the company is at least 30 percent employee-owned. It passed with overwhelming bipartisan support in both chambers of the state legislature." (Bloomberg BNA)
Understanding the Nuances of Your ESOP Plan Language: Forced or Involuntary Distributions
"Many plan sponsors do not realize that retired participants can also be forced out of the ESOP if they do not elect to receive a distribution when eligible. This is true regardless of their account balance and regardless of the plan document language. This provision is found in IRC 411(a)(11). Though many plan documents do not state this directly, it may be inferred[.]" (Principal Financial Group)
Company Stock in ESOPs: What Should a Fiduciary Do?
"After the Dudenhoeffer decision and the GreatBanc settlement agreement, ESOP trustees are compelled to consider additional steps to help manage their fiduciary liability, including: [1] Avoid conflicts of interest ... [2] Align competent financial advisors ... [3] Acquire fiduciary insurance ... [4] Plan design ... [5] Communication strategies ... [6] Document, document, document." (Principal Financial Group)
Special Considerations for an S-Corp ESOP and Net Unrealized Appreciation
" 'Can participants in an S-Corporation's employee stock ownership plan (ESOP) take advantage of the special tax treatment for NUA associated with distributed employer stock?' The answer is, 'potentially'." (National Association of Plan Advisors [NAPA])
Fifth Circuit Decision Includes Important Holdings for ESOP Fiduciaries
"Among the court's key rulings were the following: [1] ESOP participants may bring claims on behalf of the ESOP without proceeding as a class action, at least in cases where the U.S. Secretary of Labor also participates.... [2] An ESOP trustee who is also the seller in an ESOP transaction may be found to have breached his fiduciary duties, even if he abstains from voting on the transaction.... [3] [A violation of ERISA's fiduciary duties] can occur even if the ESOP fortuitously paid no more than adequate consideration.... [4] The burden of proving that an ESOP stock purchase meets the requirements for exemption from the ERISA prohibited transaction rules falls squarely on the plan fiduciaries[.]" [Perez v. Bruister, No. 14-60811 (5th Cir. May 3, 2016)] (Holland & Knight)
Assessing ERISA Risks from ESOPs: Fifth Circuit Clobbers Founder of Closely-Held Company
"When the owner of a closely-held company sells stock to an employee stock ownership plan (ESOP), there are numerous valuation, fiduciary, and conflict of interest issues that could explode into ERISA liability. Imagine having ESOP participants recover damages equal to 33% of the amount the ESOP paid for the founder's shares.... [A recent 5th Circuit] decision provides warning signs for companies with ESOPs and owners who sell shares to ESOPs -- and for those performing diligence before they buy or invest in companies that sponsor ESOPs." [Perez v. Bruister, No. 14-60811 (5th Cir. May 3, 2016)] (Paul Hastings LLP)
DOL Wins Fifth Circuit Battle Over Valuation of Employer Stock ESOP Purchase
"The Fifth Circuit devoted much of its 39-page opinion to clarifying the proper standard for determining whether ESOP fiduciaries properly relied on an expert opinion.... The court explained that the fiduciaries didn't sufficiently investigate the appraiser's background, didn't give the appraiser significant information about the company's risk factors, overlooked evidence that the appraiser was colluding with the company's attorney to increase the stock valuation and failed to double-check the appraiser's conclusions." [Perez v. Bruister, No. 14-60811 (5th Cir. May 3, 2016)] (Bloomberg BNA)
Why Chobani Gave Employees a Financial Stake in Company's Future
"Employee stock ownership is not all that unusual, especially among technology firms. Food companies like Starbucks and Whole Foods offer stock grants.... Their popularity is increasing ... in part because they enjoy large tax benefits and because retiring baby boomers who own companies see it as a good way to transfer ownership. [Corey Rosen, of the National Center for Employee Ownership,] estimates nearly one-tenth of American workers are part of an ESOP." (National Public Radio)
Class Action Against ESOP Sponsor, Trustees Advances
" 'An individual that has both fiduciary and business functions is liable for breach of fiduciary duty under ERISA for business decisions affecting the value of plan assets when the individual could directly profit from business decisions,' the court said.... The court declined to dismiss the class's fiduciary breach claim against Fleet Card and the Davies for allegedly failing to disclose to participants information regarding Fleet Card's financial condition. It also declined to dismiss the class's claims for co-fiduciary liability and violation of prohibited transactions, holding that the facts alleged in the complaint were sufficient to sustain these causes of action." [Carter v. San Pasqual Fiduciary Trust Co., No. 15-01507 (C.D. Cal. Apr. 18, 2016)] (Bloomberg BNA)
Matching Contributions in Your ESOP: Things You Should Know
"The 401(k) plan and ESOP should have identical plan years to ... help minimize the chance of exceeding contribution limits.... [T]he plan sponsor can contribute the matching contribution in stock or use a part of the cash contributions earmarked for loan payments that release shares held in suspense.... The vesting of matching contributions must satisfy one of two minimum vesting schedules.... Matching contributions will need to satisfy the average contribution percentage test or ACP test.... To avoid the ACP test, the plan sponsor may choose to make a safe harbor match." (Principal Financial Group)
DOL and SEC Opine on How Fiduciaries May React to Inside Information (PDF)
"On March 11, 2016, the [DOL] and [SEC] each filed amicus briefs ... to clarify the responsibilities of a fiduciary ... with control of an employee stock ownership plan, as a company stock fund investment option of a 401(k) plan. The DOL outlined potential corrective actions a fiduciary can take when there is an ongoing fraud (i.e., false or misleading public statements) that would be consistent with a fiduciary's duty of prudence under ERISA. The SEC's brief discussed whether these approaches would be consistent with the federal securities laws." [Whitley v. BP P.L.C., No. 10-cv-4214 (S.D. Tex. Oct. 30, 2015; on appeal to 5th Cir.)] (Groom Law Group)
DOL Subpoena Approach Comes Under Scrutiny
"There have been several reports that the Department opened investigations of ESOPs by subpoenaing ESOP trustees and company executives. That's a rather drastic approach ... At a March 16 hearing of the House Committee on Education and the Workforce.... [DOL Secretary] Perez said he was not aware of the issue and would be 'happy to look into this.' He noted that here is no substitute for discussing an issue and finding a pathway forward." (The ESOP Association)
Text of Second Circuit Opinion: Claim of Fiduciary Breach in Lehman Bros. Stock Drop Case Fails Fifth Third Pleading Standard (PDF)
"Even without the Moench presumption rejected by Fifth Third, it remains our standard that, to plead plausibly a breach of the duty of prudence for failure to investigate, 'plaintiffs must allege facts that, if proved, would show that an "adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident." ' ... The [third amended complaint] in this case includes 'no specific allegations about what lines of inquiry would have revealed this information or who, if pressed, in fact would have disclosed it to the Plan Committee Defendants.' ... [E]ven without the presumption of prudence rejected in Fifth Third, Plaintiffs have failed to plead plausibly that the Plan Committee Defendants breached their fiduciary duties under ERISA by failing to recognize the imminence of Lehman's collapse." [In Re: Lehman Bros. Sec. and ERISA Litig., No. 15-2229 (2d Cir. Mar. 18, 2016)] (U.S. Court of Appeals for the Second Circuit)
ESOP Disqualified for an Improper Transfer of Assets After Divorce
"In this case, the ESOP transferred the account balance under what it believed was stated in a legally binding divorce decree. However, the plan did not undertake any processes to determine whether the transfer was pursuant to a QDRO and, in fact, it was not.... That failure to follow the tax rules even though the plan document clearly stated those rules led to the disqualification of the plan." [Family Chiropractic Sports Injury & Rehab Clinic, Inc. v. Comm'r, No. 29613-13R (T.C. Memo. Jan. 19, 2016)] (RSM US)
Death and Taxes for Qualified Plans
"[No] standard IRS correction procedure exists to remedy a transfer of a plan benefit by a participant outside of the QDRO rules. In [a recent Tax Court case], undoing the illegal assignment of the ex-wife's ESOP account may have simply been unacceptable to the IRS and/or the parties under the circumstances." [Family Chiropractic Sports Injury & Rehab Clinic, Inc. v. Comm'r, No. 29613-13R (T.C. Memo. Jan. 19, 2016)] (Jackson Lewis P.C.)
ESOP Repurchase Liability: A Funding and Fiduciary Obligation
"A passive, 'pay-as-you-go' approach may not satisfy fiduciary requirements or be a prudent way for your company to address repurchase obligation. Developing a funding strategy for how the company will satisfy liquidity needs to pay ESOP participants is an industry standard.... Step 1: Forecast the liability ... Step 2: Use iterative repurchase liability forecasting ... Step 3: Evaluate funding alternatives ... Step 4: Consider the effects on the plan design and administrative actions ... Step 5: Monitor, evaluate and make adjustments." (Principal Financial Group)
ESOP Loan Terms: How Long Should They Be?
"Employee Benefit Considerations: Target Benefit Level ... Benefit delivered by other plans ... Compensation philosophy ... Financial considerations: Single or multiple transactions ... The share release schedule ... The relationship between eligible compensation and the projected value of the shares in the ESOP suspense account ... Projected share prices ... Method of repurchasing shares from former employees ... External factors: Who holds the note ... Experience of the trustee and their advisors." (Principal Financial Group)
Proposed Fiduciary Rule Cited in Win for ESOP Adviser
"According to the judge, Strategic Equity's role in providing a fairness opinion and stock valuation to the ESOP didn't cause it to become a fiduciary under [ERISA]. That's because the firm didn't control whether the ESOP ultimately agreed to sell stock back to the plan sponsor ... [T]he judge [also] said that fairness opinions issued to ESOPs in connection with redemption agreements don't qualify as 'investment advice' under ERISA. In support of this conclusion, the judge cited the DOL's recent statement that the proposed fiduciary rule doesn't change the department's longstanding position that valuations of employer securities in connection with ESOPs 'are not considered investment advice.' " [Carter v. San Pasqual Fiduciary Trust Co., No. 8:15-cv-01507 (C.D. Cal. Feb. 22, 2016)] (Bloomberg BNA)
Text of District Court Opinion Applying Dudenhoeffer Pleading Standards to Dismiss J.C. Penney Stock-Drop Claim
14 pages. "The plaintiff's position that Dudenhoeffer is limited to cases in which an 'artificially inflated' stock price is alleged ... ignores the Supreme Court's specific rejection of the argument that a fiduciary should have known from publicly available information alone that a stock's price was 'over- or under[]' -valued, i.e., that the stock was valued either too high or too low.... The Court therefore finds nothing in Dudenhoeffer that supports the plaintiff's contention that the Supreme Court's reasoning is 'only relevant in cases where the stock price is alleged to have been artificially inflated.' ... The plaintiff's decision not to plead special circumstances is fatal to her claim that the defendant should have known, solely from public information, that continued investment in J.C. Penney stock was imprudent." [Coburn v. Evercore Trust Co., No. 15-49 (D.D.C. Feb. 17, 2016)] (U.S. District Court for the District of Columbia)
FY 2017 Budget Proposal Would Tax ESOP Dividends Twice
"Since 1985, individuals who work for a company that offers an ESOP have avoided double taxation on the dividends they receive. The Administration's proposal would eliminate that incentive, thereby hurting companies and employees alike." (The ESOP Association)

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