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Prior to Distribution, ESOP Lacked 'Actual Knowledge' of Participant's Developmental Disability
"An ESOP plan administrator did not violate plan terms when it distributed about $80,000 to a developmentally disabled former employee who had been adjudged in state court to be legally incompetent ... Delivery of conservatorship papers regarding the employee's incompetency to the grocery store where he worked was insufficient to provide the plan administrator with the 'actual knowledge' of the worker's legal incompetency required by the plan." [Bauman v. Publix Super Markets, Inc. Employee Stock Ownership Plan, No. 17-11709 (11th Cir. Oct. 10, 2017)] (Wolters Kluwer Law & Business)
ESOPs and the Tax Act
"[T]he tax benefits for ESOP-owned companies are significantly greater for S-corporations, going from a 37 percent potential tax rate to zero percent taxes, than they are for C-corporations, going from a 39 percent tax rate to a 21 percent tax rate." (Valuation Research Corporation)
DOL Continues to Watch ESOP Valuations with Recent Trustee Settlements
"While these settlements are aimed primarily at trustees and their valuation advisors, employers who are considering sponsoring an ESOP as well as the lenders ... to ESOP sponsors should pay attention to these settlements as well. If a portion of the sale proceeds must be returned to the trust, that could affect the amount that the selling shareholders ultimately receive, particularly if the sellers financed part of the deal. In some situations, depending on the transaction documents, an ESOP sponsor may be required to indemnify an ESOP trustee. As a result, the company and its lenders could pay a price if the trustee violates its ERISA fiduciary duties with respect to the valuation process." (Porter Wright Morris & Arthur LLP)
ESOP Benefits for Defense Contractors
"[D]efense contractors may have long-term and complex contracts and relationships with government agencies. A sudden change in leadership or sale of the company can make contractors and customers nervous and could lead to the government seeking out a competitor. With an ESOP transition, leadership and ownership changes can take place over time based on the owner's direction." (Butterfield Schechter LLP)
Tax Reform's Secondary Impacts on ESOPs
"New leveraged ESOPs where the company borrows a large amount relative to its EBITDA may find that their deductible expenses will be lower and, therefore, their taxable income may be higher ... Most S corporations make distributions to non-ESOP owners so they can pay their taxes on their share of corporate profits. So if an ESOP owns 30% of the company, it gets 30% of the distributions. These distributions now will be somewhat smaller because the non-ESOP owner will be declaring 20% less income and therefore requiring a smaller S distribution." (National Center for Employee Ownership [NCEO])
DOL Settlements Set Prudence Standard for ESOP Trustees
"Through a series of recent settlements, the [DOL] has outlined the process steps fiduciaries should follow in connection with a transaction involving a purchase from, or sale to, an employee stock ownership plan (ESOP). Largely based on the 'fiduciary process steps' first introduced by the DOL in the 2014 settlement of Perez v. GreatBanc Trust Co. ... [t]he recent settlements may ... provide helpful insight into the DOL's position regarding what is required to meet fiduciary obligations under [ERISA] when engaging in an ESOP transaction." (McDermott Will & Emery)
[Official Guidance] Text of IRS CCM 201747007: Provisions in ESOP Document Designed to Prevent Occurrence of a Nonallocation Year Under Section 409(p) (PDF)
"The Prevention Methods ... are all variations on the two examples in the preamble that provide for the reduction of allocations to HCEs or the increase of allocations to NHCEs.... [T]hese provisions also need to articulate a methodology to guide the ESOP administrator in making the allocations.... One way to meet this requirement is for the ESOP to have plan language stating the order in which these provisions are to be applied.... The subject plan provision provides for the re-allocation of stock that has been already allocated to participants' accounts. This would result in the forfeiture of accrued benefits[.]" (Internal Revenue Service [IRS])
[Official Guidance] Employee Stock Ownership Plan (ESOP) LRM and Information Package, October 2017 (PDF)
43 pages. Oct. 2017, published online Nov. 2017. "This information package contains samples of plan provisions that satisfy certain requirements of the Code applicable to ESOPs. Such language may or may not be acceptable in specific plans depending on the context in which used. To expedite the review process, plan sponsors are encouraged to use the language in this package. A partnership or a joint venture is not eligible to maintain an ESOP. However, a partnership or a joint venture that has elected to be taxed as a corporation may be a Participating Employer as defined in this ESOP LRM." [Editor's note: the Oct. 2017 revision appears to replace the version released in June 2015.] (Internal Revenue Service [IRS])
First Bankers Trust Settles Three ERISA Suits
"According to DOL allegations, FBTS violated [ERISA] when it approved stock purchases by three employee stock ownership plans (ESOPs). As part of the agreements, FBTS will pay $15.75 million to the plans and reform its procedures for handling ESOP transactions." (planadviser)
How to Undertake an ESOP Repurchase Obligation Study (PDF)
"[T]he prospect of 'doing a repurchase obligation study' can be daunting ... [S]everal underlying assumptions must be developed, the calculations are complicated, and making sense of the results can be challenging.... [T]he process of performing a study should include ... Defining the issues ... Gathering data ... Developing assumption ... Modeling a 'base case' forecast ... Analyzing results ... Modeling additional scenarios ... Developing conclusions and presenting result." (ESOP Economics)
ESOPs: An Alternative Exit Strategy for Family-Owned Businesses
"Employee stock ownership plans (ESOPs) can be an attractive and tax-favored alternative for a family-owned business looking for an exit strategy. For the owner of a C corporation, proceeds on the gain from the sale of stock to the ESOP can be tax-deferred by reinvesting them in the securities (including both stocks and bonds) of other domestic companies, subject to certain requirements. If such replacement securities are not sold prior to the owner's death, no capital gains tax is ever due on the gain recognized by the sale of the company stock to the ESOP." (Family Business Advocates)
A Lender's Primer on Leveraged ESOPs and Recent Litigation (PDF)
"A prudent lender should ensure that the ESOP trustee has independently performed due diligence on the target corporation; negotiated a robust and arm's-length transaction with the selling shareholder (including the inclusion of standard indemnities and other relevant provisions in the acquisition documents that sufficiently protect the ESOP, as purchaser, and the company as it continues operations post- acquisition); and otherwise fulfilled its fiduciary duties to the ESOP." (Mayer Brown)
DOL Settlement Agreements Provide ESOP Transaction Guidance
"The [DOL] and First Bankers Trust Services Inc. [recently] entered into a settlement agreement ... resolving a case challenging FBTS' actions as trustee in a transaction whereby a private label denim manufacturer was sold to an [ESOP]. This settlement agreement ... largely mirrors a process agreement that the DOL entered into with GreatBanc Trust Company in 2014 ... [This article describes] some key areas where the Agreements differ ... [and provides] an in-depth chart that summarizes the terms and highlights the differences between the two Agreements." (Holland & Knight)
District Court: Suspension of ESOP Diversification Elections Pending Interim Stock Valuation Was Arbitrary and Capricious
"[T]he Plan could have made an exception for an alternative valuation date or other contingency plan in unexpected times of financial stress, but it did not.... [T]he terms governing the timing of the valuation of Bankshares's stock for purposes of ascertaining the fair market value of the stock and the individual ESOP accounts are clear, mandatory, and permit no exception. This court ... cannot rewrite the requirements of the Plan to alleviate the adverse consequences to Bankshares as a result of its allocation of risk." [Bryant v. Community Bankshares Inc., No. 14-1074 (M.D. Ala. Sept. 12, 2017)] (U.S. District Court for the Middle District of Alabama)
The Importance of an ESOP Distribution Policy
"The plan document typically will include the form, method and timing options the plan will allow -- cash vs. stock, lump sum vs. installments. A distribution policy will specify how distributions will be paid. For example, a distribution policy may read: 'Upon death, disability, or retirement, distributions will be paid out lump sum in cash and commence no later than one year following the event.' There are many things to consider when drafting a distribution policy -- repurchase liability, cash flow projections, future transactions, corporation status, benefit levels and compliance testing issues. All of these will impact how you structure your policy to meet your company's objectives." (Blue Ridge ESOP Associates)
The Board of Directors Responsibility in Addressing ESOP Repurchase Liability
"In order to plan for ESOP repurchase liability, the corporation must quantify the liability and implement a strategy to fund it. These functions are the responsibilities of the board of directors of the corporate sponsor of the ESOP. This article [summarizes] director duties in determining and funding ESOP repurchase liability." (Principal Financial Group)
ESOP Class Actions: An Existential Threat to the ESOP Community
"The DOL lawsuits are aimed at a relatively few specific transactions where the DOL has determined that the ESOP trustee has overpaid for the shares. However, the class action suits have a broader focus, which is to find errors in the implementation or operation of the ESOP in order to obtain the highest possible dollar recovery. What makes this so significant is that the plaintiff's bar obtains access to the ESOP's books and records by claiming the loss in share value constitutes a breach in fiduciary duty. This loss, however, is a necessary part of every leveraged ESOP transaction." (Fox Rothschild LLP)
Bill Would Boost ESOPs
"The bill is aimed at smaller companies that may not have easy access to the expertise needed to launch an ESOP. It calls for the nonprofit business-advisory group SCORE -- which operates with support from the U.S. Small Business Administration -- to provide those companies the information they need." (HRE Daily)
The Nuts and Bolts of ESOP Loans (PDF)
"There is a very high probability an ESOP will be leveraged during its lifecycle. When this leveraging occurs and the ESOP takes on debt to acquire company stock, a number of legal documents are drafted to record the terms of the transaction and the requirements of the involved parties. As the TPA of an ESOP, it is important to understand the reason these documents exist and the differences between ESOP internal loans versus external loans." (Blue Ridge ESOP Associates, via Plan Consultant)
ESOPs: Issues to Consider Before Converting from C-Corp to S-Corp
"S-Corps and C-Corps can generally deduct contributions to the ESOP of up to 25% of qualifying employee payroll annually to repay an ESOP loan used to acquire shares of the company. However, S-Corps must include interest as well as principal, where C-Corps base this contribution amount only on the principal paid.... Dividends paid on a C-Corp ESOP are tax deductible so long as they are used to pay down an ESOP loan, or are passed on to employees. However, S-Corp ESOP dividends are generally not tax-deductible." (Butterfield Schechter LLP)
S Corporation Denied Deduction for Amount Payable to ESOP Participants
"On June 13, the Tax Court concluded that an S corporation and its employees who participate in an [ESOP] are considered to be related parties, meaning that, an accrual basis S corporation could only deduct amounts payable to those employees in the year the amounts were actually paid.... This decision is not surprising. It is a good reminder, however, that S corporations with an ESOP owner must be diligent about scrubbing their year-end accruals for amounts that are payable to ESOP participants." [Petersen v. Comm., Nos. 15184-14, 15185-14 (148 T.C. 22 June 13, 2017)] (RSM US)
Three More U.S. States Move Forward with Pro-ESOP Initiatives
"In April 2017, the Colorado state legislature passed a pro-employee ownership bill (HB17-1214). The bill creates a revolving-loan program to be operated by the Colorado Office of Economic Development and International Trade (OEDIT) and to be funded by gifts and donations.... [A Texas] bill, if passed, would allow ESOP companies in Texas to be recognized as Historically Underutilized Businesses.... In September 2016, the Missouri state legislature passed legislation (H.B. 2030) that provides a tax deduction on qualifying sales to Missouri-based ESOPs." (Morgan Lewis)
ESOPs Can Provide Liquidity to Facilitate Division of a Family-Owned Business Upon Divorce
"The benefit of a financed transaction is that the ESOP can pay for the stock with pre-tax dollars as opposed to the normal stock repurchase arrangement between spouses which would require one spouse to generally use after-tax dollars for the purpose of buying out the former spouse's interest in the stock. Essentially the U.S. government is subsidizing the initial cost of the buy-out through use of tax deductible payments." (Butterfield Schechter LLP)
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)
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)

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