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News Items, by Subject

ESOPs


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Best Practices for ESOP Trustee and ERISA Compliance
"ESOP deals may see increased scrutiny by the [DOL] (DOL) when valuation includes control premiums and controlling sellers that can sell back warrants in the future. The more the ESOP transaction strays from standard ESOP deals, the more the DOL and employee participants may look at the valuation of the company stock." [Brundle v. Wilmington Trust, N.A., Nos. 17-1873, 17-2224, 17-2323, 17-2324, 18-1029 (4th Cir. Mar. 22, 2019)] (Butterfield Schechter LLP)
Recognizing the Importance of Employee Ownership, More States Move Forward with Pro-ESOP Initiatives
"Taking cues from Colorado, Missouri, Pennsylvania, Iowa, New Jersey, and Virginia, all of which have recently enacted legislation supporting and encouraging the establishment of ESOPs, the states of Texas, Indiana, and Nebraska are now moving forward with their own pro-ESOP initiatives." (Morgan Lewis)
Former Employee's Release Agreement Bars ERISA Claim Against ESOP Fiduciary
"A recent summary-judgment decision explains how individual releases can bar the individual from pursuing ERISA fiduciary-breach claims on behalf of the plan. A plan, employer or fiduciary that wants to ensure a release that includes ERISA claims on behalf of a plan should consider language that addresses the court's areas of inquiry in [this case.]" [Innis v. Bankers Trust Co. of South Dakota, No. 16-650, (S.D. Ia. Apr. 30, 2019)] (McDermott Will & Emery)
[Opinion] ESOPs Address Wealth Inequality, New Study Finds
"A [recent study] by the Rutgers Institute for the Study of Employee Ownership and Profit Sharing shows that ESOPs help families significantly increase their assets, thereby shrinking gender and racial wealth gaps.... Greater support of and participation in ESOPs -- across all demographics and especially in disadvantaged communities -- should help further narrow the wealth divide." (The ESOP Association)
IRS Summarizes Issues for S Corporation ESOPs and Section 409(p)
"There are no prescribed correction methods for a violation of 409(p). Loss of S Corporation status and excise taxes are some of the consequences of a violation.... The Issue Snapshot is a reminder that the only prescribed method for preventing a nonallocation year is the 'transfer method,' which directs the plan administrator to transfer a formulated number of shares, for any participant who would otherwise become a disqualified person, to a non-ESOP account." (Williams Mullen)
[Guidance Overview] Recently Issued IRS Snapshot Provides Guidance for S Corporation ESOPs
"[An IRS Issue Snapshot] provides several important reminders to S corporation ESOPs and ESOP practitioners regarding acceptable methods for complying with Section 409(p)'s requirements and preventing potential penalties.... [O]ne of the alternative methodologies, such as excluding allocations to potentially disqualified persons or expanding allocations to certain nonhighly compensated employees, can be used. The IRS cautions, however, that while these methods may be used, the methods must also satisfy all other applicable qualified plan requirements, including -- but not limited to -- nondiscrimination, anti-cutback and definitely determinable benefit rules." (Holland & Knight)
Colorado Rolls Out a Welcome Mat for ESOPs
"[The] 'Commission on Employee Ownership' within the Colorado Office of Economic Development and International Trade ... will have a three-pronged approach: [1] establishing a network of technical support for companies wanting to convert to employee ownership by collaborating with accountants and attorneys to facilitate such conversions; [2] educating businesses and local leaders about the economic and community benefits of employee ownership; and [3] removing obstacles to the advancement and development of employee ownership." (Holland & Hart LLP)
ESOPs: What Not to Do -- And If You Did, How to Correct It (PDF)
25 presentation slides. "Traps for the unwary: [1] Pre-transaction: party relationships, appropriateness of providers, due diligence; [2] Implementation: plan design, communication, new employees; [3] On-going administration: repurchase liability/loan amortization, distributions, diversification; [4] Termination: timeline, distributions, missing participants." (McDermott Will & Emery)
Failure of ESOP Fiduciaries to Stop Company Officers from Making Affirmative Misrepresentations Impacting Stock Price Did Not Breach ERISA Duties
"The corrective course of action suggested by the plan participants, the court determined, was not so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it. The court affirmed the strict pleading standard followed in the Fifth Circuit, while distinguishing a contrary ruling from the Second Circuit." [Fentress v. Exxon Mobil Corp., No. 16-3484 (S.D. Tex. Feb. 4, 2019)] (Wolters Kluwer; free registration required)
[Guidance Overview] IRS 'Issue Snapshot': Preventing the Occurrence of a Nonallocation Year under Section 409(p)
"The rules under IRC Section 409(p) are designed to prevent a group of 'disqualified persons' (DPs) from collectively owning 50% or more of an S corporation's stock ... Since there are no prescribed correction methods to address Section 409(p) violations, prevention methods are important considerations for both ESOP plan design and operation.... This 'Issue Snapshot' explores methods for preventing a Section 409(p) violation including those that were the subject of [Chief Counsel Advice (CCA) memorandum 201747007]." (Internal Revenue Service [IRS])
Paying the Plan Expenses of an ESOP: Best Practices
"Special consideration should be made if you allocate expenses pro rata to the [other investment account (OIA)] and you are segregating former employees out of company stock and into OIA assets. If segregated participant balances are part of a pooled investment within the plan, then most of the expenses will be paid by the terminated participants. In this scenario, it could be considered a detriment to the terminated participants and a best practice would be to have the expenses allocated on total account balance." (Blue Ridge ESOP Associates)
Fourth Circuit Permits Common Fund Award in Addition to ERISA Attorney's Fees
"After affirming the district court's conclusions on the ERISA fiduciary breach issues, the Fourth Circuit affirmed the district court's decision to award attorney's fees to plaintiff's counsel under ERISA's fee-shifting provision and the common fund doctrine.... [T]he district court held that the trustee breached its fiduciary duties and awarded well over $29 million in damages to the ESOP. The district court also awarded the participant's counsel: $1.8 million in attorney's fees under ERISA's fee-shifting provision [and] $1.5 million in attorney's fees from the ESOP's damages award under the common fund doctrine." [Brundle v. Wilmington Trust, N.A., Nos. 17-1873, 17-2224, 17-2323, 17-2324, 18-1029 (4th Cir. Mar. 21, 2019, amended Mar. 22, 2019)] (Thomson Reuters Practical Law)
Fourth Circuit Opinion: Fiduciary Considerations in Setting an ESOP's Stock Purchase Price (PDF)
"[C]ourts look to the conduct of the trustee and whether it met its fiduciary obligations, not to whether the trustee arrived at a 'fair' value.... [A] trustee must satisfy both parts of the test to benefit from the adequate consideration exception. Assuming arguendo that the purchase was for 'fair market value,' we find no error in the district court's findings that Wilmington failed to prove that the share price was also 'the product of a determination made by the fiduciary in good faith.' " [Brundle v. Wilmington Trust, N.A., Nos. 17-1873, 17-2224, 17-2323, 17-2324, 18-1029 (4th Cir. Mar. 22, 2019)] (U.S. Court of Appeals for the Fourth Circuit)
Senators Introduce Bill to Expand S-Corp ESOPs
"Senate Bill 177 [would] expand the creation of S Corporation ESOPs.... The Senate bill also claims to provide protection for small businesses by ensuring they are able to qualify for Small Business Administration (SBA) loans, contracting assistance, or business development programs after they transition to ownership to an ESOP. It also allows businesses that qualify for minority-owned, woman-owned, or veteran-owned programs to maintain their status after the ESOP acquires the shares." (Butterfield Schechter LLP)
Can ESOPs Benefit Disadvantaged Communities?
"Real estate investment businesses in these Opportunity Zones could create ESOPs as part of their employees' retirement plans, giving employees in the areas an ownership interest in those property investments. Businesses already existing in Opportunity Zones could be encouraged to create ESOPs that would benefit employees through the growth of the company that could increase capital investment in those businesses.... Qualified Opportunity Zone laws should be amended to allow for a broader range of ESOP conversions to be financed within the Opportunity Zones." (Butterfield Schechter LLP)
ESOP Workers Have Higher Retirement Savings
"S-Corp ESOP employees ... have an average of $170,326 in retirement savings compared to $80,339 for non-ESOP workers.... ESOP workers making less than $25,000 a year have more than twice the retirement savings compared to non-ESOP workers making under $25,000. Similarly, even hourly ESOP employees making between $10 and $12.85 an hour average more than $6,500 in retirement savings, through the ESOP and other non-ESOP plans." (Butterfield Schechter LLP)
Second Circuit Holds that Participants Stated Plausible ERISA Claim for Breach of Duty to Manage ESOP Assets Prudently
"[T]he Court was presented with the question of what standard one must meet to plausibly allege that fiduciaries of an [ESOP] have violated ERISA's duty of prudence.... On appeal, Plaintiff proposed just one alternative action: early corrective disclosure of the microelectronics division's impairment, conducted alongside the regular SEC reporting process. The Court found that a prudent fiduciary could not have concluded that the corrective disclosure would do more harm than good." [Jander v. Ret. Plans Comm. of IBM, No. 17-3518 (2d Cir. Dec. 10, 2018)] (Kantor & Kantor)
DOL Private Pension Plan Bulletin: Abstract of 2016 Form 5500 Annual Reports (PDF)
68 pages. "The total number of pension plans grew again in 2016 to approximately 703,000 plans, a 1.2 percent increase over 2015. The number of DC plans grew by 1.2 percent, while the number of DB plans in creased by 1.4 percent.... The number of 401(k) type plans increased yet again in 2016 by 2.5 percent, from 547,000 to 560,000. There were 67.1 million active participants in 401(k) type plans.... The share of DB plans reporting being fully frozen decreased to 19.9 percent of all DB plans; however, the amount of assets in fully frozen DB plans increased from 15.4 percent to 17.1 percent in 2016." [Also available: Data tables in XLSX and XML formats.] (Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL])
The Importance of a Beneficiary Form
"ESOP's are usually not designed to allow for immediate entry upon hire so a new employee may not be an ESOP participant right away. Asking your new employee to fill out a ESOP beneficiary form ahead of time is a proactive option to ensure you have the election once they enter the plan.... Consider a review of your employee population at least once a year ... at the beginning of the new plan year or at the time of annual distribution of participant statements." (Blue Ridge ESOP Associates)
Checklist to Improve Your ESOP Ownership Culture (PDF)
"Regardless if your organization is a new or mature ESOP, it's never too late to assess the culture and communications to determine if there's opportunity for improvement.... Use [these] questions ... to provoke discussion at your next leadership meeting." (Findley)
The Solution to Managing the ESOP Repurchase Liability Challenge: A Defined Benefit Plan
"At first blush, having an ESOP company adopt a defined benefit pension plan may seem counter-intuitive. After all, why add an obligation to fund a second plan to a company already challenged to fund liabilities associated with its primary retirement vehicle? The reality is quite different, however, because the costs associated with funding the defined benefit plan reduce the value of the company and the associated repurchase liability. Further, the employees do not lose value. Their benefit will be paid to them from the defined benefit plan upon retirement." (Fox Rothschild LLP)
Reliance Trust Settles DOL Lawsuit Over ESOP Valuation
"The consent judgment requires Reliance Trust to pay $4,545,454 back to the plan within 30 days. Once the payment is made, the Department will assess a civil penalty of $454,545 against Reliance Trust Co. Inc.... [EBSA] found that, in May 2011, the owners of Tobacco Rag Processors Inc. sold 100% of the company stock to the plan for $82.5 million, ... [which EBSA determined] exceeded fair market value[.]" (PLANSPONSOR)
New Law Makes SBA ESOP Financing Easier
"The new law encourages the creation of ESOPs and worker cooperatives by facilitating transactions via loans supported by the Small Business Administration (SBA). It also directs the SBA's outreach infrastructure to encourage business owners to consider employee ownership.... The [new law] eliminates five obstacles that were challenges under the old law." (National Center for Employee Ownership [NCEO])
The DOL and ESOP Trustees: There's No Love Lost
"ESOP trustees and attorneys report that in recent DOL audits, trustees have even been asked whether their process follows the 'GreatBanc Agreement.' In effect, the DOL is regulating via litigation and investigation." (Findley)
Eleventh Circuit: ESOP's Failure to Honor Plan Diversification Election Was Arbitrary and Capricious
"[T]he employer contended that the plan administrator's decision was supported by the fact that the Federal Reserve Bank had prohibited it from redeeming its stock. However, the appellate court, like the district court, rejected that argument as a post-hoc explanation for denying the participants' elections to diversify." [Bryant v. Community Bankshares, Inc., No. 17-15360 (11th Cir. June 12, 2018)] (Wolters Kluwer Law & Business)
District Court: ESOP Arbitration Provision Doesn't Apply to 'Cashed-Out' Participant
"The U.S. District Court for the Southern District of Ohio has ruled that the arbitration provision of an employee stock ownership plan (ESOP) does not apply to the plaintiff's class representative because she had 'cashed out' of the ESOP before the arbitration provision was added and because she was not a 'claimant' subject to the arbitration provision.... The District Court's decision did not address the question of whether the plaintiff has standing to challenge the arbitration provision if she is not subject to the arbitration provision." [Brown ex rel. Henny Penny Corp. ESOP v. Wilmington Trust, No. 17-250 (S.D. Ohio July 24, 2018)] (Holland & Knight)
Main Street Employee Ownership Act Passes in House
"The bill ... [1] allows the [Small Business Administration (SBA)] to make loans to companies that can then reloan to ESOPs ... [2] allows ESOP loans to be made under the SBA's preferred lender program ... and [3] updates the definition of ESOPs in the current law governing SBA loans so that ESOPs do not need to have full voting rights to qualify. The bill also makes an exception to an SBA rule that sellers of a company cannot have an ongoing role in the firm." (Morgan Lewis)
Lessons Learned from Recent Litigation Involving ESOP-Owned Companies (PDF)
28 presentation slides. "Recent litigation and audit activity is focusing on the process undertaken by fiduciaries in connection with a transaction involving an ESOP." (McDermott Will & Emery)
Importance of Corporate Structure for Employee Stock Ownership Plans
"The parent company sought a ruling that its stock held by the ESOP will constitute qualifying employer securities with respect to the subsidiary, and that the application of sections 409(h), 409(p), 512(e)(3) and 4975(e)(7) would not be affected by the C corporation subsidiary's adoption of the plan.... Ultimately, the IRS concluded [in PLR 201828007] that the C corporation's adoption of its parent company's ESOP will not affect its status and the rules will continue to apply based upon the S corporation parent, as the ESOP held employer securities consisting of stock in an S corporation." (RSM US)
NCEO Employee Ownership Index Doubles S&P Performance for Its First Year
"[T[he Employee Ownership Index [includes] 28 publicly traded companies that had both broad-based employee ownership and had won one of three major national employer rating awards ... For the first year, the Employee Ownership Index has a 30.3% return; the S&P 500 had a 15.5% return. The index was expanded to 30 companies this June." (Blue Ridge ESOP Associates)
Supreme Court Declines to Hear Challenge to Time Limits on Fiduciary Breach Waivers
"he Supreme Court on [June 25] declined to hear a challenge by an ESOP plan trustee on whether a time limit for bringing breach of fiduciary duty claims can be waived. The [DOL] had argued for the petition to be denied[.]" (Pensions & Investments)
Will You Be Able to Retire From Your Small Business?
"Only 31% of small business owners are confident they will be able to retire by 65.... Small business owners have built up so much equity in the company that there may not be an easy way to hand the company over to someone else. The company may fill a niche market and not have a ready buyer to pay fair market value.... In these situations, an [ESOP] could be an ideal option[.]" (Butterfield Schechter LLP)
The ESOP Fiduciary's Responsibility for Determining Stock Value
28 PowerPoint slides. "[ERISA] generally requires relying upon the work of an independent appraisal expert. If a fiduciary relies on an inadequate appraisal, that fiduciary can breach its duties and/or violate ERISA's prohibited transaction rules." (McDermott Will & Emery)
Recent DOL Settlement Agreements with ESOP Trustees
"When viewed in its entirety, the [GreatBanc Trust Company (GBTC)] Agreement emerges as the most relevant guidance for ESOP trustees by laying the groundwork for subsequent settlement agreements. While there are differences and departures, subsequent agreements ... largely follow the principles laid out in the GBTC Agreement.... [T]he most recent settlement reached in May of 2018, is notable in that it is identical to the GBTC Agreement." (The Wagner Law Group)
[Opinion] Employee Stock Ownership Plans: Vulnerable to Abuse?
"Even though ESOPs are technically considered to be retirement plans existing for the benefit of employees, the assets of these plans can be -- and often are -- used to enrich the management of the company, to create liquidity for existing shareholders, and to serve as a lucrative 'exit strategy' for company founders. This can result in significant conflicts of interest, between the management of the company and its employees, and between existing shareholders and the employees who are 'buying' the shares via an ESOP." (Cohen Milstein)
Supreme Court Workplace Arbitration Decision: Potential Impact on ESOPs
"Although the Supreme Court's recent decision ... was not a case under [ERISA], the Court's analysis indicates that it would likely reject an argument that an arbitration provision with a class action waiver in an [ESOP] is fundamentally unenforceable under ERISA. However, the decision leaves open numerous questions about the practical effect of including such provisions in ESOPs." [Epic Systems Corp. v. Lewis, No. 16-285 (U.S. May 21, 2018)] (Holland & Knight)
Unique ESOP Structure Considerations (PDF)
24 presentation slides. Topics: [1] Review development of transaction goals; [2] Summary of regulatory/litigation environment; [3] Financial structuring alternatives; [4] Post-transaction price adjustments; [5] Designing incentive arrangements; [6] Transaction provisions/considerations. (McDermott Will & Emery, Chartwell Financial Advisory, and GreatBanc Trust Company)
ESOP Trustees Are Increasingly Becoming Targets
"[C]ompanies can help ESOP trustees avoid claims that they paid too much to shareholders for their stock by providing accurate and reliable information about the company.... ESOP trustees often seek indemnification agreements from ESOP sponsors, and ESOP sponsors are typically willing to provide them. Nonetheless, the DOL and plaintiff's bar have attacked the enforceability of such agreements." (McDonald Hopkins)
DOL Enters Into Fifth Settlement Agreement with an ESOP Trustee -- and It Looks Familiar
"The agreement with Lubbock National Bank (the LNB Agreement) ... is identical to the first process agreement that the DOL entered into in 2014 with GreatBanc Trust Company (the GBTC Agreement). Notably, the LNB Agreement does not contain any of the items that the DOL requested be added to agreements with ESOP trustees that were entered into after the GBTC Agreement." (Holland & Knight)
Progress on Two ESOP Bills in Congress
"With bipartisan support, H.R. 5236 would make it easier for ESOPs to obtain stock acquisition loans from the Small Business Administration (SBA). ESOP stock acquisition loans could also be made under the SBA's preferred lender program.... [S1538 includes] an SBA program to appoint an individual to serve as the Service Core of Retired Executives (SCORE) Employee Ownership Director." (Butterfield Schechter LLP)
Sen. Gillibrand Introduces Pro-ESOP Legislation
"[The Main Street Employee Ownership Act of 2018 (S2876)] would provide $500 million in support of [ESOP] programs and would operate through the Small Business Administration." (The ESOP Association)
Private Equity Seeks Second Chance on ERISA Liability Ruling
"The court could send the matter to arbitration, which is the standard method for resolving multiemployer plan withdrawal liability. It could hear the case and distinguish its facts to rule that Trilantic was a passive investor without explicitly approving or rejecting the higher investment-plus standard. It could adopt the investment-plus test but find that the facts here fall short of plus, or alternatively that Trilantic did have the required level of involvement to constitute a trade or business. Or it could reject the higher standard, finding that even hands-on management is consistent with the status of a passive investor, resulting in circuit split." (Kaufman & Canoles, P.C.)
DOL Voids ESOP Fiduciary Indemnification Agreements to Reach Settlements
"In recent litigation involving ESOP-owned companies, the DOL has taken the position that indemnification clauses are void against public policy under Section 410 of [ERISA]. Though lacking clear precedent, this policy has also been adopted by private plaintiff classes in recent years. As evident from [a recent settlement], a policy of voiding indemnity provisions can limit defense budgets, make settlements more likely and potentially create dangerous precedent for ESOPs." (McDermott Will & Emery)
Tax Reform Impacts on ESOPS
"ESOPs will need to consider how their loan payments compare to EBITDA or EBIT to make sure that they are able to deduct payments.... State and Local taxes are expected to increase for sellers to ESOPs ... [L]ess-than-100% S Corporation ESOPs will need to distribute less cash each year so that non-ESOP shareholders can pay their share of taxes on corporate profits." (Retirement Management Services, LLC)
What You Need to Know About ESOP Valuation Season
"Impact of First Bankers Trust settlement on fiduciary responsibility... Selection and use of valuation advisor ... Conflicts of interest.... Oversight of valuation advisor ... Financial statements.... Fiduciary review process ... Documentation of valuation analysis.... Reliance on valuation report.... Preservation of Documents.... Fair market value.... Control.... Consideration of claw back." (McDonald Hopkins)
March ESOP Madness: Ready to Make the Most of Your Annual Participant Statements?
"[1] Develop a communications goal ... [2] Communicate the rules of the 'ESOP game' ... [3] Use a 'dummy' or sample statement to show the score ... [4] Share stats to illustrate what drove stock value ... [5] Give employee owners a game program ... [6] Have fun and celebrate employee ownership." (Blue Ridge ESOP Associates)
Tenth Circuit to Address Deferred Corporate Deductions for Expenses Payable to ESOP-Participating Employees
"[The employer] claimed the deductions, and the shareholders claimed flow-through deductions for the accrued but unpaid payroll expenses. The IRS disallowed these deductions... because [the employer] and the ESOP-participating employees were considered 'related persons.'... [The Tax Court] concluded that the ESOP trust was a 'trust' for purposes of IRC Section 267(a)(2) [which meant that] Petersen and other S corporations must defer deductions for expenses paid to their ESOP-participating employees until those expenses are includable in those employees' gross income.... [T]he shareholders argue that Congress never intended for IRC Section 267 to apply to employee trusts such as ESOPs." (McDermott Will & Emery)
ESOP Sponsor's Board of Directors Sued Over Company Stock
"The company stock held in Lifetouch's ESOP declined by more than $840 million between 2015 and 2018, representing an average loss of more than $22,000 in retirement savings for each of the plan's 16,000 investors, according to the lawsuit. This decline happened while several Lifetouch executives retired and cashed out their stock at favorable prices, the lawsuit claims." (Bloomberg BNA)
Power to the ESOP: Tax Savings Benefits for Employers and Employees
"Companies considering ESOP ownership, partial ESOP ownership in 2018, or even existing ESOPs may want to compare the costs and benefits of electing to be treated as a C corp or S corp. The new lower C corp taxes may have some S corps reconsidering their entity choices." (Butterfield Schechter LLP)
ESOPs: Legislative Updates
"The National Defense Authorization Act of 2017 ... has been updated to include certain ESOPs as falling within the category of small business concerns owned and controlled by service-disabled veterans. In calculating the 51% minimum veteran ownership, these businesses can now disregard the percentage of ESOP stock ownership. This change effectively opens up more partial employee-owned businesses to defense contracting preferences." (Butterfield Schechter LLP)
The Road Ahead: Considerations for Tax Reform's Impact on Your ESOP
"A C corporation or partially owned S corporation ESOP plan sponsor should immediately consider the benefits of maximizing its 2017 contribution to the ESOP.... A potential 20 percent reduction in tax liability for the outside shareholders of certain S corps means there may be less S corp distributions flowing to the shareholders, including the ESOP.... ESOP companies may be required to make greater company contributions to satisfy their debt payments and repurchase obligation." (Findley Davies | BPS&M)
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])
 
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