RSM McGladrey ESOP Blog

New publication from the NCEO

New NCEO book: The Handbook of Incentive Compensation

Greetings from snowy Iowa

I have never been a fan of snow and especially not today since I was supposed to be in Orlando for a meeting. But I couldn’t fly out yesterday and am instead trapped in my house for the day.

I did see this and thought I would pass it along even though it is not ESOP related as it might be interesting for you to see how other employers are dealing with their retirement plans -  Impact of Economic Conditions on 401(k) and Profit Sharing Plans.

More thoughts on the Invested Primarily Requirement

As a follow up to yesterday’s post, there are circumstances where I would tend to worry if the ESOP’s investment in company stock drops below 50% for a year or two. And one of those is if the ESOP is sponsored by an S corporation.
The reason that I might worry is that we know the IRS does not seem particularly fond of S corporation ESOPs.  And if the ESOP does not own 100% of the S corporation, it could very well be accumulating significant other investments via the receipt of annual tax distributions. 
Since we don’t have specific guidance on how many years that the ESOP’s investment in company stock could dip below the 50% threshold, it is probably best to be conservative on this issue. Plus, there are some pretty easy ways to address this.
The first is via the design of the plan document. Such document could be set up to have both an ESOP portion and a non ESOP portion. The company stock would be an asset of the ESOP portion and the other investments could be assets of the non ESOP portion.
Or perhaps you could make a plan to plan transfer of a portion of the other investment account balances to your separate 401(k) plan. But make sure that you have thoroughly reviewed the future repurchase obligation of the ESOP before making this transfer.
Or maybe you could amend the plan to allow certain in-service distributions to employees. Again, be sure that the implications on your ESOP’s repurchase obligation have been considered.

Is your ESOP invested primarily in company stock?

I have had this question come up a couple of times recently so I thought I would pose it here.

 

It is actually required by the IRS regulations that the ESOP be designed to be invested primarily in company stock. The intent to be invested primarily in company stock is also typically set forth in the plan document. So to the extent that an ESOP is not invested primarily in company stock, there would be a failure to follow the terms of the plan document as well as a violation of the IRS regulations.

 

So what percentage of the assets of the ESOP should be in company stock to be considered invested primarily? And what if the value of the company stock has dropped so significantly in relationship to the other assets – at what point will a failure to satisfy the invested primarily requirement be triggered?

 

Both are good questions and I don’t have a definitive answer to either. Neither the IRS nor the DOL has issued guidance that establishes a specified percentage requirement.  Most practitioners would indicate that as long as more than 50% of the assets of the ESOP are in company stock, then the invested primarily requirement should be satisfied.

 

With respect to the duration, the DOL did issue some guidance on this point in a 1983 Advisory Opinion. Specifically, such Advisory Opinion includes the following sentence:

 

"In this regard, however, we must emphasize that the Department believes that in order to satisfy the ESOP requirements imposed by ERISA and applicable regulations, a plan must satisfy the "primarily" requirement of section 407(d)(6) of ERISA over the life of the plan."

So since the requirement is over the life of the plan, we may not need to be concerned if the company stock portion of the ESOP dips below 50% for any given plan year.  But I do have a couple of additional thoughts on this subject that I will share in my next post.

Check out this addition to ESCA’s website

I received an e-mail from ESCA today that included the following:

"At the 2009 ESCA Federal Policy Conference, ESCA launched the StoryLine project to capture some of these personal stories of employee-ownership.  All employee-owners who were selected by their companies to participate in the conference and lobby day were given the opportunity to interview with ESCA’s writer and producer.  The final produced interviews from the “ESCA StoryLine” project are now available on ESCA’s website at (http://esca.us/escastories.asp)."

I predict this will be a powerful tool in promoting employee ownership

Welcome back Victor Aspengren!

You may or may not be aware that the creator of this blog was Victor Aspengren. When Victor left RSM McGladrey, I reluctantly became the official ESOP blogger for the team.  But it has been fun!

Well, as Victor announced here - A Paint Can of Cookies, he is rejoining RSM McGladrey next Monday, the 30th.  We anticipate that many companies might consider an ESOP as a part of their ownership transition in the next several years and Victor is going to help us to help those companies. In addition, he is going to help us develop new ESOP administration clients.

So what is going to happen to this blog? We have not really discussed it yet but I can envision a joint effort where Victor blogs on employee ownership culture and corporate governance topics and I blog on those somewhat boring but important technical issues.

So what am I thankful for this Thanksgiving?  I am extremely thankful for all ten members of my ESOP team. And I am also thankful that four out of those ten chose to return to RSM McGladrey after leaving us at some point.

Happy Thanksgiving!!!!!!!

Here is some happy news for Thanksgiving week

Employee Ownership Foundation Raises Close to $50,000 at 18th Annual Las Vegas Conference and Trade Show

News from the Vegas Conference on the ESOP Diversification Rules

You may not recall but I did a series of posts on the diversification rules back in February of this year. And I mentioned some of the areas in these rules where there was uncertainty.  Well, this is another issue that has apparently been addressed by the IRS in the form of some technical assistance from the national office to the determination letter group.

I have not yet seen the actual document containing the assistance but according to the IRS, they have clarified the definition of year of participation. To refresh your memory, here is what I wrote in February:

But what exactly is one year of participation? Is it the same as a year or service for vesting purposes which is a plan year in which the participant completes at least 1,000 hours of service? Is it more similar to the ERISA definition of participant so that any year in which the participant maintains an account balance in the plan is considered a year of participation regardless of hours worked?  Or is it a year in which the participant would be eligible for a contribution under the plan’s terms (e.g., completion of 1000 hours of service plus employment on the last day of the plan year)?

For existing plans, it appears that any of the above could be an acceptable definition, but with a catch. The catch is that if your plan currently has a restrictive definition, it could be amended to have a more liberal definition. But if your plan has a liberal definition, it cannot be amended to have a more restrictive definition. So for example, if your plan defines year of participation as any year in which the participant maintains an account balance, you could not now amend the plan to define a year of participation as a year in which the participant completes 1,000 hours of service and is employed on the last day of the plan year.

I will report back with more details once I am able to read the actual technical assistance document.