RSM McGladrey ESOP Blog

A final reminder re: 409A

Since Monday will be the 1st day of December, it seems appropriate to remind you one last time of the looming deadline to bring your deferred compensation plans into compliance with Code Section 409A.

Thanks to our friends at Krieg DeVault for this reminder - Compliance Deadline for Code Section 409A is December 31, 2008.

Here are some other things that happened at the Vegas ESOP conference

First, if you look at the post on the Employee Ownership Foundation blog from November 18th, you will see that the Foundation raised over $50,000 at the conference. That is excellent news for the Foundation that has been doing so much to promote the benefits of employee ownership!

As Thanksgiving approaches, I for one am grateful for the work of the Foundation. And I am grateful for the support shown to the Foundation during these difficult economic times.

You can also read Michael Keeling’s comments on the impact of the 2008 election on ESOPs – as usual, this is very interesting reading!  I know that I am naïve when it comes to politics but I still find myself surprised that we have to fight again and again for a concept (employee ownership) that seems so obviously positive to me.  But it certainly does seem like we all need to roll up our sleeves and fight, fight, fight!

I hope you all have a safe and relaxing Thanksgiving!!

 

How do you handle the ESOP accounts of former employees?

This is a topic that I did hear discussed quite a bit at the conference last week in Las Vegas. Many ESOP sponsors choose to “segregate” or “convert” the accounts of former employees out of company stock and instead invest such accounts in more liquid and diversified investments.

One obvious reason for this is that former employees are no longer contributing to the company and hence should not be sharing in future increases or decreases in the value of the company. But equally important, the former employee is also likely to receive a distribution in the relatively short term so that investing his or her account in a more liquid and more diversified manner may be prudent.

And while this practice has existed for years, the IRS has apparently suspended issuing determination letters to ESOP sponsors who have this type of provision in their plan document. This may not mean that the IRS is against this practice but apparently they are planning to issue some type of general guidance on this issue.

My concern is that the IRS really does not understand the motives and benefits of this practice. Apparently, they are using the term “reshuffling” when describing this practice. Which makes me think they are suspicious that somehow shares are being reallocated from one group of participants to another in some devious and inappropriate way. Which of course is not true!!

 

Can the emerging repurchase obligation lead to bankruptcy?

In today’s Employee Ownership Update, Corey Rosen comments on a somewhat unsettling report involving The Antioch Company. The issue of an ESOP’s repurchase obligation is clearly one of the most significant facing an ESOP sponsor, particularly a successful ESOP company as substantial increases in fair market value become a "liability."

I have to admit that I have heard of ESOP companies being forced to sell the company due the repurchase obligation of the ESOP. But I have not had any clients that have had to either sell or declare bankruptcy. Maybe I have been fortunate or perhaps these more dramatic resolutions of the repurchase issue will become more common.

What happens in Vegas stays in Vegas?

Well, not necessarily. My report back to you on The ESOP Association’s Las Vegas Conference and Trade Show is somewhat mixed.

On the positive side, this conference continues to excel in its technical content. All of what I would consider “hot” ESOP technical issues were discussed. Also, the attendance at this conference was pretty impressive given the current economic conditions.

On the not so positive side, there were discussions on topics that related to the current economic situation such as credit availability (or lack thereof) and plan administration issues stemming from either a reduction in force or significant stock value decline. 

Still, my overall feeling was positive. There was still so much enthusiasm for ESOPs and employee ownership as well as a belief that while we are in tough times currently, the existence of the ESOP will help companies survive and perhaps even thrive!

So if you attended the conference last week, what are your thoughts?

 

It is that time of year again!

I will be out the rest of this week to attend The ESOP Association’s 2008 Las Vegas Conference & Trade Show.

If you or someone from your company will be attending, I would love to meet you. So feel free to introduce yourself if you see me in the hallways or at the reception.

I will report back next week on any hot topics or new developments that may be of interest.  I could lie and tell you that I will report back yet this week while still in Vegas but I have learned from experience – I will have so few moments of free time and I will somehow end up spending those few moments at a slot machine, not at my computer.

Explaining the Ups and Downs of Stock Value

In light of all of the current economic turmoil, I thought this might be an interesting piece for all ESOP companies to read - Explaining the Ups and Downs of Stock Value

Thanks to our friends at Workplace Development, Inc.

Here is another oddity of Code Section 409(p) testing

I am sure you are thinking that I must be done prattling on about Code Section 409(p) but unfortunately, there are so many facets to this test and each can be very important.

I have mentioned on many occasions that a nonqualified deferred compensation plan is considered synthetic equity even though the contributions and benefits may have no correlation to the value of the company stock. The present value of such a NQDC plan is divided by the current per share fair market value of the company stock to determine the number of shares of synthetic equity.

Basic mathematics leads to the conclusion that if your stock value takes a significant drop, then the number of shares of synthetic equity will increase. If the present value of the NQDC plan is $1 million and the per share fair market value is $100, the number of shares of synthetic equity would be 10,000. If the stock value drops to $50, the number of shares of synthetic equity jumps to 20,000.

Now isn’t that like adding salt to the wound – you clearly already have issues that triggered that significant decline in the stock value and now perhaps the increase in the number of shares of synthetic equity will cause a Code Section 409(p) failure. 

Is there a credit crunch impacting ESOP companies?

I had a conversation a couple of days ago with an individual who was trying to secure financing for a new ESOP and he was not every encouraging. He indicated that the senior lenders out there were just not lending money.

But as Corey reported earlier this week, existing ESOP companies did not appear to be impacted by the credit crunch – New NCEO Survey Shows Limited Impact of Credit Crunch on ESOP Company Borrowing Capacity

So maybe the individual that I was speaking with had a unique situation or maybe the credit crunch is impacting companies considering a new ESOP transaction more than existing ESOP companies (who as Corey reported may not be in need of additional credit at this time.)

I need help to figure out what is happening out there so please share your experiences.

So if the Code Section 409(p) test is a daily test, how does this work?

I mentioned last week that this complicated test is actually a daily test. And I have mentioned previously that a nonqualified deferred compensation plan (NQDC) is considered synthetic equity and must be included in the test.

So did that make you scratch your head and wonder how you could possibly comply with the daily testing requirement since the values of the NQDC could change daily depending upon how the arrangement is structured?

Well, if you have the proper provision in your plan document, you can specify an annual determination date (e.g., the first or last day of your ESOP’s plan year.) This means that you measure the value of the NQDC plan on that date for purposes of converting it into shares of synthetic equity. The resulting number of shares of synthetic equity will then be what would be applicable for every day of that year.

There are a couple of key considerations here –

• Your ESOP document does have to provide for this annual determination date. If you don’t have this in your document, you should be amending your document to include it.

• You do still have to worry about Code Section 409(p) being a daily test because as indicated last week, there are things that could happen on any day of the year that could impact the test. 

Or you could just pay a TPA like me to test your ESOP every day of the year! Actually, even though that may increase my revenues, I really don’t like 409(p) testing enough to face one every single day.