RSM McGladrey ESOP Blog

Creating a culture of accountability

Normally as the end of a year approaches, it seems fitting to look back on what has transpired this year. But I am not in the mood for that this year – I guess because the bad economic news has been so dominant in 2008.

I also didn’t want to launch into a technical discussion that would carryover into 2009 as I suspect many of you may be heading into a long weekend that involves a few cocktails and you may forget the beginnings of such discussion.

So I saw this piece and thought it was worth sharing – Helping create a culture of accountability within your company can go a long way toward enhancing your profit margin, as well as increase employees' commitment to your team and organization.

Many of my ESOP clients are striving to create an ownership culture. It would seem to me that a culture of accountability would be an integral part of an ownership culture.

Have a great (and safe) New Year’s holiday weekend!

Looking for information on employee ownership??

Then you had better check this out – Largest Repository of Employee Ownership Teaching Materials Is Launched

I know that I mentioned this several weeks ago but it seemed fitting to provide the link as my holiday gift to all - The Aspen Institute Center for Business Education, the Foundation for Enterprise Development and the Employee Ownership Foundation today announced their collaboration on the creation of a Curriculum Library on Employee Ownership.

Happy Holidays!!!!

Make sure you make those age 70 ½ required distributions before 12/31/08

I had commented last week that there may be some relief from these rules coming for 2008 but that hope has appears to have been dashed - Text of Treasury Department Letter to Rep. George Miller; No Required Minimum Distribution Relief for 2008.

Think Spring! Think Portland! Think Employee Ownership Conference!

A winter storm is looming. We are expecting some evil combination of ice, snow and sleet. It is never too early to start thinking about spring.  And in Iowa, spring may not actually spring until April. 

I just found our this week that I am lucky enough to be speaking at the 2009 Employee Ownership Conference sponsored by the Beyster Institute and the National Center for Employee Ownership.  This conference will be in April in Portland. So I am excited to know that I have a spring trip planned to a city that I have never visited before.

So if you want to think ahead to spring with me, it is not too soon to make your plans to attend this great conference - 2009 Employee Ownership Conference Planned April 22-24 in Portland, Oregon

Relief from those pesky age 70 ½ distribution rules but not until next year

I guess the good news is that there appears to be relief from the age 70 ½ distribution rules coming for 2009 – Congress Kills Minimum Distributions for 2009

The bad news is that there has not been any announced relief for 2008 yet and it is currently December 16th so time is definitely running out - MRD Relief – What It Means and Why Is It Important to Your Retirees Now

Do you expect a decline in the value of the stock in your ESOP?

Clearly these are difficult times for many companies and it is possible that the value of the stock in your ESOP might decrease this year. If so, you will likely have many issues to deal with such as communicating that value decrease to your employees.

But if you are using either C corporation dividends or S corporation distributions to repay the ESOP’s securities acquisition loan(s), there could be another issue that surprises you.  Specifically, if you are using the dividends/distributions paid on shares already allocated to participants’ accounts to make debt payments, then there is a value test that must be satisfied. For example, if a participant was to receive $100 of dividends on the shares in his or her account but instead such $100 was applied to the ESOP’s debt payments, then such participant must receive shares back as a result of such debt payment equal to or greater than that $100.

This can be an issue in any leveraged ESOP where there is a post-transaction drop in value. But the issue can be magnified if there is also a decline in the value due to the company’s operations or economic difficulties.

Many plan documents provide that the value test will be satisfied by making additional allocations of shares to meet that $100 threshold from the above example. This would typically occur by changing the allocation of shares released due debt payments made from either dividends/distributions on the unallocated shares or from a company contribution.

An alternative to avoid the complications of this value test is to not use the dividends/distributions on the allocated shares to make debt payments. Of course, the company may not be able to afford the cash flow associated with not using those dividends/distributions for debt payments.

I realize this is a pretty technical subject but if you are anticipating a decline in value and do plan to use the dividends/distributions on the ESOP’s allocated shares to make debt payments, you should probably consult with your ESOP advisor before doing so. 

Some good advice for employee owned companies

If you already have Tribune burn-out like I do, here is a piece with some very good advice for employee-owned companies during the current economic “situation” - The Economic Downturn:
What Does It Mean for Employee-Owned Companies?

Pardon my sarcasm but….

I have been told that I am sometimes way too sarcastic and that can get me in trouble. Also, I have learned over time that my sarcastic comments tend to increase when I am grumpy.

Well, consider yourself warned as I feeling grumpy today – the weather is not so inviting, the financial news seems to be consistently dire and then I see a headline that has the word “bad” in front of ESOP - The SBA, Bad ESOPs and More Twitter

So my first question is - where is the public outrage over my “bad 401(k)”? Surely my employer made a mistake by offering me this bad 401(k) plan where my investment losses for one month more than exceeded my contributions for an entire year.

My second question relates to this comment from the above referenced piece- “Your company fails and your workers pay.”  The majority of most private company ESOPs are 100% funded by employer, not employee contributions.  So there really is no “payment” by the ESOP participants.

I can hear the response to that now – but these employees in a “bad ESOP” lose all of their retirement savings. This claim is also not true in most cases.  Most companies that sponsor an ESOP also sponsor a 401(k) plan and possibly other types of plans such as defined benefit or cash balance plans. (In fact, studies have shown that the compensation and benefits provided to employees by ESOP companies exceed those provided by non ESOP companies.) If an employee chose not to participate in the 401(k) plan, the company sponsoring the ESOP cannot be to blame for that poor decision – unless of course they offered their employees the same bad 401(k) plan that I have.

 

Is an interim valuation of your ESOP stock permissible?

I have been asked this question by a couple of clients – can we do an interim valuation of the company stock? The reason behind such question has been that a significant stock value decline is expected and without this interim valuation, the former participant s will be paid at the higher, prior valuation and the remaining participants will absorb more of the stock value decline (this assumes the shares are recycled within the ESOP.)

As usual, there is no easy answer. The first issue is whether the ESOP document allows for interim valuations of the company stock. And actually many ESOP documents do grant the plan sponsor or fiduciary the discretion to obtain an interim valuation.

But there may be issues even if the plan document allows for an interim valuation. There seems to be some disagreement in the legal community relating to the timing. In other words, if the former participant has already requested a distribution before the interim valuation date, should he or she still be paid based on the prior end of year value?

There are other potential fiduciary and nondiscrimination issues that should be considered. The only right answer here is to consult with your ESOP legal counsel.

The latest on the Chicago Tribune

I spent most of yesterday in my car and in meetings and while I was trying to not be distracted by e-mail, I couldn’t help but be so given the many e-mails I received relating to the news of the filing of bankruptcy by the Chicago Tribune. It is inevitable that this event will trigger another wave of negative press relating to their ESOP. So as usual, I am turning to an old reliable source – Corey Rosen of the NCEO to try to get the true story out there. Please read and forward Corey’s comments - What Will Happen to the ESOP in the Tribune Bankruptcy?