ESOP Administration Horror Stories Presented by Pete Shuler
ESOP Administration Horror Stories Presented by: Pete Shuler Crowe Horwath LLP 1 Justin W. Stemple Warner Norcross + Judd LLP
Eligibility 2
Excluded Employees IRS-approved (union; leased employees; nonresident aliens with no US income) • Related employers? • Part-Time/Seasonal? • Can they be excluded? Can they have different entry provisions? • Non-benefitting? Excluding certain groups of employees 3
Rehires Previously a participant? • Previously met requirements but did not enter? • Vested? • Breaks in Service? • 4
Temp to Hire Leased Employees • Service Crediting? • 5
Contributions & Allocations 6
Compensation • Testing 415 Compensation • Allocation Inclusions Exclusions › Taxable Fringe Benefits › Severance › Others? (e. g. , bonus, commissions) 7
Forfeitures Reallocate • Reduce contribution • Pay expenses • Mr. Forfeiture • 8
USERRA Make-Up Contributions • Compensation assumptions • 9
Incorrect Share Release Calculations • Not adhering precisely to the loan document The interest is often calculated incorrectly. There are many interest formulas that are different in very subtle ways Not recording prepayments correctly • Not recording accrued payments correctly • Incorrect formulas • P v. P&I • 10
Distributions 11
Qualified Domestic Relations Order QDROs allow a distribution while employed to an alternate payee (i. e. , ex spouse) • Divorce Judgment v. QDRO • Sample QDRO • Sham divorce? • 12
Distribution Mistakes • Overpayment Generally due to eligibility for diversification and distribution (or RMD and distribution) – and both are paid • Paid from the wrong source Cash distributions (recycling) paid directly by the company Redemptions of stock distributions paid by the ESOP 13
Distribution Mistakes Withholding on stock distributions/redemptions • Redemption proceeds paid in the form of a note • Permissible by law but almost impossible to do correctly 14
Distribution Mistakes Incorrectly paying out participants who have been converted to cash because only the vested portion was converted and paid to them • Assume: 100 shares - 60% vested and $10 per share @ termination • 15
Distribution Mistakes 60 shares are converted to $600 in cash and, 5 years later, the cash is distributed to the participant • The stock doubles to $20 per share at the time of the distribution, so the correct distribution amount is: • ((40 share * $20/share) + $600 cash) = $1, 400 * 60% = $840 • 16 And the participant is underpaid by $240
Missing Participants or Beneficiaries Steps to Locate • If unsuccessful. . • Check plan document Forfeiture Escheat IRA rollover / PBGC Missing Participants program upon termination of plan 17
Slayer Statute Plan Language • ERISA • State Law • Federal Common Law • 18
Miscellaneous 19
Fair Market Value Acquisition of Stock • Recycling • Redemption from Participant • Redemption from ESOP • 20
Controlled Group • • • 21 Parent-Subsidiary Brother-Sister Affiliated Service Group Treated as single employer Participation/coverage Valuation issues
ERISA Fidelity Bond • • • 22 10% of Plan Assets; update annually Min. $1, 000 Max. $1, 000 (for plans with employer securities) 401(k)/ESOP NOT THE SAME AS FIDUCIARY LIABILITY INSURANCE
Other Scary Things No plan for or understanding of the repurchase obligation • Benefit Levels – Massive or spikey • ESOP loan terms set too short • KSOPs – Coordinating forfeitures and mandatory payouts • 23
Other Scary Things Unrecognized partial plan terminations • Points-based allocation methods that consistently fail nondiscrimination testing • PTE 80 -26 Loans – Difficult to handle correctly • 24
Don’t Forget! Please fill out your evaluation for this session You can find it in the Conference App or ask for a paper version 25
Questions ? Pete Shuler Crowe Horwath LLP 10 W. Broad Street, Suite 1700 Columbus, OH 43215 614. 280. 5208 pete. shuler@crowehorwath. com Justin Stemple Warner Norcross + Judd LLP 900 Fifth Third Center 111 Lyon Street, NW Grand Rapids, MI 49503 616. 752. 2375 jstemple@wnj. com 16823636 26 These materials are for educational use only. This is not legal advice and does not create an attorney-client relationship.
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