BASIC ADMINISTRATION. Tri-Chapter Regional Conference and Golf Tournament March 25 27, 2012 Pinehurst Resort, North Carolina

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1 Tri-Chapter Regional Conference and Golf Tournament March 25 27, 2012 Pinehurst Resort, North Carolina BASIC ADMINISTRATION Monday, March 26 th 10:15 am Karen Hurley SES Advisors Carla Klingler PyraStar Pension Group Susan Ledingham R.K. Schaaf Associates, Inc.

2 Tee-ing Up AGENDA Reviewing the Plan Document (eligibility, participation, vesting) Gathering Necessary Data (employee, ESOP, company) Keeping the Ball in the Fairway Funding the Plan (deductions, contributions) Allocations (contributions, share release, forfeitures, income) Required Testing (coverage, non-discrimination, etc.) Setting up your Putt Distributions (in-service, diversification, termination) Reporting and Disclosure Requirements (ESOP, participant) Miscellaneous 2

3 BEFORE YOU LEAVE THE CLUB HOUSE Gather your equipment Plan Document Amendments Contact List of Advisors and Vendors Contact your team In-House HR and third-party Payroll vendor Trustee Accountant Valuation Firm Auditor Plan recordkeeper ERISA attorney 3

4 PREPARING FOR THE TEE 4

5 KNOW YOUR PLAN DOCUMENT Your Plan document provides guidance on how to perform just about every aspect of your Plan s administration. In the absence of guidance in the Plan document, look to procedures established for this purpose. Administering the Plan in accordance with the Plan document and adopted procedures, unless expressly directed otherwise by law, is fundamental to the Plan s continued qualification. A MUST READ before any further action is taken regarding your Plan s administration. 5

6 ELIGIBILITY TO PARTICIPATE What requirements must the employee meet in order to become a Participant in the Plan? Plan may exclude employees in any of the following groups without having to test for minimum coverage: Employees who are less than 21 years old Employees with less than 1 year of service Union employees, where retirement benefits were negotiated in good faith under a collective bargaining agreement Non resident aliens with no US source income Plan may exclude other categories of employees as long as the minimum coverage test is passed each year. (The Minimum Coverage Test is described later in this presentation.) 6

7 ELIGIBILITY TO PARTICIPATE What is a Year of Service for Eligibility? Plan document will define, but generally: A 12 month period during which the employees works at least 1,000 hours The first 12 month period generally starts on the hire date of the employee If the employee does not work 1,000 hours during their initial employment year, the 12 month period may switch to the plan year Some Plans require less than 1,000 hours or calculate service based on elapsed time. 7

8 ELIGIBILITY TO PARTICIPATE What are the Plan s eligibility requirements? Plan document will define. Examples: An Employee who completes one Year of Service and has attained age 21. The Plan would have: 2 Entry Dates or 1 retroactive Entry Date An Employee who completes two Years of Service All service requirements in excess of 1 Year of Service must fully vest (100%) the Participant on their Entry Date An Employee who completes 12 months of employment (elapsed time) 8

9 PARTICIPATION Once Eligibility is met, an employee becomes a participant on an entry date : The document will define the Participant s Entry Date(s). Typical examples are: The 1st day of the plan year and the first day of the 7th month of the plan year following the date the eligibility requirements are met. The 1st day of the plan year during which the eligibility requirements are met. 9

10 PARTICIPATION - REHIRES The Plan document should address the requirements pertaining to rehired Participants. A Participant with a vested benefit at the time of severance from service will again participate in the Plan on their rehire date. A non-vested Participant may need to meet the eligibility requirement upon re-employment if they had 5 consecutive Breaks in Service. A Break in Service is generally a Plan Year in which the Participant is credited less than 501 Hours of Service. 10

11 PARTICIPATION - REHIRES An Employee who has met the eligibility requirements but terminates employment before their entry date generally will enter the Plan on the later of their rehire date or the date they would have initially entered the Plan. An Employee who has not met the eligibility requirements prior to termination of employment generally has eligibility determined from their rehire date. Under certain circumstances, Employees who terminate prior to becoming a Participant may have their prior employment Years of Service excluded. 11

12 THE SHOT GUN START 12

13 DATA COLLECTION Data collection is the 2 nd most important part of your annual administration process, preceded only by knowing your Plan document. Omissions and inaccuracies at this point in the game could have a disastrous domino effect with the potential to create a disqualifying event and at the very least redoing the administration. 13

14 DATA COLLECTION Employee Census Include all Employees Indicative Data name, social security number, employee number, date of birth, date of hire, date of termination, reason for termination (death, disability, retirement, quit, employer initiated), date of rehire, employee classification (union, leased, independent contractor, etc.), address Leave of Absence and Layoff Data leave of absence beginning and end dates with reason, military service beginning and end dates and layoff beginning and ending dates Compensation Gross, bonus, overtime, expense allowances, other fringe benefits (NOTE: the components required to be used in determining compensation for allocations, deductibility and testing often differ making it important to have all components available so they may be pulled in or taken out as needed) 14

15 DATA COLLECTION Employee Census continued Other Data Hours of Service be sure to include all hours for which the Employee was paid or entitled to be paid (vacation, sick leave, holiday) Section 125 Contributions (Pre-Tax Contributions) 401(k) Pre-Tax Deferrals 401(k) Roth Deferrals 401(k) Catch-up Contributions 401(k) Matching Contributions Employer Contributions and forfeitures allocated to the Employee under all other qualified plans (Profit Sharing Plan, etc.) 15

16 DATA COLLECTION Employee Census continued Family members List all family members of the Employee that are employed by the Company. Include spouse, parent, grandparent, child, grandchild, sibling. If an S Corporation, also include cousins, in-laws, parents of in-laws, nieces and nephews. Step parent, child and adopted children are considered parent or child for all purposes above. List family members (as noted above) of the Employee that are not employed but either own stock in the Company or are an Officer of the Company. 16

17 DATA COLLECTION Plan Information Trust Account Data Bank and brokerage statements for the entire plan year Distributions paid to Participants during the plan year Required Minimum Distributions Diversification In-Service Death Retirement or Disability Other termination of employment Alternate Payee (Qualified Domestic Relations Order) 17

18 DATA COLLECTION Plan Information Trust Account Data - continued Contributions deposited during the plan year Contributions accrued as of the end of the plan year Plan expenses Bank or brokerage fees Advisor fees for services relating to the Plan Investment Advisor Appraisal Recordkeeping Audit Legal Trustee (a Trustee that is also an Employee may not be paid for services rendered) IRS user fees are not permissible Plan expenses 18

19 DATA COLLECTION Plan Information Trust Account Data continued Exempt loan payments principal and interest (loan payments must pass through the Trust - there must be a paper trail). Also note source of funds for payment: Company contribution Dividend S Distribution Combination of the above New purchases of Company stock Include Purchase price along with a copy of appraisal Seller (individual, Treasury, etc.) If the seller elected deferral of gain under IRC Section 1042 Number of shares purchased Class of stock purchased (any restrictions on this class?) If purchased with an exempt loan, include all loan documents plus the amortization schedule 19

20 DATA COLLECTION Plan Information Trust Account Data continued Distribution, Sale or Redemption of shares of Company stock Vested Benefits paid in the form of Company stock name and number of shares Sale of shares fairness opinion, appraisal, number of shares and buyer Redemption of shares stock redemption agreement, fairness opinion, appraisal and number of shares Insurance premiums paid (if applicable), cash value of policy(ies), name of insured, insurance agent name, address and amount of commission received 20

21 DATA COLLECTION Plan Information Trust Account Data continued Dividend or S Distribution information C Corporations Dividend rate per share Amount used to repay exempt ESOP loan Amount paid to Trust in cash Amount paid directly to participants (pass-through) S Corporations Amount of S Distribution declared Amount used to repay exempt ESOP loan Amount paid to Trust in cash Provide copies of the ESOP Schedule K-1 21

22 KEEPING THE BALL IN THE FAIRWAY 22

23 KEEPING THE BALL IN THE FAIRWAY Legal and Operational Compliance Deduction Limits Allocation Limits Proper Allocations to Participants Discrimination Testing 23

24 MAXIMUM DEDUCTIBLE CONTRIBUTION COMPANY LIMITS Code Section 404(a)(3) 25% of eligible compensation (limited to $250,000 for 2011) Includes: All Employer Contributions to DC plans Examples: ESOP Cash Contribution ESOP Stock Contribution at fair market value 401(k) Safe Harbor Contributions 401(m) Employer Discretionary Match 401(k) Employer Discretionary Profit Sharing Contribution 24 Does NOT include: Employee deferrals

25 MAXIMUM DEDUCTIBLE CONTRIBUTION COMPANY LIMITS Additional ESOP limits (for C-Corps only) Code Section 404(a)(9) Principal used to repay ESOP loan limited to 25% of eligible compensation Interest used to repay ESOP loan Code Section 404(k) Dividends paid on Employer Securities (subject to conditions) 25

26 MAXIMUM DEDUCTIBLE CONTRIBUTION COMPANY LIMITS Code Section 404 provides that a contribution that cannot be allocated under Code Section 415 cannot be deducted under Code Section 404. Code Section 415 limits: The maximum annual additions that any one participant may receive is the lesser of: 100% of eligible compensation; or $49,000 in 2011 [indexed for inflation in increments of $1,000] 26

27 CONTRIBUTION - ELIGIBILITY Being an eligible participant doesn t always mean you are eligible to receive contributions and/or forfeitures. An employee must first meet the eligibility requirements to enter the plan. Once they have entered the plan, they must then meet the eligibility requirements to receive an allocation of employer contributions and/or forfeitures. For example: Must have worked 1,000 hours of Service during Plan Year. Must be employed on Anniversary Date. Can have exceptions for one or both of the above for termination reasons due to death, or disability or normal retirement. 27

28 CONTRIBUTION - ALLOCATIONS Contributions and Forfeitures are typically allocated to participants based on their plan defined eligible wages. $40,000 / $4,000,000 = 1% of contribution/forfeiture Can be allocated on some other measure such as a points system based on a combination of years of service and wages, but additional testing may be required. Released Shares are also typically allocated to participants based on wages, but they can also be allocated based on stock account balances (i.e. if dividends are used to make loan payments) 28

29 CONTRIBUTION COLLATERAL SHARE RELEASE Principal-only Method Current Principal Payment X Shares in Suspense Current + Future Principal Payments Principal-and-Interest Method Current P&I Payments Current + Future P&I Payment X Shares in Suspense $150,000 / $1,500,000 * 60,000 = 6,000 shares released Participant would receive 60 shares based on $40,000 wages (1% of release) 29

30 FORFEITURES The NONVESTED portion of a terminated participant s account as determined by the Vesting Schedule. Usually reallocated at plan year end to remaining participants on same allocation formula used for Contribution. Timing: Subject to plan provisions, Forfeiture usually occurs at the earlier of: 5 year Break in Service Cash Out payment of vested value in full Zero Vested end of plan year of termination ( deemed cash out ) 30

31 FORFEITURES Nonvested amounts must be forfeited from ESOP account balances in a certain order: Cash or Other Investments forfeit first Company stock accounts forfeit proportionately At fair market value Non-Leveraged shares first 31 Leveraged shares last

32 FORFEITURES Rehires if rehired before a 5-year Break in Service, reallocated forfeitures must be reinstated to rehired participant s account IF: Participant was zero vested and forfeited entire account OR Participant was partially vested and repays the distribution amount received Reinstated Forfeitures may come from: Current year Forfeitures Current year Employer Contributions Current year Earnings 32

33 INVESTMENT EARNINGS Earnings on investments other than stock Generally allocated on the beginning balance of the other investments less distributions of other investments. Earnings on allocated stock Generally allocated on beginning balance of stock less distributions of stock Earnings on allocated stock generally consist of stock appreciation or depreciation and dividends on allocated stock If dividends on allocated stock are used to make a leveraged loan payment the shares participants receive in exchange for their allocated dividends must be at least equal in value to the dividends used to make a debt payment. 33

34 INVESTMENT EARNINGS Earnings on unallocated stock Could be allocated based on eligible compensation Could be allocated based on allocated stock balance Could be allocated based on total account balance Could be allocated on the beginning balance of the other investments less distributions of other investments. The earnings allocation method for each type of earnings should be contained in the plan document. 34

35 TESTING AND DISCRIMINATION Legal and Operational Compliance Comparing HCE to Non-HCE Benefits Managing Maximum Annual Allocation limits to Participants accounts. To Aggregate or NOT to Aggregate? 35

36 TESTING SECTION 415 MAXIMUM ALLOCABLE CONTRIBUTIONS Annual Additions DO include: Employer contributions to all qualified retirement plans Employee elective 401(k) contributions Forfeitures, unless the ESOP is leveraged and meets the 1/3 rd test Interest paid on ESOP loan Annual Additions DO NOT include: 401(k) Catch Up Contributions C-Corp Dividends or S-Corp Distributions Interest paid on ESOP loan IF ESOP meets the 1/3 rd test Leveraged stock forfeitures IF ESOP is leveraged & meets the 1/3 rd test. In the event of an excess, which plan gives? 36

37 DEFINITION OF HIGHLY COMPENSATED EMPLOYEE HCE (IRC 414(Q)) During the Plan Year or during the preceding Plan Year ( look back year ), any employee who is a 5% or more owner of the Employer OR During the preceding Plan Year 2010 (the look back year ) any employee who had Compensation in excess of $110,000 (adjusted annually by the Commissioner of Internal Revenue.) Alternative HCE Definition: Top Paid Group Plan Document provisions may limit the number of Highly Compensated Employees as defined above to the top 20% of all employees in the company ranked by total compensation 37 What if you have a 401(k) Plan?

38 TESTING SECTION 410(B) (COVERAGE TEST) Test determines if HCEs benefit in favor of Non-Highly Compensated Employees (NHCEs) Ratio must be at least 70% of NHCEs benefitting in relation to HCEs benefitting 38

39 TESTING SECTION 410(B) (COVERAGE TEST) First, determine HCEs $110,000 (2011) 5% Owner Limit to top-paid 20% Compare HCEs and NHCEs Example: 125 employees: 10 HCE 100 NHCE 15 ineligible If all 10 HCEs benefit, then at least 70 of the NHCEs must benefit 39

40 TESTING SECTION 414(S) (ALTERNATIVE COMPENSATION TEST) If the plan uses compensation for allocation purposes that does not satisfy the definition of compensation under Section 414(s) Example: Compensation excludes bonuses and overtime Test is satisfied if the average inclusion percentage of compensation for HCEs does not exceed NHCEs by a de minimus amount 40

41 TESTING SECTION 414(S) (ALTERNATIVE COMPENSATION TEST) Example: Total Comp. Covered Comp. HCE: President Jr., I.M. 127, , % President, I.M. 103, , % Wig, Big 85, , % 100.0% NHCE: Doe, John 32, , % Glad, R.U. 47, , % Bahr, Teddy 55, , % Sam, Uncle 37, , % 98.2% Test: Why do I.M. President and Big Wig qualify as HCE? 41

42 TESTING SECTION 416 (TOP HEAVY TEST) Key Employee: More than 5% Owner of company or related company More than 1% Owner of company or related company and has annual compensation greater than $150,000 (not indexed for cost of living). Officer with annual compensation of $160,000 in 2011, $165,000 in 2012 (indexed for cost of living (limited to 10% of employees or 3, whichever is greater.) Note: Compensation includes pay from all companies in a Control Group. Ownership takes into account family ownership under IRC

43 TESTING SECTION 416 (TOP HEAVY TEST) Determination Date - Last day of the PRIOR plan year. EXCEPTION: For first Plan year, it is the last day of the first plan year. Top Heavy Ratio Formula Aggregate of all qualified plans of employer: Numerator: Sum of account balances plus certain distribution add-backs of KEYS Denominator: Sum of account balances plus certain distribution add-backs of ALL participants. Top Heavy Ratio Plan is Top Heavy if ratio is 60% or greater Required Minimum Benefit - In general, lesser of 3% or KEY contribution rate. All plan documents should be consistent regarding which plan is to provide the Required Minimum Benefits if the plans become Top Heavy. 43

44 TESTING TO AGGREGATE? 401(k) and ESOP must be AGGREGATED (tested together) for: Code Section 404 Maximum deductible contribution Code Section 415 Maximum annual additions Code Section 414(q) Determination of HCE must be consistently applied to all plans Code Section 401(a)(10) and 416 Top heavy testing 44

45 OR NOT TO AGGREGATE? 401(k) and ESOP must be tested separately for: Minimum coverage requirements - Code Section 401(a)(3) and 410(b) ADP Non-Discrimination Test -Employee elective deferrals - Code Section 401(k) ACP Non-Discrimination Test Employer Matching - Code Section 401(m) However, if matching contributions are made in both 401(k) and ESOP, they can be aggregated for Code Section 401(m) testing 45

46 LINING UP THE PUTT 46

47 DISTRIBUTIONS - FORM Distributions may be made in stock or cash Distributions must be offered in the form of stock, unless share ownership to employees are restricted by corporate bylaws or the company is an S-Corporation May be in a lump sum or installments Installment Payments Conserves ESOP cash flow Participant shares in future appreciation, unless accounts are segregated Shares are put to either the company or the ESOP Two 60-day windows allow the participant to receive additional appreciation Participant does not get capital gains treatment on unrealized appreciation Can be spread out over a maximum of 5 years, with extensions for extremely large balances, to a max of 10 47

48 DISTRIBUTIONS - FORM Lump Sum Payments Reduces ESOP cash flow Participant does not share in future appreciation Shares are put to either the company or the ESOP Two 60-day windows allow the participant to receive additional appreciation Participant can get capital gains treatment on unrealized appreciation Triggers taxes and a possible 10% penalty if distributed before age 55 Lump Sum Stock Distributions and Promissory Notes Conserves cash flow Freezes the value of the stock Requires adequate security- something tangible 48

49 DISTRIBUTIONS - SEGREGATION Segregating accounts prevents a separated participant from sharing in the future appreciation of Company Stock Segregated accounts must be invested in an interest-bearing vehicle separate from the ESOP Other Investment account Cash is taken from the Other Investment accounts of the remaining participants to repurchase shares Reduces cash flow of the ESOP 49

50 DISTRIBUTIONS - TIMING Death, Disability or Retirement Distribution begins no later than the last day of the plan year following the plan year of the event May be paid over five years Exception: Death benefits must be paid within five years Vesting must be 100% for retirement Other Terminations Distribution begins no later than the last day of the sixth plan year following the plan year of the event Generally paid over five years (6 installments) Distributions are subject to a vesting schedule Required Minimum Distributions Required at age 70 ½ unless participant is an active non-owner 50

51 DISTRIBUTIONS - TIMING General ERISA rules may override ESOP distribution timing Latest date for distribution Participant s retirement age or age 65, if earlier Participant s termination of service The tenth anniversary of the date of ESOP entry Age 70 ½ distributions Leveraged ESOPs For C-corporations, distributions attributed to leveraged shares may be postponed until the plan year following the plan year in which the loan has been repaid 51

52 DISTRIBUTIONS - CONSENT When consent is not required The participant has a balance of less than $1,000 A balance between $1,000 and $5,000 can be moved to an IRA Consent also not required for death beneficiaries or alternate payees When consent is required When a participant s vested account balance is greater than $5,000, generally consent must be given prior to normal retirement age, or age 62, if later Check the plan document for specifics 52

53 DISTRIBUTIONS - METHOD Lump Sum May be in cash, or a rollover to the participant, spouse or former spouse, or for non-spouse beneficiaries Installments May be in cash, or a rollover to the participant, spouse or former spouse, or for non-spouse beneficiaries For a period not to exceed five years (six installments) Extensions allowed for large account balances One additional year for each $195,000 or fraction thereof by which the participant s account balance exceeds $985,000 Maximum of 5 additional years 53

54 DISTRIBUTIONS - MISCELLANEOUS Participants must receive a Special Tax Notice at the time distribution paperwork is received Distributions can be rolled over to another qualified plan or IRA with no tax consequences Generally, hardship and in-service distributions (other than diversifications) are not allowed A distribution policy separate from the Plan Document is recommended, to allow for greater flexibility in managing repurchase liability from year to year 54

55 REQUIRED MINIMUM DISTRIBUTIONS RMD amounts are not eligible for rollover, nor are they subject to mandatory Federal income tax withholding Requirements Participants must begin receiving at least minimum distributions: Timing Once they have attained age 70 ½ and terminated employment; or Once they have attained age 70 ½ and are a 5% owner, regardless of whether or not still employed by the company Distributions must begin by the Required Beginning Date (RBD), which is April 1st of the calendar year following one of the above requirements RMD amounts must continue to be calculated and paid each December 31 thereafter until the account is paid off 55

56 REQUIRED MINIMUM DISTRIBUTIONS Amounts RMD amounts are calculated based on the beneficiary s age and relationship to the participant When a participant s spouse is the sole designated beneficiary with an age 10 years younger than the participant, the Joint Life Expectancy table is used to determine the RMD amount If the participant s spouse is not the sole designated beneficiary or if the spouse is the sole designated beneficiary and is not more than 10 years younger than the participant, the RMD is calculated using the Uniform Lifetime table 56

57 REQUIRED MINIMUM DISTRIBUTIONS Examples Birthday: 6/30/1940 Age 70 ½: 12/30/2010 RBD: 4/1/2011 Additional: 12/31/2011 Birthday: 7/01/1940 Age 70 ½: 1/01/2011 RBD: 4/1/2012 Additional: 12/31/

58 DIVERSIFICATION Allows participants to reduce their investment risk as they approach retirement age General Rule A Qualified Participant must be permitted during the Qualified Election Period to diversify a certain percentage of the post-1986 shares in their account Qualified Participant Age 55 with 10 years of participation in the ESOP. These terms can be made more lenient, but are then considered in-service distributions 58

59 DIVERSIFICATION Participation A Year of Participation has no specific definition in the statute The Plan Document should carefully define years of participation, so its clear whether years after termination of employment should be included May include years in a predecessor plan, if assets from that plan were used to purchase ESOP shares 59

60 DIVERSIFICATION Qualified Election Periods There are six Election Periods for each participant, from January 1 through March 31 (the first 90 days) of every year. The first Election Period begins on January 1st following the date a person meets the requirements Timing Elections must be provided to eligible participants during each Election Period, and if elected, diversification must be completed within 180 days following the end of the plan year Amounts 25% for the first five plan years, reduced by prior elections 50% for the sixth year, reduced by prior elections 60

61 DIVERSIFICATION Fiduciary compliance for diversification One of the following options must be met: Funds may be distributed directly to the participant Funds may be transferred into an IRA or another of the employer s benefit plans, provided it offers at least three different investment options An offering of at least three investment options (other than employer securities) within the ESOP 61

62 DIVERSIFICATION Potential Stumbling Blocks Diversification deadlines may be too stringent for ESOPs that don t have a stock value early in the year Provide a preliminary diversification election based on prior year end information within the 90 day window Update the final diversification election once the current year end work is complete When 180 days may not be enough time to complete the year end work Preliminary diversifications may be done based on a percentage of shares elected; a true up may be done once the work is complete 62

63 QUALIFIED DOMESTIC RELATIONS ORDER Defined A Qualified Domestic Relations Order ( QDRO ) is a Domestic relations Order ( DRO ) that assigns all or a portion of a participant s plan benefits to an Alternate Payee (usually due to divorce) An Alternate Payee can be a spouse, a former spouse, child, or other dependent of a participant who is recognized by a DRO as having a right to receive all, or a portion of, the benefits payable to a participant under a Plan 63

64 QUALIFIED DOMESTIC RELATIONS ORDER QDRO Calculations A QDRO will dictate the award to the Alternate Payee A separate account is created for the alternate payee based on the terms of the QDRO The plan needs a written policy, executed by the Plan Administrator; procedures include review to determine qualification, notifications to interested parties, account segregation, and distribution policy The timing and method of payment of alternate payee benefits are governed by the Plan Document 64

65 QUALIFIED DOMESTIC RELATIONS ORDER Distribution Rules for a QDRO The ESOP can provide that as soon as an order is determined to be qualified, the ESOP may pay the alternate payee their benefit in a lump sum, even though the participant may not currently be entitled to a distribution The ESOP may postpone payment to an alternate payee until the participant terminates service An exception to this general rule: if the QDRO and the ESOP provide for this provision and the participant continues working for the company after attaining age 50, the Alternate Payee can insist that payment be made (or commence for installments) during the plan year following the plan year that includes the participant s 50th birthday 65

66 QUALIFIED DOMESTIC RELATIONS ORDER A QDRO is an exception to the anti-assignment rule under IRC 401(a)(13) No distributions shall be made to anyone if there is a pending QDRO, or knowledge that there will be a QDRO A QDRO may NOT require a form of benefit or option that is not already authorized by the plan The alternate payee s form of payment may NOT be a joint and survivor annuity, even if the plan provides for it A QDRO cannot force payments of benefits that were forfeited before the order was issued. A QDRO may NOT require the plan to provide increased benefits 66

67 VOTING RIGHTS General Approach Public company ESOPs pass the vote through to participants Private company ESOPs generally do not pass the vote through to participants (unless required by law) The Board of the ESOP company typically appoints a committee that directs the ESOP trustee on voting ESOP shares; sometimes the ESOP trustee has full discretion Rights always passed through to ESOP participants to permit them to direct the ESOP trustee how to vote include: Mergers or consolidation Recapitalization or reclassification Liquidation Dissolution Sale of substantially all assets 67

68 VOTING RIGHTS The Mechanics ESOP participants must be educated about the matter in which they are entitled to direct the voting of their shares by either: An information statement or Proxy materials Participants require a minimum period of time to consider and make an informed decision about the information provided before submitting their voting instructions Voting instructions are typically tallied by the ESOP trustee or an independent third party 68

69 REPORTING EBSA (DOL) Form 5500 Annual Return Required informational return Filed within 7 months following plan year end, without extension Audit Requirements- an independent CPA audit is required for plans with more than 100 participants Filed with the Form 5500 For plan years beginning in 2009, EFAST2 electronic filing is mandatory Form 5500 is open for inspection by plan participants, and also may be viewed at Form 5558 Application for extension of time to file Form 5500 Filing date is on or before the original Form 5500 due date Provides an additional 2 ½ month extension 69

70 REPORTING SSA Form 8955-SSA Replaces the old Schedule SSA of Form 5500, now filed separately from the Form 5500 Requires the signature of a plan sponsor, administrator, attorney, CPA or someone with a power of attorney Information from this form is provided to the Social Security Administration, which forwards data to participants when they file for Social Security benefits Reports terminated participants that are eligible for future benefits, as well as previously reported participants that have been paid out their entitled benefits This Form is not available for participant viewing, as it contains social security numbers May be filed by mailing in, or by using FIRE (Filing Information Returns Electronically), which is the only means for filing electronically 70

71 REPORTING IRS Form 945 Used to report all Federal tax withholding from distributions paid during the calendar year. The due date is typically January 31st of the year following the year of distribution Form 1099-R Used to report distributions paid from a qualified retirement plan The Form 1099R is based on the calendar year, regardless of plan year end Participants must receive the 1099R postmarked no later than January 31st of the year following the calendar year of distribution Form 1099-DIV Used to report dividends and other distributions on stock 71

72 REPORTING IRS Additional Miscellaneous IRS Reporting Forms Form 5300 Application for Determination for Employee Benefit Plan Form 5308 Request for Change in Plan/Trust Year Form 5309 Application for Determination of Employee Stock Ownership Plan Form 5310 Application for Determination upon Termination Form 5310-A Notice of Merger, Consolidation or Transfer of Plan Assets or Liabilities Form 5330 Return of Excise Taxes related to Employee Benefit Plans 72

73 REPORTING TO ACTIVE PARTICIPANTS Annual Reports Participant Statements Statement of a participant s account balance and the percentage of nonforfeitable amount based on the most current data available must be provided annually; generally by the due date (including extension) of the Form 5500 For plans with participant-directed investments (such as KSOPs), benefit statements must be provided at least quarterly Summary Annual Report (SAR) Provides a summary of the financial activity in the Plan for the prior plan year Notifies participant where certain documents may be inspected, as well as the Department of Labor s address Must be given to plan participants (both active and terminated with any balance) and beneficiaries within 9 months after the close of the plan year end, or if later, within 60 days after the Form 5500 due date 73

74 REPORTING TO ACTIVE PARTICIPANTS Ongoing Reports Summary Plan Description Provides a summary of the provisions of the plan document in laymen s terms, as well as participant rights and plan representative information Distribution Deadlines For a NEW plan, within 120 days of the adoption date, or if later, 120 days after the effective date For new participants, within 90 days of meeting the eligibility requirements In the case of a participant s death, the beneficiary must receive the SPD within 90 days after first receiving benefits 74

75 REPORTING TO ACTIVE PARTICIPANTS Ongoing Reports Summary Plan Description Provides a summary of the provisions of the plan document in laymen s terms, as well as participant rights and plan representative information Distribution Deadlines For a NEW plan, within 120 days of the adoption date, or if later, 120 days after the effective date For new participants, within 90 days of meeting the eligibility requirements In the case of a participant s death, the beneficiary must receive the SPD within 90 days after first receiving benefits 75

76 REPORTING TO ACTIVE PARTICIPANTS Beneficiary Form Ongoing Reports Necessary in the event of the death of a participant Clear instructions on processing distributions to the named beneficiary In the event that no beneficiary is named, the provisions of the plan document prevail Diversification Notice Participants must be notified within 90 days of the plan year end in which they meet eligibility 76

77 REPORTING TO TERMINATED PARTICIPANTS Form 1099-R Reports distributions made from the ESOP to the participant Due to participants by January 31 Due to the IRS by February 28, March 31 if filed electronically Form 1099-DIV Reports dividend distributions Due to the participant by January 31 Due to the IRS by January 31 Notice of Deferred Vested Benefits Reports amounts filed on Form 8955-SSA Due to the participant on or before filing of Form 8955-SSA 77

78 BACK AT THE CLUBHOUSE QUESTIONS? 78

79 Carla Klingler, PyraStar Pension Group (770) , ext. 14, Karen Hurley, SES Advisors (434) , Susan Ledingham, R.K. Schaaf Associates, Inc. (877) , 79