THE RECIPE ABC Company, Inc. Employee Stock Ownership Plan

Transcription

1 2A - UNDERSTANDING ESOP ADMINISTRATION: HOW TO READ A RECIPE The ESOP Association California/ Western States Chapter Conference October 5-7, 2011 Paradise Point Resort, San Diego, CA Margo Ferguson Chuck Bachman Marcus Piquet, CPA GH Phipps Construction Companies Menke & Associates American ESOP Advisors LLC 1 THE RECIPE ABC Company, Inc. Employee Stock Ownership Plan Participant Statement For: John Jones For Plan Year Ended: December 31, 2010 Number of Common Shares Value of Common Shares Other Investments Account Total Balance at Beginning of Plan Year 6, $ 447, $ 16, $ 464, Distribution of Benefits -1, , , Investment Rebalancing Increase/(Decrease) in Value of Accounts , , Forfeitures and Reallocations , , Investment Income Employer Contributions , , , Total Account Balances at End of Plan Year 5, $ 334, $ 30, $ 364, Vesting Percentage (13 years of Credited Service) % Vested Balances at End of Plan Year $ 364, Fair Market Value Per Share $

2 KITCHEN LAYOUT 1. What is an ESOP? 2. How Does an ESOP Acquire Stock? 3. Share Release 3 What is an ESOP? An ESOP is a Qualified Retirement Plan Plan assets held in trust for the benefit of employees Trust is tax exempt Governed by ERISA! Primary ESOP asset is Employer Stock 4 2

3 Non Leveraged Purchase Company Cash Contribution ESOP Cash Company Stock Selling Shareholder 5 Leveraged Purchase Lender $ 10,000,000 ESOP $ 10,000,000 Company Stock Selling Shareholder 6 3

4 SHARE RELEASE The ESOP Suspense Account (aka Unallocated Shares ) Shares are placed in a suspense account within the ESOP trust. Shares are then proportionately distributed to eligible (in that year) employees as the inside loan is paid down. ESOP Trust Suspense Account Participants 7 THE RECIPE ABC Company, Inc. Employee Stock Ownership Plan Participant Statement For: John Jones For Plan Year Ended: December 31, 2010 Number of Common Shares Value of Common Shares Other Investments Account Total Balance at Beginning of Plan Year 6, $ 447, $ 16, $ 464, Distribution of Benefits -1, , , Investment Rebalancing Increase/(Decrease) in Value of Accounts , , Forfeitures and Reallocations , , Investment Income Employer Contributions , , , Total Account Balances at End of Plan Year 5, $ 334, $ 30, $ 364, Vesting Percentage (13 years of Credited Service) % Vested Balances at End of Plan Year $ 364, Fair Market Value Per Share $

5 INGREDIENT LIST 1. Eligibility 2. Allocations 3. Vesting 4. Distributions 9 Ingredient: Eligibility Coverage Testing (IRC 410(b)) 1. The Control Group 2. Excluding certain categories of employees Age & Service Requirements 10 5

6 The Control Group Parent/Subsidiary Relationship Brother/Sister Company Relationship Shareholder A Shareholder A Shareholder A Parent Company X Company X Company Y Subsidiary Company Y 11 Coverage Testing (IRC!410(b)) Excluding Categories of Employees The plan may be written to exclude certain categories of employees: Statutory Exclusions (No coverage testing needed) Independent contractors Union members Employees under age 21 Non residents aliens Part-time or short term employees who do not meet the plans eligibility service requirements Non Statutory Exclusions (Require coverage testing) Leased employees Exclusions based on job description Exclusion based on company divisions 12 6

7 Eligibility The Employee Service Requirement Year of service The Plan generally cannot require more than one Year of Service A Year of Service means 1000 hours during a 12 month period, beginning on the date of hire 13 Ingredient: Allocations 1. Allocation Formulas 2. Ongoing Employee Participation Requirements 3. Deduction & Benefit Limits a) Company Contribution Limits (IRC 404) b) Individual Participant Annual Addition Limits (IRC 415) c) Dividends/S Distributions 14 7

8 Allocation Formulas 1. W-2 Compensation Add backs for 401(k) Plan and 125 cafeteria plan salary deferrals Capped at $245,000 per IRC Section 401(a)(17) 2. W-2 Compensation with certain exclusions* Possible exclusions include commissions, bonuses and overtime 3. Other possible formulas* *= Requires additional testing for nondiscrimination 15 Allocations Examples Contributions, Forfeitures, and Shares Released from Suspense Eligible Participant Eligible Compensation % of Total Eligible Compensation Allocation of Contribution/ Forfeitures Tom $45,000 45% $4,500 Sally $45,000 45% $4,500 Sue $10,000 10% $1,000 Total $100, % $10,

9 Ongoing Employee Requirements The Plan document may include ongoing employee service requirements (aka participation requirements) in order for an eligible participant to receive an allocation each year 1000 hour requirement? Year end employment requirement? Waiver for Death, Disability or Retirement (DDR)? 17 Example IRC!404 Company Contribution Limit Eligible Compensation Less: Compensation in excess $245,000 per employee Net Compensation x 25% Maximum Total Contribution to all plans Less: employee salary deferrals to 401(k) Less: employer matching contributions Less: employer profit sharing plan contribution Maximum ESOP Contribution Limit $10 million <500,000> $9,500,000 x25% $2,375,000 0 <$500,000> <$250,000> 1,625,

10 Example IRC!415 Annual Additions Limit Employee Pat Doe s Gross Compensation Lesser of $49,000 or 100% of compensation Annual Additions: Employee Salary Deferrals to 401(k) Employer Matching Contributions Employer Profit Sharing Plan Contribution 401(k) Forfeitures Maximum Allowable ESOP Allocation per IRC 415 $300,000 x100% $300,000 $49,000 <16,000> < 1,650> <500> <500> 29, Earnings, Investment Income and Dividends 20 10

11 Dividends C Corp Dividends / S Corp Earnings Distributions Not subject to company contribution limits of IRC 404 Not subject to individual annual addition limits IRC 415 Dividends may be deductible for C Corps Plan Investment Income is generally allocated on the basis of adjusted beginning account balances o Exception: dividends attributable to unallocated/suspense shares are often allocated on the same basis as contributions 21 Allocations Examples Dividends/S-Corp Distributions attributable to Allocated Shares Participants with Stock Balances Beginning Stock Account Balance % of Total Beginning Stock Account Balance Dividends Attributable to Allocated Shares Tom 2,000 20% $20,000 Sally 5,000 50% $50,000 Sue 3,000 30% $30,000 Total 10, % $100,

12 Ingredient: Vesting If an ESOP participant terminates employment with the company, how many shares can he or she keep? Leftovers TO GO BOX 23 VESTING SCHEDULES 6-year GRADUATED Year % year CLIFF Year % % * Slower vesting may still be available under PPA of 2006 grandfathering provision if the stock acquisition loan was outstanding on September 26, 2005 (e.g., 7-year graded or 5-year cliff)

13 Full Vesting Retirement Death Disability (optional) 25 Ingredient: Distributions 3 Terminating Timing Categories: 1. Category A ( DDR ) Employees: Participants who leave because of Death, Disability, or Retirement ( Retirees ) 2. Category B ( Non-DDR ) Employees: Participants who quit or get fired ( Other Terminees ) 3. In-Service Distributions: Diversification, Required Minimum Distributions (Age 70 1/2 ), Special Plan Provisions 26 13

14 Timing of Distributions Category A Employees=Retirees 27 Timing of Distributions For Retirees (Category A/DDR Employees) Commencement of Distribution No later than one year after the end of the Plan Year in which the employee terminates employment (death, disability, or retirement) Example 1/1/2011 Termination Date 2/1/2011 Plan Year End 12/31/2011 Distribution Must begin before 12/31/

15 Timing of Distributions for Other Terminees (Category B/Non DDR) Commencement of Distribution: distribution need not begin until the later of the year following: 1) Five years after the close of the plan year in which the terminee left the company 2) When the ESOP loan is paid off Exception: Internal Revenue Code Section 401(a)(14) requires that no qualified retirement plan can begin commencement of distributions any later than, the later of: 1) a participant!s retirement, or 2) termination, or 3) the 10 th Anniversary of commencement of participation 29 ESOP Diversification Eligibility: Notify Participant at Age 55 and 10 years of Participation = Qualified Participant Qualified Election Period Over 6 consecutive plan years Start date: the first day of the plan year following diversification eligibility Diversification Amount Up to 25% of eligible shares for the first 5 years Up to 50% for the 6 th year Diversification De Minimus = $500 Satisfaction of Diversification Requirement 30 15

16 THE RECIPE ABC Company, Inc. Employee Stock Ownership Plan Participant Statement For: John Jones For Plan Year Ended: December 31, 2010 Number of Common Shares Value of Common Shares Other Investments Account Total Balance at Beginning of Plan Year 6, $ 447, $ 16, $ 464, Distribution of Benefits -1, , , Investment Rebalancing Increase/(Decrease) in Value of Accounts , , Forfeitures and Reallocations , , Investment Income Employer Contributions , , , Total Account Balances at End of Plan Year 5, $ 334, $ 30, $ 364, Vesting Percentage (13 years of Credited Service) % Vested Balances at End of Plan Year $ 364, Fair Market Value Per Share $ COOKING INSTRUCTIONS 1. S Corp 409(p) Limits 2. Section 1042 Allocation Limits 3. Top Heavy Test 32 16

17 Limits for S Corp. ESOPs: IRC! 409(p) The Opie ESOP 33 S Corp IRC!409(p) Test 409(p) Test (in general): Disqualified Persons cannot own 50% or more of the company equity. It!s a 2-prong test: Prong 1: Who are the Disqualified Persons? Prong 2: Do these Disqualified Persons own at least 50% of the company!s equity? 34 17

18 1042 Allocation Limitations (Only applies to Section 1042 tax-free rollover sales) Seller and family may not receive any allocation under ESOP * Seller!s sons & daughters potentially can receive allocation not exceeding 5% of funds rolled over Over 25% shareholder and family may not receive any allocation under ESOP 35 TOP HEAVY TEST Test to determine whether Key Employees have accrued 60% or more of the plan benefit Aggregation of all plans of the Employer If plan is Top Heavy 1. minimum benefit for non-key employees 2. special vesting schedule 36 18

19 THE RECIPE ABC Company, Inc. Employee Stock Ownership Plan Participant Statement For: John Jones For Plan Year Ended: December 31, 2010 Number of Common Shares Value of Common Shares Other Investments Account Total Balance at Beginning of Plan Year 6, $ 447, $ 16, $ 464, Distribution of Benefits -1, , , Investment Rebalancing Increase/(Decrease) in Value of Accounts , , Forfeitures and Reallocations , , Investment Income Employer Contributions , , , Total Account Balances at End of Plan Year 5, $ 334, $ 30, $ 364, Vesting Percentage (13 years of Credited Service) % Vested Balances at End of Plan Year $ 364, Fair Market Value Per Share $