Diversification Beyond Statutory Requirements & Trends

Transcription

1 New England Chapter Annual Conference Mystic, CT October 11 12, 2018 Diversification Beyond Statutory Requirements & Trends Carla Neal Klingler Client Relations (678) Alan AL F. Harrington ESOP Administrator/Trustee (508)

2 WE ARE SWERDLIN & COMPANY Swerdlin & Company was founded in 1980 and is one of the largest ESOP service providers in the nation, serving clients and participants in all 50 states! Swerdlin & Company provides third party administration, recordkeeping and consulting services for all types of retirement plans. Our retirement plan services for ESOPs, KSOPs, and 401(k) plans include the following: o o o o o o o o o Plan Administration & Compliance Employee/Participant Processing & Recordkeeping Allocations & Recordkeeping for Plan Accounts Trust Accounting Plan Distributions Diversification & Minimum Distribution Requirements Reporting and Disclosure Employee Communication Repurchase Liability Studies

3 WE ARE WEB INDUSTRIES Over 600 employee-owners focused on inspiring ingenuity through the power of close collaborative relationships.

4 WE ARE WEB INDUSTRIES An industry leader in precision converting & outsource manufacturing for nearly 50 years A 100% employee-owned company with seven facilities in six US states and Germany We handle day-to-day manufacturing, freeing our partners to focus on their next great idea We touch lives daily in a variety of markets Aerospace Medical Devices & Diagnostics Personal & Home Care Industrial Wire & Cable Components Industrial Fabrics & Components

5 Agenda 1. Diversification Statutory Requirements Newest IRS/DOL Guidance Listing of Required Modifications (ESOP LRM) Trends 2. Discussion: Diversification Elections and Consent to Distribution are participant investment decisions. Plan design and policy changes are investment decisions by plan fiduciaries. 3. Practical Insight: What we THOUGHT we were supposed to do, What we DID DO, What we WOULD DO if we knew then what we know NOW.

6 Diversification Statutory Requirements Newest IRS/DOL Guidance Listing of Required Modifications (ESOP LRM) Trends

7 Diversification Statutory Requirements and Basic Guidance IRC section 401(a)(28) IRS Notice Has not been updated since 1988 (until NOW?) Contains procedural requirements that have been recognized by the ESOP industry as unworkable with closely held ESOPs Technical Assistance Requests ESOP Document provisions Many just mimic the notice requirements Some additional definitions may be provided

8 Diversification Stand Alone ESOP Private Company IRC 401(a)(28)(B) Calculating Amounts Eligible for Diversification: Required ONLY for company stock acquired by the ESOP after December 31, Amounts are Cumulative up to 25% of eligible stock over the first 5 Election Periods, then up to 50% in the 6 th and FINAL Election Period (calculated on cumulative formulas).

9 Diversification Stand Alone ESOP Private Company IRC 401(a)(28)(B) For Fiduciary compliance, Diversification Policy must offer one of the following options: 1. Offer at least 3 investment options within ESOP 2. Offer at least 3 investment options in another qualified plan (the company 401(k)) 3. Distribute directly to participant (may choose IRA rollover or taxable distribution).

10 Diversification Stand Alone ESOP Old Interpretation Requirements Assume the Plan Year is Jan 1 Dec 31: Age years of plan participation Election Periods : There are 6 Election Periods for each participant that begin on January 1 through March 31 (90 days) of every plan year. The first Election Period starts January 1 following the date a person meets the requirements. Timing: Election forms must be provided to eligible participants during each Election Period to make elections during that 90-day period, and if elected, assets must be diversified within 180 days of the close of the plan year.

11 Diversification Operational Procedure OLD Timing for Notice & Execution (assume 12/31 Plan Year End) Election Period begins Jan 1 and ends March 31. Send out preliminary Election forms. Participant must make election by March 31 (within 90 days) after end of plan year in which they become eligible to diversify and each of the next 5 years. Participant may revoke, modify or submit new diversification election any time during 90- day election period. Distribution/transfer elections must be completed by June 30 (within 90 days after end of participant s 90-day election period). When the stock price is available, account balances are updated, and eligible shares for Diversification are determined, real numbers are communicated to participants and final decision is made timing may or may not be compliant with IRC 401(a)(28) provisions.

12 Diversification New ESOP LRM 5 Guidance Same rules as old interpretation of IRC 401(a)(28) regarding compliant options & calculations What IS NEW? (assume 12/31 Plan Year End) Defines Annual Election Period as a minimum 90 period that begins on Jan 1 and ends on March 31; HOWEVER, END date CAN be extended until the date that the value of the shares are communicated to participants. When the stock price is available & account balances are updated, Diversification election forms are provided to eligible employees with real numbers to make their elections. The END Date of the Election Period is set to accommodate Distribution statutory and practical requirements based on the date Diversification benefits are COMMUNICATED to participants Distribution/transfer elections must be completed within 90 days following the established END Date. Diversified shares are subject to put option rights but NOT to the demand to take the stock. Diversified shares cannot be reinvested into company stock except at Participant s election

13 Diversification New ESOP LRM 5 Guidance (assume 12/31 Plan Year End) NEW! Election Period begins Jan 1 each year all other dates are discretionary or contingent! Example of new procedural timeline: June 1: Appraisal is completed & Diversification amounts are determined. June 15: Diversification Notices are received by Eligible Participants. July 31: Company sets the timing for Election Period to END deadline for election forms to be returned. October 29: (90 days later) Deadline for shares to be diversified.

14 Diversification Current Trends Beyond Statutory Requirements - Amending the Plan To USE ESOP LRM 5 provisions, Plan must be amended by year end. Other changes to consider: Changing the criteria for Qualified Participants Amending definition of Qualified Participant Old: A Participant age 55 with 10 Years of Participation New: An Employee age 55 with 10 Years of Participation Amending definition of Year of Participation Examples Old: A Participant with an account balance in the Plan New: An employed Participant with an account balance in the Plan OR New: A benefiting Participant eligible to share in the allocation of Employer contributions and forfeitures

15 Diversification Current Trends Beyond Statutory Requirements - Amending the Plan Plan Sponsors are incorporating more flexible or expanded diversification provisions. Since they are outside of the statutory requirements, they are technically in-service withdrawals for those still employed. Examples of Plan Design changes: Permit diversification beyond the six year statutory period Permit diversification EARLIER than Age Years of Participation Or Both May allow diversification % greater than 25/50 May allow diversification of pre-1987 shares

16 Diversification Bubbles Sample Calculations for all 6 Election Periods Demo Assumptions: a) This demo shows just an individual Bubble, not the bigger problem of the first Diversification group that arises when the plan reaches the 10-year mark and moves as a group through the first 6-year election periods. b) New shares added to the account ( additions ) are the same each year c) Participant is electing to Diversify the max shares each year d) No change in FMV per share

17 Diversification Current Trends Beyond Statutory Requirements Policy Changes Many Plan Sponsors are being more specific in the Plan document regarding distributions resulting from diversified shares. Diversification for Active (employed) Participants Automatic rollover to 401(k) plan Renewed interest in directed investment funds within ESOP Diversification for Terminated Participants Rollover to IRA or another qualified plan Taxable

18 Diversification Remaining Issues Establishing Practical Internal Policies Guidance from LRM indicates that stock allocation methods must preclude diversified shares from being returned to accounts. Is the practical affect on Allocation formula plan provisions covered in the written Diversification Policy? A participant could be eligible for both a normal distribution and diversification. Is the compliance method covered in the Plan Document or written Distribution Policy? Compliance or discrimination issues may arise when a fiduciary is re-designing plan benefits outside of statutory requirements. Are the enhanced benefits discriminatory under IRC 401(a), i.e. do they favor HCE s? Plan Document provisions and operational policies must always be in agreement. Must determine how changes are authorized and documented for continued qualified plan compliance.

19 Diversification The Real Thing Establishing Practical Internal Policies Background Is company culture relevant in establishing policies? How did you plan for Diversification? What did you expect? What actually happened? What kind of changes have you made along the way? What would you have done differently then if you knew then what you know now? Worse decision ever? Best advice?

20 WEB INDUSTRIES, INC. Web Industries was started in 1969 ESOP established in 1985 Converted to S-Corporation and become 100% ESOP in 2000 As of Plan Year End September 30, 2017 o 482 Plan Participants 387 Active Participants (Employees) 95 Non-Active Participants (Separated Employees) Diversification Eligibility o Age 55 and 10-years active participation o All Participants (Active & Non-Active) Options o Direct cash disbursement to Participants o Direct rollover to IRA or another qualified plan o Combination of above

21 Diversification - What Really Happened?

22 Diversification Beyond Statutory Requirements & Trends Carla Neal Klingler Alan AL F. Harrington Client Relations ESOP Administrator/Trustee (678) (508)

23 Postscript Please fill out a session evaluation form and drop it off at the table outside of this room Your feedback on topics and presenters is important and will be used to develop subsequent New England Chapter programs