Building a Plan Administration Timeline

Building a Plan Administration Timeline The ESOP Association Southwest Chapter Spring Conference Grapevine, TX March 24, 2017 Wendy Lankes SES Advisors, Inc. San Antonio, TX

Wendy Lankes / SES Advisors, Inc. Since 1988, SES has been providing services for ESOP companies including Administration, Consulting, and Financing. Wendy has been providing ESOP administration services since 1985. SES is an ESOP company, too!

Agenda for this Session Plan Document Review, Amendment Adoption Gathering Data ESOP Calendar: General, Company, ESOP Funding Contributions, Limits, Deductibility Reporting SAR, Form 5500, ESOP Statements, SPD

ESOP Administration Compliance with the ESOP plan document is the fundamental qualification requirement for your ESOP as a tax-qualified retirement plan. The only exception is if your plan document instructs you to do something outside of permissible limits due to an out dated plan.

YOU and ESOP Administration Whether you do your own administration in-house or hire a third party administrator ( TPA ) or other professional, it is important that you establish and maintain good procedures throughout the year. It may be helpful to have a global view of the overall process. Start a calendar of project deadlines to keep you focused. Keep notes about each step of the process. Communicate with your ESOP advisors and don t be afraid to ask questions along the way.

Plan Document

Plan Document Contains the Rules for the Game Who is eligible and when do they enter the plan? How is the contribution allocated and who receives it? How are various types of earnings allocated? When does a participant get vested in their account? How and when are forfeitures incurred/reallocated? When is a participant eligible to receive a distribution (payout)? When is a participant eligible to diversify?

Plan Document You should review your plan document at least annually to make sure statutory amendments have been adopted, and determine if discretionary amendments need to be adopted for changes you wish to make. The date an amendment is effective is generally not the same as the date an amendment is adopted. Discretionary amendments adopted by the end of the plan year can generally be effective retroactive to the first day of that plan year. Different amendment requirements for pre-approved plans (like many 401(k) plan documents) and individually designed documents (like most ESOP documents).

Plan Document Rev. Proc. 2005-66 established 5-year amendment cycles for individually designed plans starting 2/1/06 As of 1/1/17, the remedial amendment cycle system only applies to pre-approved plans. For required (statutory) amendments of individually designed plans to be considered timely adopted, the amendment period is the end of the second calendar year following the year the provision appears on the annually published Required Amendments List. For the required amendments list, go to: https://www.irs.gov/retirement-plans/required-amendments-list

Gathering Data

ESOP Administration Calendar Key items you will want to keep track of: IRS filing due dates Participant compliance due dates ESOP annual cycle: Census timing Testing requirements (e.g. ADP/ACP) Audit schedules (for large plans) Valuation requirements

Data Collection The data collection process is the MOST critical part of ESOP administration as it has an impact on every other aspect of the plan s annual administration.

Gathering Data General / Census Information Trust accounting Company Information ESOP Information

Gathering Data You will want to keep track of the census basics: Full name Complete Social Security Number Dates of: Birth Hire Termination (and reason why) Rehire (if any) Wages (see next slide)

Gathering Data You will also need the following: Gross wages, 401(k) Deferrals, Catch-up Contribution, 125 (Cafeteria Plan) deductions Excluded wages if your plan has excluded wages, e.g. overtime, commission, bonuses Employer Matching Contribution if applicable Company Discretionary Contributions and Forfeitures allocated for the Plan Year from other qualified retirement plans of the Employer Is the Employee covered by a collective bargaining agreement [Union] for any part of the year

Gathering Data Trust Accounting Each year the trust assets must equal the participant s equity. The participant s equity is the total amount allocated to all plan participants, with the exception of the unallocated shares attributed to an ESOP Exempt Loan and the outstanding loan balance(s). The participant s equity plus the value of the unallocated shares and outstanding loan balances is the amount that is reported on the tax forms (Form 5500 and Related Schedules).

Gathering Data Dividend information: The amount of dividend declared and the Shareholder Record Date. Was the dividend used to pay down the debt, allocated to participants, or passed through? Distributions: A complete listing of distributions paid during the plan year and whether they were paid in cash and/or stock. If the distributions were paid in cash directly to the participant and not rolled over, the amount paid should include the amount paid for Federal and State withholding taxes. If these taxes were not paid, they need to be reflected as a payable and paid as soon as possible.

Gathering Data List of Stock Purchase/Sales: Include the number of shares and the per share value at the time of the transaction. If shares were purchased, the name of the stock seller and whether or not the seller took a 1042 deferral of gains on the sale (C-corp.). Stock appraisal: The IRS requires the use of an independent appraiser to express an opinion on the Fair Market Value of employer stock which is held in the Trust at the end of the plan year. Many times this is the last item available and often can take anywhere from 2 to 6 months to complete after the plan year-end. Schedule K-1 S-Corp only: Needed to determine the amount by which the Company stock cost basis will be adjusted.

Gathering Data Company Information Employer ID number S or C corporation Was there a change in fiscal year Total number of shares issued and outstanding Officers/Shareholders of Company Family members

Gathering Data ESOP Information Leveraged or Non-Leveraged Number of Shares in ESOP and from whom they were purchased Shares subject to restriction (e.g. 1042) New stock transactions during year (cash-purchase or leveraged-purchase) IRS Determination Letter Plan Amendments Correspondence with IRS or DOL

Funding

Contributions Deductible contribution amount is provided in Code Section 404(a)(3) 25% of eligible compensation (compensation limited to $265,000 for 2016, $270,000 for 2017) 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 Does NOT include: Employee 401(k) deferrals

Contributions 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)

Contributions Code Section 404 provides that if a contribution amount cannot be allocated under Code Section 415, it 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: a) 100% of eligible compensation; or b) $53,000 in 2016, $54,000 in 2017 [indexed for inflation in increments of $1,000] IRS Benefit/Contribution Limitations for current and prior years may be found at: http://www.irs.gov/retirement-plans/cola-increases-for-dollar- Limitations-on-Benefits-and-Contributions

Contributions The components of the Section 415 limits are more inclusive than those of Section 404: ESOP Cash Contribution ESOP Stock Contribution at fair market value ESOP Contribution for Loan Payments 401(k) Safe Harbor Contributions 401(m) Employer Discretionary Match 401(k) Employer Discretionary Profit Sharing Contribution 401(k) deferrals Forfeitures allocated under all plans

Contributions When you make (deposit/credit) a contribution will determine the tax year for which it is deductible. Contributions are deductible for a tax year as long as they are made by the corporate tax return filing deadline (including extensions). Example: 12/31/16 tax year, corporate tax form filing due date 3/15/17, extended due date 9/15/17 So if you filed an extension to file your corporate tax return, you must deposit your 2016 contribution no later than 9/15/17.

Reporting

Form 5500 Must be filed electronically no later than the end of the 7 th month following the last day of the plan year (e.g. 12/31/16 plan must file by 7/31/17) Extension of Time to File (Form 5558) will give an extra 75 days (e.g. 12/31/16 plan must file by 10/15/17) Form 5558 must be filed by plan s original filing due date If plan is on extension and Form 5500 is not filed by extended due date, Plan Sponsor LOSES the extension and penalties will accrue from original filing due date (e.g. 12/31/16 = 7/31/17) Plan Sponsor may also rely on corporate filing due date extension (e.g. 12/31/16 = 9/15/17) if a Form 5558 is not filed Form must be open to inspection by plan participants Participants may also request copies of the Form Participants (or anyone for that matter) may now view the Form at www.efast.dol.gov

Form 8955-SSA Form 8955-SSA replaces Schedule SSA of Form 5500 Form is used to report terminated participants who have not been paid their vested benefit from the plan Now filed electronically, same as Form 5500 Same due dates and extended due dates This Form is NOT made available to participants in the plan because it contains social security numbers Terminated participants reported on 8955-SSA must receive a notice that they have been reported (timing requirement is in conjunction with benefit statement).

Form 1099-R and Form 945 Form 1099-R is used to report distributions paid from qualified retirement plan This Form is filed based on a calendar year (regardless of Plan s year end) Participant receives Form 1099-R which must be postmarked no later than January 31 st of the year following the distribution year (e.g. distribution paid in 2016, reported on 2016 Form 1099-R and must be postmarked on or before January 31, 2017) IRS receives Form 945 which is used to report and reconcile all Federal tax withholdings from distributions paid during the calendar year. Due date is typically January 31 st of plan year following year of distributions. All states have different reporting requirements for taxes withheld.

Benefit Statements Annual benefit statement is considered timely if provided to participant either before the Form 5500 is filed or before the Form 5500 due date (including extensions), whichever is FIRST*. Statement Must provide: Value of participant s account balance Portion of account balance which is vested Value of each investment in a participant s account as of most recent valuation date More detail is required on quarterly statements *This timing also applies to terminated participants required to receive a notice for being reported on Form 8955-SSA.

Summary Annual Report SAR Provides a summary of the financial activity in the plan for the plan year. Must be furnished to all participants of the plan within nine months after the close of the plan year or two months after the close of the period for which an extension of time to file the Annual Report was granted. According to Department of Labor regulations, the SAR must be distributed to active participants, terminated participants with beginning or ending balances and beneficiaries receiving or entitled to receive benefits from the plan.

Summary Annual Report SAR If there are fewer than 100 participants, 25% of which are literate in the same non-english language, or if there are more than 100 participants, 10% of which are literate in the same non-english language, you must provide these participants with an English language SAR along with a common non-english language notice outlining the procedures to follow in order to obtain assistance in translating the SAR.

Summary Plan Description SPD Provides a summary of the plan document provisions in laymen s terms. A new participant is required to receive an SPD within 90 days after becoming a participant. In the case of a participant s death, the spouse and/or designated beneficiary is required to receive an SPD within 90 days after first receiving benefits. For a NEW plan, the last date for distribution of an SPD is 120 days after the adoption date (or if later, 120 days after the plan s effective date).

Summary Plan Description SPD For an AMENDED plan, the last date for distribution of a Summary of Material Modifications ( SMM ) or an amended SPD is 210 days after the end of the plan year in which the amended or restated plan is effective. Some practitioners are of the opinion that the SMM or SPD should be provided no later an 60 days after the later of the adoption date or effective date of the amendment, so be sure to check with your advisors.

Wendy Lankes Senior ESOP Administrator San Antonio, TX (210) 610-0111 wlankes@sesadvisors.com

ESOP Administration Calendar (General guidelines with illustrations for a 2016 Calendar Year Plan) Activity General Due Date Due Date (Cal.Yr.) Primary Responsibility Plan TPA sends client year end request generally by year end 12/31/2016 TPA All Plans TPA sends client reminder about preparing Forms 1099-R generally within few days of new calendar year 1/2/2017 TPA All Plans IRS Form 1099-R must be mailed to participants who received distributions in prior year * Postmarked by January 31st of year following year of distribution 1/31/2017 TPA/Company All Plans Send IRS Form 945 to IRS * generally January 31st 1/31/2017 Company All Plans Plan Document Restatement due to IRS * depends on Remedial Amdt.Cycle January 31st Company ESOP Preliminary diversification forms sent to participants 90 days after PY in which requirements are met 1/1/17-3/31/17 TPA ESOP Census file, Death Notification forms, Death Certificates, and QDRO's sent to TPA generally 1 month after PYE 1/31/2017 Company ESOP Data Collection package completed and sent to TPA generally 1 month after PYE 1/31/2017 Company ESOP Census questions sent to client generally 2 weeks after receipt 2/15/2017 TPA ESOP Census answers completed and sent to TPA generally 2 weeks after receipt 2/28/2017 Company ESOP Trust statements sent to TPA generally 2 months after PYE 2/28/2017 Trustee ESOP Submit financial statements to valuation firm generally 2 months after PYE 2/28/2017 Company ESOP List for potential Required Minimum Distributions (RMD) for first-time eligible participants sent to client for verification * generally calculated at prior YE -- to be paid no later than April 1st 3/2/2017 TPA All Plans Pay initial RMD * April 1st 4/1/2017 Trustee All Plans ADP Non-discrimination testing completed and sent to client refunds (if applicable) are due 2½ months after PYE 3/5/2017 TPA 401(k)/KSOP File Corporate tax return extension 2½ months after year end 3/15/2017 Company n/a Preliminary trust completed and sent to client for verification generally 3 months after PYE 3/31/2017 TPA ESOP Preliminary trust review completed and verification sent to TPA generally 2 weeks after receipt 4/15/2017 Company ESOP Status Report completed and sent to client for verification generally 4 months after PYE 4/30/2017 TPA ESOP Status Report review completed and verification sent to TPA generally 2 weeks after receipt 5/15/2017 Company ESOP Discuss participant statement format with client during completion of Reports 5/15/2017 TPA ESOP Participant statement disclosures and updated addresses provided to TPA after completion of formatting 5/20/2017 Company ESOP Current Fair Market Valuation Report sent to Company/TPA generally within 5 months of PYE 5/31/2017 Valuation Firm ESOP Preliminary allocation and draft Form 5500 completed and sent to client for verification Preliminary allocation review completed and verification sent to TPA Final reports completed and sent to client Participant statements completed and sent to client Diversification distribution processing Death Notification forms, Death Certificates, QDROs, and updated addresses sent to TPA for distribution process generally 1 week after receipt of value 6/5/2017 TPA ESOP generally 1 week after receipt 6/15/2017 Company ESOP generally within 1 week of approval generally within 1 week of approval as soon as administratively feasible (90 day period following 1st 90 day election window) generally within 2 weeks of statement preparation 6/22/2017 TPA ESOP 6/22/2017 TPA ESOP 4/1/17-6/30/17 TPA ESOP 7/5/2017 Company ESOP Distribution eligibility list sent to client for verification generally within 2 weeks of updated info 7/15/2017 TPA ESOP Diversification eligibility list sent to client for verification generally within 2 weeks of updated info 7/15/2016 TPA ESOP Date of employee meetings completely discretionary 7/27/2017 Company ESOP File form 5558 Application for an extension of time 7 months after PYE 7/31/2017 TPA All Plans Distribution eligibility list review completed and verification generally within 2 weeks of sent to TPA updated info 7/31/2017 Company ESOP Diversification eligibility list review completed and verification generally within 2 weeks of sent to TPA updated info 7/31/2017 Company ESOP Distribution Notices mailed to eligible employees generally within 1 week of approval 8/5/2017 TPA ESOP Diversification Notices mailed to eligible employees generally within 1 week of approval 8/5/2017 TPA ESOP Distribution processing at Trustee direction 8/5/17-9/30/17 Company/Trustee ESOP Federal and State Tax Withholding Payments various 8/5/17-9/30/17 Company/Trustee ESOP Start repurchase liability study discretionary 8/5/2017 Company ESOP generally 9 months after PYE, Distribute Summary Annual Report (SAR) and participant prior to extended due date for statements prior to filing Form 5500 5500 8/30/2017 Company ESOP generally 9 months after PYE, Distribute 8955-SSA notices prior to filing Form 8955-SSA prior to extended due date for 8/30/2017 Company All Plans 8955-SSA File Corporate tax return by extended due date 8½ months after year end 9/15/2017 Company n/a File IRS Form 5500 (& 8955-SSA) by extended due date 9½ months after PYE 10/15/2017 Company All Plans Review plan documents, adopt amendments on or before last day of plan year 12/31/2017 Company All Plans Distribute Required Minimum Distributions (RMD) for eligible participants who already received their first RMD * * Calendar year requirement, regardless of plan year end must be paid by end of calendar year 12/31/2017 Company/Trustee All Plans