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2. work
3. retirement

Ohio Employee Ownership Conference
April 29,
29 2011
ESOP Administration ‘Gotchas’
and
dH
How T
To A
Avoid
id Th
Them
Thomas E. Potts,, Jr.,, CPA
Fiduciary Trust Services, Inc.
5140 Commerce Circle
Indianapolis, IN 46237
(317) 888-1400
[email protected]
www.fiduciarytrustservices.com
Lynn
y
Archer,, Partner
Barnes & Thornburg, LLP
225 South Sixth Street, Suite 2800
Minneapolis, MN 55402
(612) 333-2111
[email protected]
www.btlaw.com
Pete Shuler, Partner
Crowe Horwath LLP
10 West Broad Street, Suite 1700
Columbus, OH 43215
(614) 280-5208
[email protected]
www.crowehorwath.com
Rebecca Hoffman, Director
Director-Consulting
Consulting
Principal Financial Group
896 King William Drive
Charlottesville, VA 22901
(434) 975-3787
[email protected]
www.principal.com
B
Benefits
fit off Plan
Pl Qualification
Q lifi ti
{
{
Employer deduction for contributions
when made
Tax deferred
f
retirement savings
z
z
{
Trust doesn’t generally pay tax on income
Benefits eligible for rollover
Benefits of S corporation ESOP structure
2
I
Impact
t off Plan
Pl Disqualification
Di
lifi ti
{
{
{
{
{
Employer
p y loses deduction for nonvested contributions
z Generally, deduction taken by employer when
amounts become vested
Employees recognize current income as amounts vest
Trust recognizes taxable income on earnings (interest,
dividends, capital gains)
Distribution made during nonqualified years
z Not eligible for rollover
z Excise tax may apply for any amounts rolled over that
exceed eligible IRA contribution amount
z Tax deferred retirement savings
Termination of S corporation status and related benefits
3
Impact of Plan Disqualification (cont.)
{
As if the rest wasn’t enough Termination of S corporation status and
related benefits
z
z
Company reverts to C corporation
C corporation
p
taxes due
4
Pl D
Plan
Documentt
{
{
{
Follow the terms of your plan document
Make sure SPD matches plan
M k sure combined
Make
bi d plan
l provisions
i i
are
coordinated
z
z
{
HCE top paid group
Top heavy
Compliance with IRS rules and
regulations
5
E l
Employee
D
Data
t C
Collection
ll ti
{
{
Employee data is the foundation
Make sure it is accurate
z
z
z
z
z
z
{
Dates
Hours
Military leave status
Family relationships
Allocation restriction information due to
Section 1042 elections
Compensation
Common mistake – allocation eligibility
determination error due to submission of
incorrect dates/hours
6
C
Compensation
ti
{
Many different forms and purposes
Section 415 regulation amendment
{
Common mistakes:
{
z
z
z
z
z
Not accounting for the changes made by
the Section 415 regulations
g
Gross vs. taxable
Exclusions from eligible compensation
Mid-year compensation
Group term life insurance
7
R hi
Rehires
{
{
{
{
{
Re-entry
Vesting
Restoration of forfeitures
Future installments
Reverse segregation
8
B
Benefits,
fit Rights
Ri ht and
dF
Features
t
{
{
{
Benefits, Rights and Features (BRFs)
Benefits
Creativity might run afoul of
nondiscrimination rules
Watch areas:
z
z
z
z
z
Excluding specific participants from
recycle/purchase transactions
Targeted reshuffling
Excess diversification
Segregation policies
Distribution policies
9
E
Excess
A
Annuall Additi
Additions
{
{
{
Prevention or correction
Prevention = reallocate under the
ESOP
Correction = qualification failure,
correct under EPCRS
z
z
EPCRS preferred approach is to return
deferrals and forfeit associated match
Questionable availability of self
correction program
10
Oth Common
Other
C
‘G
‘Gotchas’
t h ’
{
{
{
{
Vesting – Remember vesting percent
adjustments when distribution occurs in
year of termination
Required minimum distributions (RMDs) –
don’t forget about the 5% owner rule and
the death RMD rule
Updated beneficiary forms
Bonuses to S
S-corp
corp participants expensed
when paid – no accrual
11
SC
Corporation
ti A
Anti-abuse
ti b
T
Testing
ti
{
{
{
Prevention is key!
Do NOT add synthetic equity
structures without knowing impact
Determine the impact of all equity,
synthetic equity and ESOP
transactions BEFORE taking such
action
12
EPCRS O
Overview
i
{
{
{
Program overview
Self correction
VCP
13
IRS A
Audits
dit
{
Generally
Gene
all more
mo e “technical compliance” audits
a dits
which require large amounts of data:
z
{
{
Annual administrative tests, employee account
statements plan sponsor tax returns & payroll
statements,
records, Forms 5500
The ESOP document compliance is less integral to
the review,, since the current determination letter
cycle program agents are very thorough in their
review of each plan every 5 years
Common Gotchas:
z
Inadvertent partial termination due to layoffs
14
DOL A
Audits
dit
{
{
If you
o have
ha e an S-corp
S co p ESOP,
ESOP count
co nt on a DOL a
audit
dit
A self-audit can be very helpful to identify and
correct issues with:
z
z
z
{
Specific ttransactions
ansactions
Specific audit initiative subject matters
Payment of expenses from plan assets
Common Gotchas:
z
Using non-ERISA loan documentation and terms for
an exempt loan (e.g. recoupment of fees of
collection), lack of accurate records of who was
serving as Trustee at what time, ESOP stock
valuations and how they are reviewed by ESOP
trustees
15
Plan Governance - Who is Calling
th Sh
the
Shots?
t ?
{
Pl
Plan
document
d
silent
il
or ambiguous
bi
z
z
z
z
{
{
Stock purchases
Recycled shares
Sources applied to repayment of the loan
Distribution timing, method, and form
Who is making these decisions at your
company?
Look to your plan document and trust
agreement for roles and responsibilities
16
Ad i
Advisor
S
Selection
l ti
{
ESOPs are not the same as other
qualified plans
z
{
An extra set of p
plan q
qualification rules
Good signs when picking advisors
z
z
Significant
g
ESOP p
practice
ESOP related association involvement
Authored ESOP articles
{ Conference speakers
{ Association advisory committees
{
17
Q
Questions?
18