ESOPs Workshop 20 Presented by Lee I. Swerdlin Swerdlin & Company James C. Paul Paul Benefits Law...
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Transcript of ESOPs Workshop 20 Presented by Lee I. Swerdlin Swerdlin & Company James C. Paul Paul Benefits Law...
![Page 1: ESOPs Workshop 20 Presented by Lee I. Swerdlin Swerdlin & Company James C. Paul Paul Benefits Law Corp. W. Waldan Lloyd Callister Nebeker & McCullough.](https://reader036.fdocuments.in/reader036/viewer/2022062520/5697bff21a28abf838cbbbeb/html5/thumbnails/1.jpg)
![Page 2: ESOPs Workshop 20 Presented by Lee I. Swerdlin Swerdlin & Company James C. Paul Paul Benefits Law Corp. W. Waldan Lloyd Callister Nebeker & McCullough.](https://reader036.fdocuments.in/reader036/viewer/2022062520/5697bff21a28abf838cbbbeb/html5/thumbnails/2.jpg)
ESOPsWorkshop 20
Presented by
Lee I. SwerdlinSwerdlin & Company
James C. PaulPaul Benefits Law Corp.
W. Waldan LloydCallister Nebeker & McCullough
![Page 3: ESOPs Workshop 20 Presented by Lee I. Swerdlin Swerdlin & Company James C. Paul Paul Benefits Law Corp. W. Waldan Lloyd Callister Nebeker & McCullough.](https://reader036.fdocuments.in/reader036/viewer/2022062520/5697bff21a28abf838cbbbeb/html5/thumbnails/3.jpg)
3
INTRODUCTION
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WHY HAVE AN ESOP?
• Motivate employees– Esprit de corps– “Have skin in the game”– Owners?– NOT shareholders
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WHY HAVE AN ESOP?
• Exit strategy for owners• ESOP culture
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PLAN TYPES
• Employee Stock Ownership Plan (ESOP)• Stock Bonus Plan• KSOP• Profit Sharing Plan
![Page 7: ESOPs Workshop 20 Presented by Lee I. Swerdlin Swerdlin & Company James C. Paul Paul Benefits Law Corp. W. Waldan Lloyd Callister Nebeker & McCullough.](https://reader036.fdocuments.in/reader036/viewer/2022062520/5697bff21a28abf838cbbbeb/html5/thumbnails/7.jpg)
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INVEST PRIMARILY IN EMPLOYER STOCK
• Qualifying Employer Securities• Stock that is readily tradable• Stock of parent company or affiliate• Timing for initial investment
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ALLOCATION AND VALUATION
• Employer contributions– Cash– Stock
• Allocated to individual accounts• Valuation by Qualified Independent
Appraiser
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PLAN DESIGN AND ADMINISTRATION
• Stock and cash accounts• Eligibility• Vesting
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PLAN DESIGN AND ADMINISTRATION
• Coverage • Nondiscrimination• Counting past service
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DISTRIBUTIONS
• Right to demand stock• Exceptions
– Readily tradable– S Corporation stock– Restricted ownership
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DISTRIBUTIONS
• Timing– 5 year delay after termination– Pay in installments
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DISTRIBUTIONS
• Future repurchase liability
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DISTRIBUTIONS
• Cash distributions– Sell stock– Valuation/Timing– Reshuffle
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DISTRIBUTIONS
• Stock distributions– Put option if stock is not readily tradable– Timing– Valuation
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DIVERSIFICATION RIGHTS
• Age 55 + 10 years of service• Portion of account• Distribute?• Non-stock investment options
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VOTING RIGHTS
• Pass through voting• Stock that is tradable• Stock that is not readily tradable
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LEVERAGED ESOPS
• ESOP borrows from the employer or a third-party lender to buy a block of stock
• Stock is placed in suspense while loan is outstanding as security for the loan
• Each year, the company contributes enough to make a loan payment– Part of loan principal is paid– Proportionate amount of stock is released from
suspense– Allocated to participants’ accounts
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LEVERAGED ESOPS
• Exempt loans– Plan borrows from bank– Company borrows from bank; lends to ESOP– Seller carries back a note
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LEVERAGED ESOPS
• Suspense account– Share release formulas– Security for loan
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LEVERAGED ESOPS
• Prohibited transaction rules– Exemption for loans– Exemption for purchase/sale– Timing for valuation
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LEVERAGED ESOPS
• Code Section 1042 – Defer gain on sale of stock– C Corporation– ESOP must own 30%– Must reinvest sale proceeds in Qualified
Replacement Property• Timing for purchase of QRP• Holding Period
– Non-allocation rules
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LEVERAGED ESOPS
• Contributions/Deductions
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LEVERAGED ESOPS
• Feasibility– Eligible payroll– Amount needed to make loan payments
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LEVERAGED ESOPS
• How much stock to buy– All at once?– Buy in stages?
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Company
ESOP
Participant Accounts
Step #3: Company stock is allocated to participant accounts
Step #1: Company contributes cash or stock to ESOP
3
2
2
1 $$
$
HOW AN ESOP WORKS
26
Step #2: ESOP uses cash to buy stock from Company or shareholder
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Stock Purchase
Company
ESOP
$
Lender
$
1
2
guarantee
$
LEVERAGED ESOP
Step #1: Lender lends ESOP money
27
Step #2: ESOP buys stock from Company or shareholder
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Company
ESOP
$
Step #3: Each year, Company makes contribution to ESOP
Participant Accounts
Lender
$3
4
5
Loan RepaymentLEVERAGED ESOP
28
Step #4: ESOP makes loan payment to lender
Step #5: Shares released and allocated to participant accounts
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S CORPORATION ESOPS
• Tax advantages• Code section 409(p)
– No allocation/accrual for Disqualified Person– DQP
• Member of 20% shareholder group• 10% shareholder• Family member
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S CORPORATION ESOPS
• Code section 409(p) [Cont.]– Violation
• Not treated as “ESOP”• PT exemptions don’t apply; excise taxes• S Corporation election may terminate• Excise tax on prohibited allocations
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FIDUCIARY ISSUES
• Who wears which hats?
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FIDUCIARY ISSUES
• Conflicts and self-dealing– Purchase/sale– Valuation– Owner/Officer compensation and benefits– Other issues
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FIDUCIARY ISSUES
• Avoiding prohibited transactions
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FIDUCIARY ISSUES
• Potential Solutions– Independent trustee
• Cost• Availability
– Committee– Employee involvement
• Pros• Cons
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IRS/TAX QUALIFICATION
• Scrutiny• No pre-approved documents – advisable
to get individual determination letter
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DOL SCRUTINY
• Fiduciary issues• Fees• Acts by Company Directors, Officers and
Shareholders
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LITIGATION
• Couturier• Moench• Participant claims
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ADVANTAGES TO ESOPS• If company is a C corporation, dividends
paid to the ESOP may be tax deductible• ESOPs transfers ownership to employees
– Encourages their productivity
• Creates a market for privately held shares• Tax-deductible manner to finance
company growth or expansion• May contain 401(k) feature (generally
called a “KSOP”)
38
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QUESTIONS?
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PresentersJames C. Paul
Paul Benefits Law Corp.2356 Gold Meadow Way, Suite 240
Gold River, CA 95670(916) 403-7242
W. Waldan LloydCallister Nebeker & McCullough
10 East South Temple, Suite 900Salt Lake City, Utah 84133
(801) [email protected]
Lee I. SwerdlinSwerdlin & Company
5901 Peachtree Dunwoody RoadBuilding B, Suite 170
Atlanta, GA 30328(800) 507-9373