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Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry
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Webinar Slides: Employee Stock Ownership Plans for the Architecture/Engineering/Construction Industry

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This course from Mayer Hoffman McCann P.C. will cover several current and emerging accounting topics that will impact employee stock ownership plans (ESOPs). We will cover recent accounting, legal and …

This course from Mayer Hoffman McCann P.C. will cover several current and emerging accounting topics that will impact employee stock ownership plans (ESOPs). We will cover recent accounting, legal and regulatory updates and the potential implications of the proposed changes on ESOPs.

The compliance requirements impacting ESOPs are unique and continue to be significant. Understanding these changes will take some effort for ESOP sponsors and their accountants (but less than the effort of not implementing them correctly and then trying to retroactively fix errors).

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  • 1. EMPLOYEE STOCK OWNERSHIP PLANS FOR THEARCHITECTURE/ENGINEERING/CONSTRUCTIONINDUSTRYPresented by: Anthony Hakes, Hal Hunt,Cindy Dwyer and Mark WelkerJune 13, 2013
  • 2. 2 To view this webinar in full screen mode, click on viewoptions in the upper right hand corner. Click the Support tab for technical assistance. If you have a question during the presentation, please usethe Q&A feature at the bottom of your screen.Before We Get Started…
  • 3. 3 This webinar is eligiblefor CPE credit. To receivecredit, you will need toanswer periodic pollingquestions throughout thewebinar. External participants willreceive their CPEcertificate via emailimmediately following thewebinar.CPE Credit
  • 4. 4The information in this Executive Education Seriescourse is a brief summary and may not include all thedetails relevant to your situation.Please contact your MHM service provider to furtherdiscuss the impact on your financial statements.Disclaimer
  • 5. 5#MHMWebinarToday’s PresentersHal Hunt, CPAShareholder913.234.1012 | hhunt@cbiz.comHal leads MHM’s Employee Benefit Plan (EBP) Audit Practice. With over 25years of diverse experience with EBP accounting, auditing and complianceissues, he is also a member of the firm’s Professional Standards Group as EBPsubject matter expert. As the EBP National Practice Leader, Hal is responsiblefor providing internal training, along with providing technical support toengagement teams, serving as engagement quality reviewer and developingresource tools for our EBP audit professionals. He served on the AICPA’sEmployee Benefit Plan Audit Quality Center (EBPAQC) Executive Committeeand is currently a member of the EBPAQC ESOP Task Force.Anthony M. Hakes (Tony), CPAShareholder602.650.6225 | ahakes@cbiz.comTony is a Director/Shareholder in the Phoenix office and joined CBIZ and MayerHoffman McCann P.C. (MHM) in June 2002 and has approximately 15 years ofexperience with national and international public accounting firms. Tony servesas the Western Region ERISA Audit Leader for MHM and is a member of theMHM ERISA Task Force. Through these roles, Tony participates in designing andimplementing MHM’s audit approach as well as ensuring audit quality forapproximately 1,000 ERISA audit clients firmwide.
  • 6. 6Cindy DwyerShareholder913.234.1022 | cdwyer@cbiz.comCindy is the President of MHM Retirement Plan Solutions and a Shareholder ofMayer Hoffman McCann P.C. She supervises staff, oversees technical research,and provides quality control services. She has previously served as the nationalChairperson of the American Institute of Certified Public Accountants EmployeeBenefits Technical Resource Panel (TRP) and has recently been reappointed asa member of the TRP. Additionally, Cindy has been a recurring speaker at theAmerican Institute of Certified Public Accountants National Conference onEmployee Benefit Plans. Cindy is also a committee member and current chair ofthe Employee Benefits Institute sponsored by UMKC School of Law.#MHMWebinarToday’s PresentersMark D. WelkerPartner, Husch Blackwell816.983.8148 | mark.welker@huschblackwell.comChair of the firms Tax & Benefits Department, Mark is considered clients’go-to advisor on any important benefit or compensation matter. He focuseson all benefit and compensation matters, including the creation andoperation of employee retirement plans, deferred and equity executivecompensation, employee stock ownership plans, and health and welfareplans. Mark is highly regarded for his strategies and management offiduciary and tax disputes.
  • 7. 7How Does an ESOP Work?#MHMWebinarToday’s Agenda123456ESOP OverviewESOP Advantages/DisadvantagesCreating an ESOP and Candidate ChecklistManagement Incentives in ESOP CompaniesOperational Issues
  • 8. ESOP OVERVIEW
  • 9. 9 More than 11,000 ESOPs in U.S. (10% of private sectorworkforce—ESOPs cover 10.3 million employees) 5,000 majority owned by an ESOP 4,000 are 100% owned by an ESOP 2,000 are minority owned by an ESOP Approximately 1/3 are S-Corporation ESOPs Approximately 1/2 are ESOPs with <250 participants Found in all industries with a very significant concentrationin the A/E and construction sector At least 70% of ESOPs are or were leveraged, (i.e. theyused borrowed funds to acquire stock bought by theESOP)(Source: The ESOP Association)#MHMWebinarESOP Population
  • 10. 10 1950s—ESOP concept developed 1970s—Employee Retirement Income Security Act of 1974(ERISA) 1990s—ESOPs became eligible to hold shares ofS-Corporations in 1998 2000s—Clarification and definition of abusiveS-Corporation ESOP structures, IRC 409(p) in 2001(Source: The ESOP Association)#MHMWebinarESOP History
  • 11. 11An ESOP is a tax-qualified, defined contribution, employeebenefit plan (ERISA) Invests primarily in the stock of the sponsoring company “Tax-Qualified” in that sponsoring company and sellingshareholder receive various income tax benefits Technique of corporate finance May use debt to purchase employer securities#MHMWebinarWhat is an ESOP?
  • 12. 12 One of many alternatives for business perpetuation to beexplored Sales to third party Merger Sale to management Corporate stock redemption Initial public offering Gift or other transfer to heirs Wind-up business and liquidate Leveraged recapitalization Sale to Employee Stock Ownership Trust (potential tax deferral or sale) Creates liquidity, in part or whole, enabling the businessowner(s) to diversify their portfolios.#MHMWebinarWhy ESOPs?
  • 13. 13 Provide a market (at fair-market value as determined by anindependent appraiser) for partial or complete sale by existingshareholders, potential “tax-deferred” rollover treatment if ESOPownership in a C Corporation is 30% or greater (IRC 1042) and“qualified replacement property” is acquired Borrow from a bank, the sponsoring company, or sellers topurchase a block of stock Make corporate tax-deductible contributions, including loanprincipal and interest payments via the ESOP (25% of Payroll +C Corporation Interest) Gain a corporate tax deduction for C Corporation dividendspassed through the ESOP to employees, or used to repay ESOPdebt (excluded from 25% limit)#MHMWebinarWhy ESOPs? (cont’d)
  • 14. 14 Income attributable to S Corporation stock owned by anESOP is not subject to federal income tax Raise working capital (dilutive) Charitable giving Going private (usually a public company selling a subsidiaryor division to an ESOP) 401(k)/ESOP combination plan#MHMWebinarWhy ESOPs? (cont’d)
  • 15. 15 Plan qualification requirements of the IRC require that anindependent valuation of privately held employer securities,(acquired after December 31, 1986), must be performedannually. However, the DOL strongly encourages all ESOPs holdingprivate securities to obtain such an independent valuation andrequires a valuation for any employer security purchase or saletransactions between the plan and a party in interest. This annual valuation is used to allocate shares to participantaccounts, and to redeem shares from retiring plan participants toput back to the employer. Valuations are also used for annual ESOP administration andESOP plan and plan sponsor reporting purposes.#MHMWebinarESOP Complexities
  • 16. HOW DOES AN ESOP WORK?
  • 17. 17(1) Company sets up an ESOP Trust.(2) Company makes annual tax-deductiblecontributions in cash or stock to theESOP.(3) Cash is used to buy stock from currentshareholders.(4) Shares are allocated to the accounts ofeligible employees within the ESOPbased on salary.(4) ESOP holds stock for employees andannually notifies them of how much theyown and how much the stock is worth.(4) Employees receive stock or cash afterthey retire or leave the company, avesting schedule applies.#MHMWebinarNon-Leveraged
  • 18. 18 The ESOP receives a loan and uses the proceeds topurchase stock from current shareholders. These shares are held in trust and are released intoemployee accounts at a rate corresponding to debtamortization.#MHMWebinarLeveraged ESOPs
  • 19. 191) Lender lends to company.2) Company lends to ESOP.3) ESOP buys stock from existing shareholders.4) Company makes annual tax-deductible contributions to ESOP.5) The ESOP then in turn repays lender.6) Employees receive stock or cash when they retire or leave (vesting schedule).#MHMWebinarLeveraged ESOP
  • 20. 20 Owner/Selling Shareholder Take back a note in exchange for shares Taxed on principal upon receipt at capital gains and interest as ordinaryincome (if installment sale treatment is elected) Advantage: Entitled to higher interest rate; subordinated to bondingcompany and bank Disadvantage: 1042 Tax Free Roll over requires proceeds to be reinvestedwithin 12 months Bank Loan is to the company which makes “mirror” loan to ESOP Typically 7 years Assessment of company credit Advantage: Selling shareholder ends up with cash up front Disadvantage: Lenders look to collateralize short fall with proceeds, Bank willnot subordinate to bonding company The Company Cash rich company can make loan to the ESOP Advantage; Company repays itself with market rate of interest#MHMWebinarESOP Lenders
  • 21. ESOPADVANTAGES/DISADVANTAGES
  • 22. 22 Substantial tax savings (40% to 100%) Increase ability to attract and retaintalent Corporate perpetuation Cash flow increased Pre-tax dollars repay debt S Corporation stock owned by anESOP is not subject to federal tax(most states mirror) Tax-deductible C Corporationdividends Justifies accumulated retainedearnings#MHMWebinarAdvantages for the Company
  • 23. 23‹#›#MHMWebinarAdvantages for Selling Stockholders Creates liquidity at fairmarket value (as determinedby an independentappraiser) Control maintained(if desired) Deferral of capital gainstaxes available to qualifiedsellers of C corporationstock (IRC 1042) Establishes value andprovides liquidity for estateplanning Selling shareholdersexcluded from ESOPparticipation can be “madewhole” by the corporation(deferred compensation) Additional equity incentivesstill available(stock option,bonus, purchase,phantom stock,etc.)
  • 24. 24‹#› Provides employees an opportunity to obtain ownership Employees share directly in equity growth of company ESOP employer contributions tend to be larger than profitsharing contributions Proven motivator and builds unity and team spirit Retains key employees (25 years of studies) ESOP accounts accumulate tax-free and are tax-favored atdistribution Employees can realize dividend income Buy/sell agreements ensure future employee ownershipthrough the ESOP#MHMWebinarAdvantages for Employees
  • 25. 25‹#› Qualified seller can elect to defer gain on C Corporationshares sold to ESOP by reinvesting all or any portion of thesale proceeds in Qualified Replacement Property (“QRP”) Note that IRC 1042 treatment can be elected for less than100% of sales proceeds – amount not reinvested is taxed QRP is stock or debt instruments of a domestic operatingcorporation QRP must be acquired within 12-months of the ESOPsale (or 3 months before – use of actual proceeds is notrequired) After the sale, ESOP must own at least 30% of company#MHMWebinarPlanning for C Corporation IRC 1042Deferral of Capital Gains Taxes
  • 26. 26‹#›#MHMWebinarQualified Replacement PropertyGeneral Guidelines*Not EligibleCommon StockConvertible BondsCorporate FixedRate BondsCorporate “FloatingRate Notes”Municipal BondsUS GovernmentBondsMutual FundsForeign SecuritiesREITsBank CDs* QRP must be evaluated by an experienced investment advisor to ensurecompliance guidelines are met.* *Eligible issuer must have:• more than 50% of its assets used in the active conduct of a trade or business• no more than 25% of its gross income from passive sourcesEligible**
  • 27. 27‹#› Qualified seller must have owned stock for at least threeyears prior to sale: Seller cannot have acquired the stock in a compensatory stock optionplan or any other section 83 transaction, nor from a qualifiedretirement plan. Seller, certain related individuals, and greater-than-25% ownersgenerally cannot participate in ESOP allocations. 10% excise tax applies if ESOP disposes of stock withinthree years, except for normal benefit distribution. Above rules do not apply, if seller does not elect thedeferral (“tax-free” rollover).#MHMWebinarPlanning for C Corporation IRC 1042Deferral of Capital Gains Taxes (cont’d)
  • 28. 28‹#› Tax status conversion, if necessary Convert an S corporation to a C corporation, if tax deferral is desiredby selling stockholders Execute IRC 1042 “tax-free” rollover as C corporation transaction May want to consider converting back to an S corporation post IRC1042 transaction (five year wait to convert to S) Convert C corporation post IRC 1042 transaction to Scorporation if tax benefits of S corporation ownership ofESOP are desired 100% shareholder approval for S Corporation election#MHMWebinarPlanning for C Corporation IRC 1042Deferral of Capital Gains Taxes (cont’d)
  • 29. 29‹#›#MHMWebinarComparison of After-Tax Proceeds90%8%50%40%100% 100%100%75%50%25%0%IPO Recap Stock Swap ESOPPercent available to investin diversified portfolioPercent remainingin company stock
  • 30. 30‹#›(The ESOP can own less than 100%, with a proportionalreduction in tax-free income.)#MHMWebinar100% ESOP – Five-Year Value of Tax-FreeOperations by Electing S Corporation StatusAssume: $500,000 pretax income10% growth rate40% effective tax rateTotal Tax Savings: $1,221,020 = more than two times the current income!1 2 3 4 5Pretax Income $500,000 $550,000 $605,000 $665,500 $732,050Tax Savings $200,000 $220,000 $242,000 $266,200 $292,820
  • 31. CREATING AN ESOP
  • 32. 32 Preliminary Assessment Questionnaire Business Matters Are the owners ready to sell? What are the sellers’ valuation expectations? Who will run the company? Is there adequate cash flow to service debt, provide workingcapital, provide adequate capital expenditures and cover ESOPrepurchase liability? How much stock to be sold? (100% sales work best) Are the sellers willing to take notes? Are the sellers willing to give reps and warranties?#MHMWebinarCreating an ESOP – Preliminary Analysis
  • 33. 33 Legal Matters Controlled group Is it a corporation? Union contracts Fiduciary issues Accounting Matters Financial statement impact Bonding Loan covenant compliance Tax Matters Individual and corporate#MHMWebinarCreating an ESOP – Preliminary Analysis
  • 34. 34#MHMWebinarCreating an ESOP – Phase 1PreliminaryvaluationBasic TransactionDesign
  • 35. 35Implementation Detailed transaction design Seller note terms Warrants in lieu of interest Post – close management incentives Stock sale agreement Plan design Financing Repurchase obligation planning Independent transaction valuation Independent trustee analysis Employee communication#MHMWebinarCreating an ESOP – Phase II
  • 36. 36Ongoing#MHMWebinarCreating an ESOP – Phase IIIKeep planup-to-dateCommunicationsAnnualValuationAdministration
  • 37. CANDIDATE CHECKLIST
  • 38. 38#MHMWebinarIs an ESOP Right for You?ESOP Candidate ChecklistYes/No___/___1. At least some stockholders are motivated to sellsome stock; e.g., planning for retirement, liquidatingan estate, entering a new business venture,children not involved in business, etc.___/___2. The owners are psychologically ready and willingto transfer ownership to an employee trust,assuming an attractive transaction can be arranged.___/___3. If one or more principal executives will bedeparting in the foreseeable future, there is a viablemanagement transition plan.
  • 39. 39#MHMWebinarIs an ESOP Right for You?ESOP Candidate Checklist (cont’d)Yes/No___/___4. The entity is a corporation taxed in the normalmanner.___/___5. The company has a strong pretax, pre-distributionand bonus earnings and cash flow over theprevious few years.___/___6. The company expects to have strong pretax, pre-distribution and bonus earnings over the next fewyears.
  • 40. 40#MHMWebinarIs an ESOP Right for You?ESOP Candidate Checklist (cont’d)Yes/No___/___7. The company customarily makes payments to a401(k) or profit sharing or other employee benefitplan that could in the future be made to an ESOP.___/___8. The company has payroll adequate to support theproposed ESOP.
  • 41. MANAGEMENT INCENTIVES INESOP COMPANIES
  • 42. 42Management Incentives Management’s interest through ESOP is generallyinadequate Most common design Annual cash bonuses Tied to no breach of debt covenants or payment obligations Stock appreciation rights This is a contract: “Company will pay you cash equal to rise inESOP appraisal multiplied by ‘x’ hypothetical shares.” Based on post-debt, depressed value Payable after seller notes repaid Generally 5-15% for management team Establish as part of deal and communicate to trustee
  • 43. OPERATIONAL ISSUES
  • 44. 44Operational Issues Handling Liquidity or Repurchase Obligation Process of Distributions Diversification Rules Use of Dividends Overview of Anti-abuse rules 409(p)#MHMWebinar
  • 45. 45Handling Liquidity or Repurchase Obligation Form of Benefit Paid in Cash and/or Employer Securities Who decides the form of Benefit? Participant Plan Sponsor#MHMWebinar
  • 46. 46 Know the plan document Distribution provisions – Immediate pay-out, delay for 5 years, installments? Annually prepare a Repurchase Obligation Study Properly plan for cash flow requirementsHandling Liquidity or Repurchase Obligation
  • 47. 47Handling Liquidity or Repurchase ObligationSource of the money to fund distributions Cash contributed and distributed Recycle/Reshuffling Shares distributed and repurchased by ESOP with cash Where did the cash come from? Shares distributed and repurchased by ESOP with note Re-leverage Securities acquisition note subject to all of the leveraged ESOP rules Shares distributed and repurchased by Plan Sponsor Repurchase transaction is outside the plan
  • 48. 48Handling Liquidity or Repurchase Obligation Cash contributed and distributed —Recycle/Reshuffling One of the most common Cash is distributed from the plan and the shares allocated tothe remaining participants. Benefits: i) It’s easy ii) tax deductions created by the ESOP sponsor’s contributions tofund the cash recycling distributions to former participants. Disadvantages: Distribution obligations may be setting the Plan Sponsorscontribution decision May contribute to the have and have not issue#MHMWebinar
  • 49. 49 Recycling/Reshuffle Example#MHMWebinarHandling Liquidity or Repurchase Obligation
  • 50. 50 Shares distributed and repurchased by…? The ESOP with Cash The ESOP with a Note The Plan Sponsor – “put option”#MHMWebinarHandling Liquidity or Repurchase Obligation
  • 51. 51 Why would an ESOP want to distribute shares? May help resolve the “have and have nots” issue#MHMWebinarHandling Liquidity or Repurchase Obligation
  • 52. 52#MHMWebinarRedeem / Re-contribute vs. Recycle
  • 53. 53 Eligible participants have the right to elect to diversifyup to 25% of their post-1986 stock accounts First 5 years up to 25% Last year (year 6) up to 50% of stock#MHMWebinarDiversificationEligible participants10 years of participationAge 55 or older
  • 54. 54 Election Period: 90 days after the end of the Plan Year The ESOP trustee has 90 days from the end of the electionperiod to actually satisfy or implement the participant’selection. Satisfaction of Requirements distribute cash equal to the stock value distribute the stock that is diversified offer 3 or more alternative investment funds for theliquidated shares within the ESOP Transfer the liquidated shares to another plansponsored by the employer than offers 3 or morealternative investment funds#MHMWebinarDiversification
  • 55. 55 Sometime called “account segregation” Converting a terminated participant’s account balancefrom company stock to other investments of equalvalue. Segregation happens before a participant is eligible toreceive a distribution and therefore is technically not part ofa plan’s distribution policy. Helps the Plan Sponsor plan for repurchase obligation.#MHMWebinarMandatory Diversification
  • 56. 56Dividends Used for Debt Service Dividends on allocated shares MAY be used for debt service if“return for value” rule is satisfied. IRC §404(k) (aka “DividendShort Fall”) Shares allocated to participant due to use of dividends mustat least equal in value the dividend dollars applied. Other allocations to account due to contributions cannot beused to satisfy this test. Typically any shortfall is made up through allocation ofshares attributable to dividends paid on collateral IMPACT: This is a condition of the right to use dividends fordebt service. Violation may result in an additional employercontribution or a prohibited transaction, subject to correction.
  • 57. 57Dividends Paid to an ESOPExample: Suppose a participant receives a dividend of$1,000 on shares allocated to his account in the ESOP. The$1,000 is used to repay the exempt loan. Twenty shares arereleased and returned to the participant. The share value atthe end of the plan year is $40 per share, or $800 for the 20shares returned. This is $200 less than the value removedfrom the account.“Dividend shortfall” or“return of value” issue
  • 58. 58Dividends Paid to an ESOP Violation may result in an additional employer contributionor a prohibited transaction, subject to correction. Particular issue for S Corporations as correction methodsmay be limited. Dividend short fall rules do not apply to shares held in thesuspense account. A rising stock price does not guarantee that the plan will nothave a dividend short fall issue.
  • 59. 59S Corporation Anti-abuse — Rules 409(p) To ensure that ESOPs that are established for SCorporations provide broad-based employee coverage, andto benefit rank-and-file employees as well as highlycompensated employees and historical owners Prohibited allocation rules — no portion of the planattributable to employer securities may accrue during a“nonallocation” year to “disqualified persons”
  • 60. 60S Corporation Anti-abuse — Rules 409(p) “Disqualified Person” — An individual is adisqualified person if:1. The aggregate number of “deemed-ownedshares” of such individual and the individual’sfamily unit is at least 20% of the number ofall deemed-owned shares or2. The number of “deemed-owned shares” heldonly by the individual is at least 10% of thenumber of all “deemed-owned shares”≥20%≥10%
  • 61. 61S Corporation Anti-abuse — Rules 409(p) Non Allocation Year: Defined A plan year under the ESOP is treated as a nonallocation year ifat any time during the plan year Disqualified persons own at least 50% of the outstanding SCorporation shares (both shares outside the ESOP and “deemed-owned shares” in the ESOP) Non Allocation Year Consequences An excise tax (50%) is imposed on the S Corporation the disqualified person is treated as having received adistribution in the amount of the prohibited allocation ESOP no longer eligible for the prohibited transactionexemption with respect to any outstanding loan to the ESOP S Corporation income is subject to UBIT Results in plan disqualification
  • 62. 62S Corporation Anti-abuse — Rules 409(p) Synthetic equity — can also be included in thecomputations Stock options Warrants Restricted stock Deferred issuance stock right Non-qualified deferred compensationplans
  • 63. 63S Corporation Anti-abuse — Rules 409(p) Summary Before implementing an S Corporation ESOP examine thetest and all family relationships. Address synthetic equity. ESOPs with numerous, broad-based employeeparticipation generally should not have a problem passingthe section 409(p) test but watch family relationships. Testing should be done at the beginning of the plan year;corrective action must be taken AFTER preliminary testingbut BEFORE any formal allocation is made. Annually, make sure your third-party administrator isperforming this test and review the results.
  • 64. 64#MHMWebinarQuestions?
  • 65. 65If You Enjoyed This Webinar… Join us for these related EES courses: Oct. 24: The Role of ESOPs in Private Equity Firms Nov. 14 and 19: Employee Benefit Plan Accounting IssuesUpdate Read these related publications: MHM Messenger 11-13: FASB Proposal Affects EmployeeBenefit Plans Employee Stock Ownership Plan Primer
  • 66. 66#MHMWebinarToday’s PresentersHal Hunt, CPAShareholder913.234.1012 | hhunt@cbiz.comHal leads MHM’s Employee Benefit Plan (EBP) Audit Practice. With over 25years of diverse experience with EBP accounting, auditing and complianceissues, he is also a member of the firm’s Professional Standards Group as EBPsubject matter expert. As the EBP National Practice Leader, Hal is responsiblefor providing internal training, along with providing technical support toengagement teams, serving as engagement quality reviewer and developingresource tools for our EBP audit professionals. He served on the AICPA’sEmployee Benefit Plan Audit Quality Center (EBPAQC) Executive Committeeand is currently a member of the EBPAQC ESOP Task Force.Anthony M. Hakes (Tony), CPAShareholder602.650.6225 | ahakes@cbiz.comTony is a Director/Shareholder in the Phoenix office and joined CBIZ and MayerHoffman McCann P.C. (MHM) in June 2002 and has approximately 15 years ofexperience with national and international public accounting firms. Tony servesas the Western Region ERISA Audit Leader for MHM and is a member of theMHM ERISA Task Force. Through these roles, Tony participates in designing andimplementing MHM’s audit approach as well as ensuring audit quality forapproximately 1,000 ERISA audit clients firmwide.
  • 67. 67Cindy DwyerShareholder913.234.1022 | cdwyer@cbiz.comCindy is the President of MHM Retirement Plan Solutions and a Shareholder ofMayer Hoffman McCann P.C. She supervises staff, oversees technical research,and provides quality control services. She has previously served as the nationalChairperson of the American Institute of Certified Public Accountants EmployeeBenefits Technical Resource Panel (TRP) and has recently been reappointed asa member of the TRP. Additionally, Cindy has been a recurring speaker at theAmerican Institute of Certified Public Accountants National Conference onEmployee Benefit Plans. Cindy is also a committee member and current chair ofthe Employee Benefits Institute sponsored by UMKC School of Law.#MHMWebinarToday’s PresentersMark D. WelkerPartner, Husch Blackwell816.983.8148 | mark.welker@huschblackwell.comChair of the firms Tax & Benefits Department, Mark is considered clients’go-to advisor on any important benefit or compensation matter. He focuseson all benefit and compensation matters, including the creation andoperation of employee retirement plans, deferred and equity executivecompensation, employee stock ownership plans, and health and welfareplans. Mark is highly regarded for his strategies and management offiduciary and tax disputes.
  • 68. 68#MHMWebinarConnect with Mayer Hoffman McCannlinkedin.com/company/mayer-hoffman-mccann-p.c.@mhm_pcyoutube.com/mayerhoffmanmccanngplus.to/mhmpcblog.mhm-pc.comslideshare.net/mhmpcfacebook.com/mhmpc

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