Case Study: A First Look at ESOP Recordkeeping

ABC Company recently adopted an Employee Stock Ownership Plan (ESOP). SES Advisors’ sister law firm, Steiker, Fischer, Edwards & Greenapple, P.C., drafted the plan documents, trust documents and summary plan description (SPD). The SES financial team completed all of the loan documentation, establishing a leveraged ESOP owning 100% of ABC Company. Communication consultants explained the ESOP directly to the employees. The selling shareholders were pleased with the transaction, the employees were excited to become employee-owners, and the management team asked, “What’s next?” The next phase in the ongoing ESOP process is ESOP “administration, or recordkeeping.

For a new ESOP, the process can seem overwhelming. Although an ESOP is a qualified defined contribution plan, there are significant differences from a 401(k) or profit sharing plan. Terms such as anti-abuse testing, 1042 elections, repurchase obligation and diversification, as well as various Code Sections, such as 409(p) and 4975, are new to human resources and finance departments. SES Advisors guided ABC Company through each step of the administration process, including:

• Census data compilation. We worked with ABC’s payroll department to compile the census data necessary to determine eligibility and vesting for each plan year. The compensation definition for ESOPs may or may not mirror other retirement plans.
• Financial data compilation. We also coordinated with ABC’s financial service provider(s) and valuation company to collect the necessary cash and stock information to prepare trust financial statements and calculate the allocations for each plan year.
• Compliance testing. Each year, SES Advisors performs all compliance tests as mandated by the Internal Revenue Service, Department of Labor or other regulatory agencies. In addition, if a company sponsors other defined contribution plans, such as a 401(k), profit sharing, or money purchase plan, we work with the administrators of those other plans to do all of the required combined plan compliance testing.
• Draft allocation report. After receiving all the census and financial data necessary, SES Advisors prepares a draft allocation report that includes financial statements, summary of financial assumptions and transactions for the plan year, results of applicable compliance tests, participant detail including updated eligibility and vesting, allocation detail in total and per participant including contributions, forfeitures, distributions, dividends or S corporation distributions, investment gain or loss, and ending balances.

After ABC Company reviewed and accepted the draft allocation report, the company’s SES recordkeeper provided bound copies of the finalized allocation and compliance report for the plan year and then proceeded with the following:

• Participant Statements. SES Advisors prepares customized participant statements detailing the activity in each participant’s cash and stock account(s) for each plan year.
• Distributions Forms. We determine which participants are eligible for a distribution - including distributions due to diversification, retirement, death, disability, termination and age 70½. After making this determination, SES Advisors creates customized distribution forms for each eligible participant, which includes all required language on taxation, consent and rollover options.
• Form 5500. We complete Form 5500 for ABC ESOP to file, including all required Schedules and attachments. If necessary, we will file a Form 5558 to extend the filing deadline.
• Summary Annual Report. We prepare this annual disclosure for participants based upon the information contained in Form 5500.
• Assist the Audit Team. Since ABC ESOP has more than 100 participants, it generally has to attach an audited financial report to Form 5500. With ABC’s consent, we help its audit team in the preparation of their report.

In addition to the steps described above, SES Advisors can also provide the following services:

• Review the Plan Document to make sure all necessary amendments have been executed as required by law.
• Assist with Qualified Domestic Relations Orders.
• Review the Summary Plan Description to check that the SPD language matches the terms set forth in the Plan Document, ensuring that it meets regulatory standards and is easy to understand.
• Prepare Form 1099 R and Form 945, if contracted by the company.

Of course, ABC Company’s SES recordkeeper and our entire ESOP team is always available throughout the year to answer any questions that arise and guide the company on a variety of ESOP-related topics.

Ready to Move Forward?

If you would like to learn more about how SES Advisors can guide you through the complexity of administering an ESOP, please contact us.