A closing might be the final step in a leveraged Employee Stock Ownership Plan transaction; however, upkeep is needed annually to keep the plan compliant with the law. For instance, companies that sponsor ESOPs need to perform recordkeeping each year to allocate shares of company stock to employees, and to inform employees of the value of their holdings.
The following case study outlines the basics of ESOP administration. It details what you can expect and how the SES recordkeeping team can help you along the way.
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The ABC Employee Stock Ownership Plan (the “ESOP”) was adopted this year. The legal consultants drafted the plan documents, trust documents, and the summary plan description (SPD). The financial consultants completed all of the loan documentation establishing a leveraged ESOP owning 100% of the ABC Company. The communication consultants gave an informative employee presentation to explain the concept of an ESOP. As a result, the selling shareholders were happy, the employees were excited by the idea of becoming employee-owners, and the management of the company was asking “What’s next?” SES guides companies through the ongoing ESOP process, including what we typically call “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 your 401(k) or profit sharing plan. Suddenly you are hearing terms like Anti-abuse testing, 1042 elections, repurchase obligation and diversification, as well as various Code Sections such as 409(p) and 4975. These are just a sprinkling of the terms that you will hear batted around. No need to worry – SES Advisors will help you step-by-step through the administration process. These steps include:
- Census data compilation: We work with your payroll department to compile the necessary 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 coordinate with your 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: SES Advisors performs all compliance tests as mandated by the Internal Revenue Service, Department of Labor, or other regulatory agencies. In addition, if your company sponsors other defined contribution plans (like a 401(k), profit sharing, or money purchase plan) we will work with the administrators of those other plans to do all of the required combined plan compliance testing.
- Draft allocation report: After we receive all the census and financial data necessary, we prepare 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 you review and accept the draft allocation report, your SES recordkeeper provides you with bound copies of the finalized allocation and compliance report for the plan year and proceeds with the following:
- Participant Statements: We prepare 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 70 ½). After making such determination, SES Advisors will create customized distribution forms for each eligible participant that includes all required language on taxation, consent, and rollover options.
- Form 5500: We prepare a complete Form 5500 for you to file including all required Schedules and attachments. If necessary, we will file a Form 5558 to extend your filing deadline.
- Summary Annual Report: We will prepare this annual disclosure for your participants based upon the information contained in your Form 5500.
- Assist Your Audit Team: If you have more than 100 participants, you generally have to attach an audited financial report to your Form 5500. With your consent, we will help your audit team in the preparation of their report by answering questions and providing information.
In addition to the above mentioned steps, 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 of 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’s and Form 945, if contracted by the company
- Be available throughout the year to answer questions that arise and guide on a variety of ESOP related topics.
*This ESOP Recordkeeping Case Study was written by Mychelle Holloway – Senior ESOP Administrator with SES Advisors. To contact Mychelle Holloway with questions regarding this case, please call her at our Virginia office – 757-442-6651. Or to receive a complimentary quote on SES Advisors administrative services, please call Brian Wurpts – Vice President of Plan Recordkeeping Services at 215 – 508 - 1600 ext. 227.
