ESOP Rebalancing and ESOP Reshuffling Defined

The IRS issued a February 23, 2010 Response to Technical Assistance Request #4 with regard to ESOP rebalancing and ESOP reshuffling provisions. The memo was issued three days prior to the Hoffman v. Tharaldson Motels Inc. Employee Stock Ownership Plan, D.N.D., No. 3:08-cv-109, 2/26/10 ruling and defines rebalancing and reshuffling:

• Rebalancing – "the mandatory transfer of employer securities into and out of participant ESOP accounts, usually on an annual basis, designed to result in all participant accounts having the same proportion of employer securities."
  
• The memo notes that a plan provision that allows participants to opt out is "not a rebalancing provision, but is rather a provision providing for participant-directed investment elections."
  
  
• Reshuffling – "the mandatory transfer of employer securities into or out of ESOP accounts, not designed to result in an equal proportion of employer securities in each account."
  
• Other terms for reshuffling are segregations of accounts or cash conversion of accounts.
  
• Historically we have seen reshuffling and rebalancing used interchangeably. However, since the IRS has clearly differentiated between the two, we will make it a point to use these definitions going forward.

In December we provided a brief description of the differences:

Rebalancing

• When a plan rebalances, shares are "reshuffled" as needed so each participant will has the same proportion of cash and stock at the end of the plan year. The reshuffling is processed with an internal repurchase of shares (a.k.a recycling).
  
• This approach provides a method to get shares to newer employees and help manage the "haves vs. have nots" scenario that occurs in many mature ESOPs.
  
• This IRS has stated that this approach cannot be used to solve IRC Section 409(p) Anti-Abuse Testing issues.

Reshuffling

• Also known as segregation of accounts or cash conversion of accounts.
  
• Reshuffling occurs when the company buys all or some of the shares of the accounts of participants that have separated service from the company. The cash is invested in other prudent investments until distribution.
  
• Reshuffling prevents former employees from sharing in future gains.
  
• Reshuffling protects former employees from sharing in future losses in the value of the company and provides them with additional diversification.
  
• This strategy is used by many ESOP companies to manage their repurchase obligation, enabling them to purchase the shares of terminated participants at the current fair market value. This approach essentially speeds up the repurchase obligation to the time of segregation. Assuming an increasing stock value, this strategy accelerates your repurchase obligation in the short-term and reduces it in the long-term.
  
• Reshuffling can also free up more shares for allocation.
  
• The 2006 Final IRC Section 409(p) Regulations indicate that "Targeted reshuffling", or only reshuffling when needed to satisfy the IRC Section 409(p) Anti-Abuse Testing requirements, would most likely be discriminatory because it would usually provide HCEs with an investment opportunity that NHCEs do not have. Targeted reshuffling was not specifically mentioned in the memo. [Another term included in similar discussions, mandatory diversification or forcing certain or all participants to diversify when they are eligible, was also not addressed in the memo.]

Check back for more analysis of the February 23, 2010 memo.

Latest HEART Act Guidance

In ESOP Planning 2009: Plan Documents and Disclosures we discussed how the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) was one of the major pieces of Employee Benefits Legislation enacted in 2008. Some of the changes were retroactive to 2007 and others became effective January 1, 2009. An amendment must generally must be adopted by the end of the 2010 plan year.

The IRS issued IRS Notice 2010-15 – Miscellaneous HEART Act Changes in January and discussed the guidance in the Retirement News for Employers – Winter 2010 Edition:

Death Benefits

The Act added Code §401(a)(37) that imposes a new requirement on 401(a) plans, 403(b) annuities and 457(b) governmental plans. The Act requires these plans to treat participants who died on or after January 1, 2007, while performing qualified military service (QMS) as being re-employed prior to death and, therefore, entitled to certain additional benefits provided under the plan, such as:

• accelerated vesting;
• ancillary life insurance benefits; and
• other plan survivor benefits that are contingent on a participant's termination of employment due to death.

The Notice provides:

• The plan's additional death benefits are not required to include benefit accruals (if a defined benefit plan) or contributions (if a defined contribution plan) for the QMS period;
• The plan must provide service credit for vesting purposes for the deceased participant's QMS; and
• A participant's survivors are not entitled to Code §401(a)(37) death benefits unless the participant was entitled to reemployment with the employer maintaining the plan following his or her QMS.
  

Contributions or Benefits for Time of Military Service

Other clarifications in the Notice relate to §104(b) of the Act that permits certain plans to treat participants who die or become disabled on or after January 1, 2007, while performing QMS as:

• being rehired the day before his or her death or disability; and
• then terminating employment on the date of death or disability.

If the plan uses this provision, then it may provide benefit accruals or contributions for the period when the participant was absent as would have been required by the Uniformed Services Employment and Reemployment Rights Act (USERRA) had the participant actually been rehired. However, the plan must provide the same benefits or contributions to all similarly situated participants on a reasonably equivalent basis.

Differential Pay (Also see Differential Military Pay as Wages.)

The Notice also describes how a plan treats differential pay that an employer may provide after December 31, 2008, for retirement plan purposes. Differential pay is the difference between a person's pay from the employer and his or her military pay. For example, a plan does not have to treat differential pay as compensation to determine contributions and benefits but it must consider the differential pay when determining the total amount of employer and employee contributions under Code §415(c)(3).

Plan Distributions

The Notice clarifies that if a plan allows distributions upon severance of employment, it may treat an individual's service in the uniformed services while on active duty for more than 30 days as a deemed severance from employment under Code §§401(k), 403(b) and 457(d) and allow a distribution. If so, the plan can't permit the individual for a 6-month period following the date of the distribution to make:

• an elective deferral to the plan; or
• an employee contribution to the plan.

Required Plan Amendment Date

Some of the Act's provisions were effective retroactively to January 1, 2007, while others were effective for later years. The Notice extends the remedial amendment period during which a plan can make certain amendments retroactively effective to comply with the Act's provisions. Generally, sponsors must amend their plans for HEART Act provisions by the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012, for governmental plans).

The IRS is considering additional guidance on various sections of the Act and requests comments from the public.

The HEART Act created the following Internal Revenue Code Sections:

IRC Section 401(a)(37) - Qualified pension, profit-sharing, and stock bonus plans - Requirements for qualification - Death benefits under userra-qualified active military service

(37) Death benefits under userra-qualified active military service.— A trust shall not constitute a qualified trust unless the plan provides that, in the case of a participant who dies while performing qualified military service (as defined in section 414 (u)), the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan had the participant resumed and then terminated employment on account of death.

IRC Section 414(u)(12) - Definitions and special rules - Special rules relating to veterans' reemployment rights under USERRA and to differential wage payments to members on active duty - Treatment of differential wage payments

(12) Treatment of differential wage payments

(A) In general

Except as provided in this paragraph, for purposes of applying this title to a retirement plan to which this subsection applies—

(i) an individual receiving a differential wage payment shall be treated as an employee of the employer making the payment,

(ii) the differential wage payment shall be treated as compensation, and

(iii) the plan shall not be treated as failing to meet the requirements of any provision described in paragraph (1)(C) by reason of any contribution or benefit which is based on the differential wage payment.

(B) Special rule for distributions

(i) In general Notwithstanding subparagraph (A)(i), for purposes of section 401 (k)(2)(B)(i)(I), 403 (b)(7)(A)(ii), 403 (b)(11)(A), or 457 (d)(1)(A)(ii), an individual shall be treated as having been severed from employment during any period the individual is performing service in the uniformed services described in section 3401 (h)(2)(A).

(ii) Limitation If an individual elects to receive a distribution by reason of clause (i), the plan shall provide that the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution.

(C) Nondiscrimination requirement

Subparagraph (A)(iii) shall apply only if all employees of an employer (as determined under subsections (b), (c), (m), and (o)) performing service in the uniformed services described in section 3401 (h)(2)(A) are entitled to receive differential wage payments on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the employer, to make contributions based on the payments on reasonably equivalent terms. For purposes of applying this subparagraph, the provisions of paragraphs (3), (4), and (5) of section 410 (b) shall apply.

(D) Differential wage payment

For purposes of this paragraph, the term "differential wage payment" has the meaning given such term by section 3401 (h)(2).

IRC Section 3401(h) - Definitions - Differential wage payments to active duty members of the uniformed services

(h) Differential wage payments to active duty members of the uniformed services

(1) In general

For purposes of subsection (a), any differential wage payment shall be treated as a payment of wages by the employer to the employee.

(2) Differential wage payment

For purposes of paragraph (1), the term "differential wage payment" means any payment which—

(A) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) while on active duty for a period of more than 30 days, and

(B) represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer

Using an ESOP as an Exit Strategy

The Journal of Accountancy (March 2010) has a great article on ESOPs. The ESOP Exit Strategy explores the advantages of using an ESOP as a succession planning tool:

• S corporation tax attributes make ESOPs very attractive. More companies installing ESOPs are arriving at an employee-owned company often with 100% of the stock.
  
• S corporation and C corporation attributes (including the IRC § 1042 tax-free rollover) may be combined to forge a flexible succession plan meeting the goals of sellers, senior management and ESOP participants. (See Increasing Capital Gains Rates and Section 1042 Sales for more information)
  
• The potential for future tax increases magnifies the tax incentives enjoyed by ESOPs.
  
• An aging population increases the demand for succession alternatives, including ESOPs.
  
• Optimal financial results are obtained when the ESOP is combined with ongoing communications to educate employees about the responsibilities and obligations of ownership.
  
• ESOPs are practical for both business owners and CPA firms.
  

It defines some of the issues to consider before installing an ESOP. Here are some of the key takeaways:

• When a business owner is evaluating their business transition options, the seller could sell to a strategic buyer (if available), but would lose control over what happens after the sale:

  In mature markets or economic down cycles, strategic buyers may not be available or may be unwilling to pay what a long-term owner believes the business is worth. In addition, the synergies that make a purchase attractive to many strategic buyers generally involve consolidation, which frequently includes facility closings, discontinuation of product lines or services, layoffs, name changes and other transitional moves that operating owners find incompatible with their loyalty to other shareholders, employees, customers and communities where they operate.

• When selling to an ESOP, the selling shareholders control the transition process:
  
  One important aspect of a company's ESOP installation is that current shareholders control the transition process. They determine the full range of transaction attributes including whether the ESOP will be installed, when the transaction will take place, how much stock will be sold, and the financing details.
  
• Another benefit to selling to an ESOP is that the CPA will continue to maintain a relationship with the company. As a company's trusted advisor, the CPA will be positioned to continue advising the company for many years and may even be a strong candidate to serve as an ESOP trustee:
  

  While CPA firms are typically not independent of their clients for the purposes of providing ESOP valuations, CPAs individually are often strong candidates to serve as ESOP trustees where there are no real or perceived conflicts of interest. By the nature of their training and familiarity with accounting, finance, corporate governance and regulatory literacy, CPAs often possess the skills required of ESOP trustees... Serving as an adviser on such issues as corporate governance, strategic thinking and best internal control practices are other venues for CPAs to provide services to ESOP clients.

• ESOPs also allow the selllers to sell in stages:
  
  The selling shareholders may elect to sell any amount of their stock from a small block to 100%. This means that the transaction is scalable. Selling a smaller block of stock may mean the transaction is more easily financed from existing lines of credit, reducing the company's risk of default if events suddenly turn negative. If a piecemeal approach is adopted, the shareholders may structure the transaction so that control remains with the sellers until the controlling block of stock is sold to the ESOP. This popular strategy helps ensure the company's survival by avoiding excessive leverage.

The article also explores implementing an ESOP in a professional services firm, noting that state law will be a key factor in establishing a firm. We have previously explored some examples of ESOP-Owned CPA Firms.

ESOPs Create Jobs

Employee Ownership and Job Growth discusses the relationship between employee ownership and job growth and how Key Studies on Employee Ownership and Corporate Performance have found that employee owned companies outperform their counterparts. [ESOPs also Increase Employee Wealth and Wages and Provide Greater Employment Stability and Increase Job Satisfaction.]

The post also cites Why Employee Ownership is Necessary for Economic Growth, an article written by the Treasurer of R.E. Kramig & Co., Inc. that explains the benefits of ESOPs and cites their ESOP company as an example:

For example, Kramig Insulation has been in business since 1896 and is headquartered in Lockland, Ohio, with revenues now over $25 million. Were it not for ESOPs, Kramig would have either continued to be owned by two well-to-do businessmen or sold to a private equity group out of state. Favorable tax treatment of ESOP companies, however, has instead allowed our company to be 100% employee owned, of which almost 20% is owned by females and minorities.

Kramig employs an average of 300 employees a week, both union and non-union. No participant has ever had to invest one penny of their cash in the company. Moving to an ESOP has had the following outcomes:

1. Meaningful retirement for "Main Street" employees.

2. Higher levels of employee performance through an ownership culture.

3. An opportunity for all employees to have ownership in a private business with no capital of their own put forth.

4. Retention of employees during economic slowdowns.

5. Investment in projects such as green technology and real estate management, which have led to new hiring.

It is thus imperative that we continue the bipartisan legislative policies that incentivize such a structure.

One takeaway from an ESOP advocacy panel discussion on getting involved in government was that many Congressional representatives do not even know what an ESOP or the current outstanding ESOP legislation, which makes the need to Remaining Vigilant even more important.

Hoffman v. Tharaldson Motels Inc. Employee Stock Ownership Plan, D.N.D., No. 3:08-cv-109, 2/26/10

In Hoffman v. Tharaldson Motels Inc. Employee Stock Ownership Plan, D.N.D., No. 3:08-cv-109, 2/26/10, a U.S. District Court for the District of North Dakota found that a plan amendment providing for the conversion of stock to cash for the ESOP accounts of terminated participants (a.k.a. Segregation of Accounts) was not a violation of the anti-cutback provisions of IRC Section 411(d)(6)(C) - Minimum vesting standards - Special rules - Accrued benefit not to be decreased by amendment.

Forcing Terminated Participants out of Company Stock no ERISA Violation discusses the findings:

Chief Judge Ralph R. Erickson said in his opinion that an employer offering a plan which provides terminating participants a single sum distribution in employer stock "may modify the plan to provide the equivalent distribution in cash without violation of the anti-cutback provisions" of ERISA.

According to Erickson, the finding is supported by the comments at the time the regulations were under consideration by the Department of the Treasury, which note that it has become easier for individuals to replicate the various payment choices available from qualified plans through other means, such as a rollover to an IRA, and that requiring a plan to continue to offer all existing payment options – such as keeping company stock in the plan - "often imposes significant administrative burdens that are disproportionate to any corresponding benefit to [plan] participants."

Finally, Erickson said the expectation of the plaintiffs, that the TMI stock would increase in value should TMI be sold, is not an accrued benefit, but rather an expectation not covered by the anti-cutback rule. "The 2006 Amendment is permitted by law and the cash out option to departing employees protected their accrued benefits under the Plan," Erickson concluded.

While many ESOP practitioners feel that account segregation is legal, the ESOP community is still waiting for clarification of the IRS Position on Segregation Plan Provisions.

The Congressional Company Visit

Today I will be participating in an ESOP advocacy panel discussion on getting involved in government. We will be discussing the recent Positive ESOP Legislation and the need to Remain Vigilant. We will also be planning some trips to visit Capital Hill.

The ESOP Association is currently running a series of tips for Scheduling a Meeting with your Congressional Representative:

• Part 1 – The most effective way to obtain Congressional support is to arrange a company visit. "To make the factual case – since 1982, no member who has visited an ESOP company in his or her Congressional District or State has failed to take the pro-ESOP position."
  
  
• Part 2 – This part provides guidance on how to call or write to schedule a company visit. "But emails and faxes are frequently ignored if arrangements are not made ahead of time to email or fax a staff person directly. So when discussing the formal written invitation, ask if you can email it directly to the person handling the member of Congress schedule. If you are not given a specific person's email address, rely on a letter. If faxing, only fax to the person who has told you, "I will expect your fax.""
  
  
• Part 3 – This part discusses the best time for a company visit. "So the best time to arrange a visit with a member of Congress is when there are no crisis ESOP issues to be decided by Congress, or in other words, NOW. Specific Time: The best time for a Congressional visit would be during Employee Ownership Month at one of the company's EOM events, during October."

We have previously shared a link to a Capital Hill Visit Kit and some recaps of recent visits in Capital Hill Visit Recap, Incredible Success Rate: Visiting 73% of Elected Representatives, and Recap of a 2008 Illinois ESOP Capitol Hill Visit. All of our ESOP legislative coverage can be found using the legislation label.

Employee Ownership in the United Kingdom

The March 1, 2010 Employee Ownership Update is online and discusses the following:

• Conservatives in UK Now Want to Expand Worker Ownership to All Public Sectors
• New NCEO Data Looks at Frequency of Broad-Based Option and Stock Purchase Plans
• ABC News Story on Bob's Red Mill
• Foundation for Enterprise Development Sponsors Essay Contest on Employee Ownership
• Janich, Dodge Appointed to the NCEO Board

The Update discusses how the Conservative Party in the United Kingdom has called for privatization into employee-owned companies through 'worker co-operatives':

David Cameron has renewed a pledge to give public sector workers the chance to form co-operatives to run services as part of a push to woo Labour voters.

Staff of taxpayer-funded services, such as primary school teachers and nurses, would decide how they were run - within certain national standards.

Mr Cameron said it would "unleash a new culture of public sector enterprise".

Employee Ownership of public services – A Success Story notes that co-ownership will be an issue in the upcoming elections and shares an example of employee ownership that has worked in the United Kingdom.

UPDATE 3/2/10: Here is a link to additional information about a policy document issued by the Conservative Party that will use co-ops to shake up public services.

It also discusses the National ESOP Coverage of Bob's Red Mill Natural Foods and the NCEO's initial findings of how many companies have broad-based option plans:

There is no easy way to find out how many companies have broad-based option plans (plans offered to most or all employees) or ESPPs. There is no required government registration for these plans, so the only practical way to find out is to look in the benefits section of their careers page on the Web or, in some cases, in their 10-K filings (many companies do not provide all of this information there, however). So the NCEO has been painstakingly going through a list of over 2,000 large public companies to compile who has plans and who does not. We will also soon have data on other kinds of broad-based equity plans (restricted stock, stock appreciation rights, and phantom stock). So far, we have found that about 12% of the companies have broad-based options and about 30% have ESPPs.

DOL Issues Revised Investment Advice Regulation

The DOL has announced two new rules to improve retirement security. As you may recall, the DOL announced final regulations in January 2009 in January 2009 before putting them on hold and ultimately withdrawing them in November 2009. One of the two new rules is a revised investment advice rule "limited to the implementation of the PPA statutory exemption relating to investment advice". Here is an overview of the proposed investment advice regulation:

Overview of Proposed Investment Advice Regulation

• After review, the Department decided to propose a revised rule limited to the implementation of the PPA statutory exemption relating to investment advice.
  
  
• The proposed regulation allows investment advice to be given under the statutory exemption in two ways. One is through the use of a computer model certified as unbiased. The other way is through an adviser compensated on a "level-fee" basis (i.e., fees do not vary based on investments selected by the participant).
  
  
• Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive. The regulation contains some key safeguards and conditions, including:
  
  
• Requiring that a plan fiduciary (independent of the investment adviser or its affiliates) select the computer model or fee leveling investment advice arrangement.
  
• Imposing recordkeeping requirements for investment advisers relying on the exemption for computer model or fee leveling advice arrangements.
  
• Requiring that computer models must be certified in advance as unbiased and meeting the exemption's requirements by an independent expert.
  
• Establishing qualifications and a selection process for the investment expert who must perform the above certification.
  
• Clarifying that the fee-leveling requirements do not permit investment advisers (including its employees) to receive compensation from affiliates on the basis of their recommendations.
  
• Establishing an annual audit of investment advice arrangements, including the requirement that the auditor be independent from the investment advice provider.
  
• Requiring disclosures by advisers to plan participants.

More Employee Engagement and Listening Ideas

We have recently discussed Creative Meeting Ideas and Using An Employee Committee to Informally Improve Communication. How to Make* Employees Listen explains that while you cannot force employees to listen, knowing your audience, setting an example, and trying to eliminate obstacles are three strategies to help you control your "communications team building culture" so that employees will decide to listen on their own. It also shares some engagement listening tools:

• Clearly communicate departmental objectives, and solicit input from your employees on what they can do to help achieve them.
  
  
  
• Ask employees for advice in areas where they have expertise.
  
  
  
• Create a committee of employees at different levels and areas of responsibility that has "New Ideas" in its title – and as its objective.
  
  
  
• Same as above, but with the title/objective of creating and implementing workplace team building activities.
  
  
• Implement "lunch & learns."
  
  
• If your firm is small enough – have your CEO conduct one-on-one career advancement meetings with those interested in a leadership role.
  
  
• "90 percent solution" – give employees 90% ownership in each project.
  
  
• Do 10-minute daily stand up meetings in departments.

Government – Get Involved! In Madison, Wisconsin

I will be the moderator of Government – Get Involved!, a panel presentation that will take a look at the current ESOP legislative environment. The session will be on Wednesday, March 3, as part of the Wisconsin Chapter Spring Conference and Awards Reception in Madison, Wisconsin:

Government – Get Involved!

This session will review current ESOP legislative and regulatory hot topics, the 2009 legislative efforts of Wisconsin ESOP Companies, and the 2010 plans for visiting congressional representatives in Washington D.C., as well as a discussion on how you and your company can help with ESOP advocacy.

Paul Karch from Godfrey & Kahn, Sherri McDermott from Sentry Equipment, and Sandy Paavola from Enterprise Services, Inc. will also be on the panel. In addition to gaining lots of valuable information, state chapter events offer a great opportunity to network with other ESOP companies and advisors. If you see me at the conference, I hope you will stop by and say hello. Please send me an email and let me know if you will be attending so I can look for you.

2009 RMD Withholding Rules

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) provided a waiver of the requirement to take Required Minimum Distributions (RMDs) for the 2009 plan year. The Retirement News for Employers – Winter 2010 Edition provides an example, noting that the first amounts distributed are RMDs from earlier years not yet distributed, followed by RMDs in the current year:

I am retired and I turned 70½ last year. I received a payment from my former employer's defined contribution (DC) plan on January 30, 2010. Can I roll over this payment?

Maybe. You may only roll over a payment from a DC plan if it is an eligible rollover distribution (ERD). Certain payments from qualified plans, such as required minimum distributions (RMDs) and substantially equal periodic payments (SEPPs), are not ERDs and, therefore, may not be rolled over.

Since you turned 70½ last year and are retired, under normal circumstances you would have had to receive an RMD for 2009 by April 1, 2010. However, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) waived 2009 RMDs from IRAs and most DC plans, such as profit-sharing, 401(k), 403(b) and governmental 457(b) plans. WRERA did not waive 2010 RMDs and, therefore, you must take a 2010 RMD based on your December 31, 2009, account balance by the end of 2010. To determine which payments from a plan during a calendar year are RMDs, Treasury Regulation §1.402(c)-2, Q&A-7 provides that the first amounts distributed are RMDs from earlier years not yet distributed, followed by RMDs for the current year, until the amount distributed equals RMDs due through the end of the current calendar year.

Applying this rule to your case, if the January 30 payment was the first payment you received from the plan in 2010, you must first apply the payment to the 2010 RMD (because, due to WRERA, there was no RMD for 2009). If the January 30 payment is more than your 2010 RMD, the excess may be rolled over, assuming it is not a SEPP.

Also note that ERDs are subject to mandatory 20% withholding, under Code §3405(c), on the amount includible in income if not rolled over in a trustee-to-trustee transfer.

Mandatory 20% Withholding Applies to 2009 RMDs Paid in 2010 notes that while all 2009 RMDs are eligible rollover distributions (ERDs), 2009 RMDs paid prior to January 1, 2010 are subject to the 10% optional withholding rules (per IRC Section 3405 - Special rules for pensions, annuities, and certain other deferred income) and 2009 RMDs paid in 2010 are subject to the mandatory 20% withholding rules (per IRC Section 3405 - Special rules for pensions, annuities, and certain other deferred income).

Mandatory 20% Withholding Applies to 2009 RMDs Paid in 2010

The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) permits participants in defined contribution plans to waive required minimum distributions (RMDs) for the 2009 plan year. Any recipient of a 2009 RMD can roll over that amount to an eligible retirement plan or an IRA. 2009 RMDs paid prior to January 1, 2010 were subject to optional withholding rules. However, RMDs paid between January 1, 2010 and April 1, 2010 are subject to the mandatory 20% federal income tax withholding that applies to eligible rollover distributions.

March 15 Employer Contribution Deadline (without extension)

The Retirement News for Employers – Winter 2010 Edition provides a reminder that the deadline to make ESOP contributions for a calendar-year filer is March 15. With a valid extension, that date can be extended until September 15:

Deadline for Making Employer Contributions

Employer contributions to a defined contribution (DC) plan can be made until the due date of the employer's tax return, including extensions, regardless of when the tax return is actually filed. For example, a calendar-year corporate income tax return is due on March 15, but, with a valid extension, the corporation has until September 15 to both file its tax return and deposit employer contributions into its DC plan's trust or IRA. If contributions are not deposited timely, the employer must amend its tax return and pay any tax, interest and penalties that may apply.

The employer's DC contributions for a year can be made until the extended due date of the tax return for that year if:

• the plan was established by the end of the calendar year; and
• the plan treats these contributions as though it had received them on the last day of the calendar year.

However, a SEP plan sponsor has until the due date of the year's income tax return, including extensions, to both set up and fund the SEP plan for the year.

It also provides some upcoming mandatory deadlines, noting that non-calendar-year plans will need to adjust some of the dates:

• March 1: Paper Forms 1099-R and Form 1096 for 2009 distributions due to IRS. Benefit Payment Government Filings (IRS Forms 1099-R, 1096, 945)
  
• March 15: Application of Waiver for 2009 Minimum Funding Standard for defined benefit plans due.
  
• March 15: ADP/ACP distributions of 2009 excess amounts, with earnings, due to highly compensated participants to avoid 10% excise tax (June 30, in the case of certain eligible automatic contribution arrangements.)
  
• March 15: Form 1042S, Foreign Person's U.S. Source Income Subject to Withholding, and Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, due to IRS to report retirement plan distributions and income tax withheld from distributions made to nonresident aliens.
  
• March 15: 2009 corporate employer contributions due to take tax deduction (with no corporate filing extension).
  
• March 31: Electronic filing of Forms 1099-R for 2009 distributions due to IRS. Benefit Payment Government Filings (IRS Forms 1099-R, 1096, 945)
  
• March 31: Last day for sponsors of single employer defined benefit plans to obtain AFTAP certification from enrolled actuary to avoid possible 10-percentage-point decrease in presumed AFTAP.
  
• April 1: Sponsors of single employer defined benefit plans that have not received a certified AFTAP from the enrolled actuary should review benefit restrictions under Code §436 to determine whether additional restrictions apply or whether other action is required.
  
• April 15: Deadline for returning 2009 participant deferrals, with earnings, in excess of $16,500 ($22,000, if 50 or older).
  
• April 15: Deadline to make 2009 traditional and Roth IRA contributions.
  
• April 15: First quarterly defined benefit contribution installment due for the 2010 plan year.
  
• April 15: 2009 self-employed individual and partnership contributions due to take tax deduction for 2009 (with no filing extension).
  
• April 30: Last day to adopt EGTRRA pre-approved defined contribution plans, and submit them for a determination letter, if desired, to the IRS.

Positive ESOP Legislation and Remaining Vigilant

There has been a lot of positive ESOP legislation introduced in the 111th United States Congress:

• S. 2914: United States Employee Ownership Bank Act
  
• S. 2909: WORK Act
  
• H. Con. Res. 204: Expressing continued support for employee stock ownership plans
  
• H.R. 3586: S Corporation ESOP Promotion and Expansion Act of 2009
  
• S. 1612: Employee Stock Ownership Plan Promotion and Improvement Act of 2009
  
• H.R. 692: To amend the Internal Revenue Code of 1986 to exclude from gross income compensation received by employees consisting of qualified distributions of employer stock

While the ESOP community certainly deserves to be proud of their hard work in Meeting with their Congressional Representatives and Visiting with their Elected Representatives in Washington DC, everyone should continue to be aware of some of the recent proposed ESOP cuts:

• The Bush Administration Presidential Panel on Federal Tax Reform proposed replacing the current retirement plan structure with Employee Retirement Savings Accounts (ERSAs). The original proposal did not specifically address ESOPs. The proposed 2008 version clarified that it did not include ESOPs, but many questions were unanswered. (February 2007).
  
• The Congressional Budget Office (CBO) recommended Repealing 404(k). (February 2007)
  
• A Treasury Conference on Business Taxation and Global Competitiveness proposed reducing the corporate tax rate by eliminating "tax loopholes". One of the "special provisions" mentioned is "Special ESOP Rules". (July 2007)
  
• President Bush considered a fresh plan to cut the corporate tax rate that would eliminate the above-mentioned "tax loopholes". (August 2007)
  
• Rangel's Corporate Tax Proposal proposed cutting the corporate tax rate by eliminating "tax loopholes". Like the July Treasury Department report, Rangel's tax proposal eliminated "Special ESOP Rules" and included a provision that would create an additional income tax on synthetic equity and negatively impact many S Corporation ESOPs. (October 2007)
  
• President Obama asked Paul Volcker to Lead a Panel on Tax-Code Overhaul by December 2009. It is possible that they will return with solutions to increase taxes by eliminating "tax loopholes", including the ESOP rules that have already been suggested. (March 2009)
  
• The Congressional Budget Office (CBO) again recommended repealing 404(k): CBO Option 22: End the Preferential Treatment of Dividends Paid on Stock Held in Employee Stock Ownership Plans (August 2009)
  
• White House Tax Panel Stays Out Of Public Eye noted that the task force has held no public meetings and has not revealed whom the panel has met with in private. (September 2009)
  
• Obama Picks Simpson, Bowles for Panel on Cutting the Deficit discusses how President Obama has signed an executive order creating a commission focused on reducing the federal debt. (February 2010)
  
• Uncertain future for Obama's tax reform panel discusses how the tax reform panel may be folded into the fiscal commission review. (February 2010)

Although many of the proposals have expired, Obama's tax reform panel (or its successor panel or commission) may utilize some or all of the "tax loopholes" identified above to "fund" their proposed tax changes. This is why it is essential that the ESOP community continue to find as many ESOP Allies in Congress as possible.

In related coverage, we have recently discussed how Capital Gains Rates will be increasing in 2010 and a Proposal to Repeal ESOPs.

National ESOP Coverage: Bob’s Red Mill Natural Foods

Although the ABC News coverage doesn't specifically mention the ESOP, Owner of Multi-Million Dollar Company Hands Over Business to Employees celebrates the fact that Bob Moore has sold Bob's Red Mill Natural Foods to his employees via an ESOP:

Employee-Run Business

Moore's work is a way of life and his employees are a second family, which is why he announced this week that he's handing over the keys to his 209 employees.

Moore said he's gotten countless buy-out offers over the years, but he couldn't envision selling the business to a stranger.

"It's the only business decision that I could make," he said. "I don't think there's anybody worthy to run this company but the people who built it. I have employees with me right now that have been with me for 30 years. They just were committed to staying with me now and they're going to own the company."

The company will now be run by an Employee Stock Ownership Plan (ESOP) -- the idea being that a company's stock is put in a retirement plan for its employees, but the stock is never held or bought directly by individuals. When a vested employee retires, he can pull out money from the trust.

On 81st birthday, Oregon man gives company to employees discusses how selling to an ESOP enables business owner(s) to have more control over the future of their company and reward the employees that helped build and grow it:

"This is Bob taking care of us," said Lori Sobelson, who helps run the business' retail operation. "He expects a lot out of us, but really gives us the world in return."

Moore declined to say how much he thinks the company is worth. In 2004, however, one business publication estimated that year's revenue at more than $24 million. A company news release issued this week stated that Bob's Red Mill has chalked up an annual growth rate of between 20 percent and 30 percent every year since.

"In some ways I had a choice," Moore said of what he could have done with the company he founded with his wife, Charlee, in 1978. "But in my heart, I didn't. These people are far too good at their jobs for me to just sell it."

It's not that the offers aren't there. Hardly a day goes by that Nancy Garner, Moore's executive assistant, doesn't field a call or letter from someone wanting to buy the privately held company or take it public.

"I had four messages waiting when I returned from a recent vacation," she said. "Three of them were buyout offers." Garner said she and other employees are floored by Moore's plan, under which any worker with at least three years tenure is now fully vested.

"We're still learning all of the details," Garner said, "but it's very humbling to be part of a company that cares this much about its employees."

Hat tips to Bill and Todd.

For more information on the benefits of ESOPs, read our discussions on how ESOPs Increase Employee Wealth and Wages and Provide Greater Employment Stability and Increase Job Satisfaction. We have also discussed how the tax benefits of selling to an ESOP will become more attractive with the upcoming 69% Increase in Capital Gains Rates.

Nestlé Purina Petcare Co. v. Commissioner of Internal Revenue, No. 09-1381 (8th Cir. 2010)

We have previously discussed how the IRS Will Continue to Litigate Deductible Redemptive Dividends and some related cases. In Nestlé Purina Petcare Co. v. Commissioner of Internal Revenue, No. 09-1381 (8th Cir. 2010), the U.S. Court of Appeals for the Eighth Circuit affirmed the Tax Court's ruling (Ralston Purina Co. v. Commissioner, 131 T.C. No. 4 (September 10, 2008)) that found that IRC Section 162(k) renders payments to an ESOP that were distributed to terminated participants nondeductible under IRC Section 404(k) because they are in connection with a redemption of stock.

For a history of Deductible Redemptive Dividends Litigation and discussions on how the courts originally allowed a company to use redemptive dividends to make distribution payments in Boise Cascade Corp. v. U.S. (9th Cir., No. 01-36086, 5/20/03) and General Mills v. United States, No. 06-3547 (D. Minn. 1/14/08), see Deductible Redemptive Dividends Used to Fund ESOP Distributions.

The Keeper of the Company Culture: The CEO

One of the themes in a recent The Ownership Culture Check-Up presentation was the importance of upper management's commitment to building a strong ownership culture. That commitment starts with the President and CEO. The CEO as Keeper of the Culture discusses the importance of strong leadership in developing and maintaining a strong ownership culture. By modeling and recognizing desired behaviors, the CEO of American Fidelity Assurance set the stage for a strong culture:

American Fidelity Assurance has built a strong culture of fairness and respect that looks to Bill, as the CEO, as an example for behavior and values. With a high degree of accountability for upholding the company values and a goal of maintaining people's confidence in the organization as a whole, Bill is well aware of his role in the culture of the organization and takes personal responsibility for upholding the culture already in place.

The CEO, a third generation leader, affects the culture via company security and fair practices:

When considering how a CEO's behavior can affect the culture of an entire organization and its success, Bill approaches the issue in two areas: company security and fair practices. He cites the positive, upbeat culture at American Fidelity as the source of people's confidence that the company is stable, especially since the company is privately held. Bill added, "I think when people can have a comfortable feeling about their jobs, it gives them the ability to focus on what they're doing as opposed to focusing on what their future looks like."

The article also discusses the company's five values ("AFs") of "always fair,... always flexible, future-oriented, focused on niche markets, and financially secure," and how they live out their AFs during their decision making process:

These values came into place 15 years ago after a process where the senior management team came together to conclude what American Fidelity was all about. Bill takes responsibility to adhere to these values – especially in decision making – even if it can be "uncomfortable," as he puts it. For him, there is no gap between corporate values and personal values: "It's important that the values you hold for yourself really are your values and not just something you are trying to do that's not real."

We previously discussed the importance of the Relationship Between the CEO and Human Resources in building, improving, and sustaining a strong company culture.

The Ownership Culture Check-Up at the Chicago Marriott Oak Brook Hotel

I will be presenting The Ownership Culture Check-Up on Thursday, March 4 at the Chicago Marriott Oak Brook Hotel as part of the Illinois ESOP Chapter Annual Conference: The Past, Present and Future of ESOP's:

THE OWNERSHIP CULTURE CHECK-UP

How does your ownership culture rate? Whether you are just starting to build an ownership culture or you have an ESOP communications committee and a fully engaged team, this session will evaluate and measure where you are at and identify action items to take your ownership culture to the next level.

Tony Lessmeister from Forsythe Technologies will also be presenting as part of a one-day, three-track conference. In addition to gaining lots of valuable information, state chapter events offer a great opportunity to network with other ESOP companies and advisors. If you see me at the conference, I hope you will stop by and say hello. Please send me an email and let me know if you will be attending so I can look for you.