Why Aren’t ESOPs Growing Faster

I previously discussed some of the reasons Why the Number of ESOPs is not Growing at a Faster Rate. The Employee Ownership Blog recently discussed this issue in Why Aren’t ESOPs Growing Faster in the U.S.?:

"There are several popular theories on why more ESOPs are not created each year:

• Time involved in setting up the ESOP
  
• Feasibility study is expensive
  
• Ongoing administration costs are expensive
  
• A current owner may get more money if the company is sold outright as opposed to selling to the employees
  
• There is a loss of perceived control for the owner which leads to the theory of a psychological barrier to sharing information and ownership with employees"
  

Deductible Redemptive Dividends Used to Fund ESOP Distributions, Employee Ownership in 1903

The January 29, 2008 Employee Ownership Update is online and discusses the following:

• Peculiar Decision Allows General Mills Deduction for Redemptive Dividends Used for ESOP Distributions


• Old Account of Employee Ownership at Proctor & Gamble Worth a Look


• CEPI Extends Risks and Controls Project to Restricted Stock Awards/Units
  

Deductible Redemptive Dividends Used to Fund ESOP Distributions

[UPDATE 5/9/08: See General Mills v. United States, No. 06-3547]

The Update discusses a district court summary judgment that allowed a company to use a redemptive dividend to make distribution payments:

• The case discussed was General Mills v. United States, No. 06-3547 (DSD/SRN, Jan. 14, 2008).
  


• General Mills redeemed stock to fund a portion of their cash distributions. They treated the redemptions as deductible dividends under IRC Section 404(k) - Deduction for dividends paid on certain employer securities.
  


• The IRS denied the deduction and sued based on IRS Revenue Ruling 2001-6 - Section 404.--Deduction For Contributions Of An Employer To An Employees' Trust Or Annuity Plan And Compensation Under A Deferred-Payment Plan and IRC Section 162(k) – Stock reacquisition expenses. The IRS lost the ruling.
  

The Update discusses some concerns in the ESOP community:

"The use of dividends this way raises serious concerns among ESOP practitioners. First, it means companies get a deduction twice, once for contributing the dividend to repay the ESOP loan (as happened here) and again for redeeming the stock with another dividend. Worse, the employees now may not be able to take favorable tax treatment on these distributions by, for example, rolling them into other plans, if the IRS concludes the distributions are dividends. It is not clear whether the IRS will challenge the ruling or whether other companies have used this or now will."

This case is similar to Boise Cascade Corp. v. U.S. (9th Cir., No. 01-36086, 5/20/03):

• The company redeemed stock of participants upon termination and either distributed the cash to participants or allowed it to be invested in another investment account. If the participant received a cash distribution, the company considered the redemption a deductible dividend under IRC Section 404(k) - Deduction for dividends paid on certain employer securities.
  


• The company amended a prior return to take the deduction. The IRS disallowed it. The district court and the appeals court ruled for the company.
  


• As a result of this case, the IRS published IRS Revenue Ruling 2001-6 - Section 404.--Deduction For Contributions Of An Employer To An Employees' Trust Or Annuity Plan And Compensation Under A Deferred-Payment Plan.
  

While the participants were able to roll over the distributions, they would not have been able to do so had the case been resolved at the time the distribution was processed. As a result, the company could have structured their distribution policy as follows to meet the deductibility needs of the company and the rollover needs of the participant:

• If the participant elected a cash distribution, the cash would be treated as a deductible dividend, would not be eligible for rollover treatment, and would not be subject to IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans.
  


• If the participant elected a stock distribution, the stock would not be treated as a deductible dividend and the distribution would be eligible for rollover treatment.
  

This Employee Ownership Update and Ninth Circuit Case Creates Deduction Opportunity for Companies with ESOPs provide additional discussions of the Boise Cascade case.

Employee Ownership in 1903

The Update discusses an employee ownership plan established in 1903 by Procter & Gamble. The plan “allowed employees to buy stock for a 2.5% down payment, with the rest borrowed from the company, but repaid out of profit sharing (a 12% or more "dividend" on wages available only to those buying stock). The plan was not available to more highly paid employees. P&G would buy the stock back at the purchase price if the employee left and the stock had dropped in value.”

The Update provides a link to The World’s Work, which discusses the plan. The plan is also discussed in Built to Last: Successful Habits of Visionary Companies and mentioned on the Procter & Gamble website.

ESOP Planning: Plan Expenses

Most 401(k) plan sponsors have become accustomed to performing a due diligence review of plan expenses every one to five years. This review is done primarily because ERISA provides that qualified retirement plans are solely for the benefit of the participants and that plan expenses must be reasonable. The review also helps ensure that fees as well as the supplementary tools provided are competitive with the marketplace.

Since expenses for most ESOPs are paid outside of the plan, fees are typically not reviewed as closely. However, a due diligence review would still be beneficial. Are the fees that you are paying reasonable? Are they competitive in the marketplace? While it is important to have competent ESOP advisors who you trust, does the cost of using the advisors exceed the benefits that you are receiving? A thorough analysis, which may or may not include obtaining proposals from other firms, could result in lower fees or more included services, and you may not even have to switch advisors to obtain this adjustment.

It is also important to make sure that you are comparing apples to apples. I am sure you have heard that cliché before, but it is definitely relevant with plan expenses. Some advisors charge one fee for all the services you will need, while others charge for each service separately. When you are comparing the overall cost, it is important to make sure you are using the total cost for a particular time period (usually one year). To make things easier for your due diligence review, you should request that all advisors provide you with a specific and detailed estimate of what the total expenses would be for one year.

Some advisors will also bundle into their fees services you do not need or can easily process in-house. You should not hesitate to request a separate quote based on removing functions that you do not need or could process in-house. You may discover that you can significantly reduce your overall fees (and may even improve your advisor's profitability, a win-win for both parties). At a minimum, you will get a good idea of the flexibility of the advisor.

In addition to price, here are some other factors to consider:

• Quality of service (How often are mistakes made, how are mistakes handled?)
  
• Timeliness of service (Do you get your deliverables when you want them? How persistent do you need to be to get your deliverables on time?)
  
• Technology (Do you get reports, statements, and other information in the form and format that you desire?)
  
• The advisor's background and experience with ESOPs of similar size and complexity
  
• Your relationship with the advisor (Sometimes you cannot put a price tag on trust.)

The ESOP Planning process includes planning for both the current year ESOP administration process as well as the various events that take place over the life of an ESOP. This article is one in a series of ESOP Planning articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC.

ESOP Association Mission and Vision Statements/Innovations Award/AACE Award

The Employee Ownership Blog discusses the purpose of the Employee Ownership foundation and the mission and vision of the ESOP Association:

• Employee Ownership Foundation's primary purpose – “to support programs that will increase the level of awareness and appreciation of the benefits of employee ownership and increase the number of employees who have access to this benefit.”
  
• The ESOP Association’s mission – “to educate and advocate about employee ownership with an emphasis on ESOPs.”
  
• The ESOP Association’s vision:
  
  “We believe that employee ownership improves American competitiveness…that it increases productivity through greater employee participation in the workplace…that it strengthens our free enterprise economy and creates a broader distribution of wealth…and that it maximizes human potential by enhancing the self-worth, dignity, and well-being of our people.
  
  Therefore, we envision an America where employee ownership is widely recognized as a catalyst for economic prosperity…where the great majority of employees own stock in the companies where they work…and where employee ownership enables employees to share in the wealth they help create.
  
  And we look for our nation to become for all the world an example of prosperity with justice through employee ownership.”

For more information on mission and vision statements, check out Build a Strategic Framework: Mission Statement, Vision, Values ...

NCEO Innovations Award

The NCEO has extended the Innovations Award deadline to February 7, 2008:

"The Innovations in Employee Ownership Award (the "Innovations Award") is an annual award recognizing creative ideas that help make employee ownership stronger, and publicizing those ideas so others can learn from them. Innovations can deal with employee participation, entrepreneurship, communication programs, education, plan design, or other ideas that strengthen employee ownership."

Annual Awards for Communications Excellence (AACE)

The AACE award deadline is March 3, 2008:

"The Annual Awards for Communications Excellence (AACE) are sponsored by The ESOP Association to recognize the outstanding communications programs of its members. AACE winners are chosen by a panel of five judges made up of both management and non-management employee owners, each of whom has demonstrated active experience and interest in the field of ESOP communications.

Every AACE entry is a winner because each one represents a company with a commitment to ESOP communications. It is hoped that the AACE program will be a motivating factor in encouraging more ESOP companies to share this valuable benefit with their employees.

All entries will be displayed at The ESOP Association's Annual Conference in May, in Washington, DC and at the Communications Seminar in July, in Chicago. Winners will be honored at the Awards Banquet during the Annual Conference.

Any Corporate Member of The ESOP Association may enter material from its ESOP employee communications program."

Additional Information on the Innovations and AACE Awards
Here are some links to prior blog posts that discussed the above-mentioned awards:

• Should You Consider An ESOP?
• 30th Annual ESOP Conference: ESOPs: Creating a REAL Ownership Society
• Combining Broad-Based Employee Ownership and Participation in the Management Process

Rollovers to Roth IRAs/402(f) Safe Harbor Notice

Pre-Tax Rollovers to Roth IRAs discusses how a plan participant may roll over distributions from qualified retirement plans to Roth IRAs beginning January 1, 2008.

Prior to 2008, a two-step process was required to move funds from a pre-tax retirement plan to an after-tax IRA. First, the funds were rolled to a traditional IRA (pre-tax). Second, the traditional IRA (pre-tax) was converted to a Roth IRA (after-tax) and included in gross income (subject to the $100,000 AGI limitation).

While the new rules provide for a direct rollover (still not subject to IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans), the distribution must still be included in income and the AGI limitation still applies (until 2010). For more information on rollovers and conversions, here are links to the IRS Rollover Chart and Conversion Eligibility - Find out if you're allowed to convert to a Roth IRA.

IRC Section 402(f) Notice

The article also reminds you to make sure your 402(f) Notice (required by IRC Section 402(f) - Written explanation to recipients of distributions eligible for rollover treatment) has been updated. It also notes areas that the IRS has not recently updated their Safe Harbor Explanation - Certain Qualified Plan Distributions:

"The IRS has not updated its model 402(f) notice for the non-Roth plan to Roth IRA law change. In addition, the Service has not yet updated its model 402(f) notice to take into account distributions from Roth 401(k) plans or other expanded rollover options (such as rollover of after-tax contributions to a 403(b) plan). Nor has the IRS issued a model notice for a nonspouse beneficiary entitled to roll over a death distribution."

FYI - The automatic rollover requirements under IRC Section 401(a)(31) - Direct transfer of eligible rollover distributions are also not included in IRS Notice 2002-3 - Safe Harbor Explanation - Certain Qualified Plan Distributions.

UPDATE 5/10/08: The Safe Harbor Explanation provided in IRS Notice 2002-3 also does not include the PPA change that changed the notice effective time from 90 days to 180 days. This is also discussed in IRS Issues Additional PPA Guidance

Distribution Notices. PPA requires changes to distribution notices (including joint and survivor annuity rule notices) given in plan years that begin after December 31, 2006, regardless of the actual distribution date. Under the PPA changes, a distribution notice may remain in effect for up to 180 days instead of 90 days as under pre-PPA law. In addition, the notice must contain a description of the consequences of a participant’s failure to postpone the distribution. The plan must modify its distribution notices to provide this description for any notice given after the 2006 plan year. However, until 90 days after the IRS issues regulations on the subject, the plan administrator need only make a “reasonable attempt” to comply. The Notice provides a safe harbor for the “description of the consequences” statement. To meet the safe harbor, the description must be written in a manner reasonably calculated to be understood by the average participant. In the case of a defined contribution plan, it must include: (i) a description of the plan investment options and fees available if distribution is deferred; and (ii) the portion of the SPD that contains any special rules that might affect materially the participant’s decision to defer. The Notice does not give any example of the latter, but this might include special taxation available such as income averaging. In the case of a defined benefit plan, the notice must include the same SPD “material information” and, in lieu of investment information, it must describe how much larger benefits will be if the participant defers distribution. That description may be one that includes the financial effect of deferral as described under Treas. Reg. §1.417(a)(3)-1(d)(2)(i).

UPDATE 6/11/08: Is Your 402(f) Safe Harbor Special Tax Notice Out of Date? discusses how several law changes must be incorporated into the Safe Harbor Explanation:

1. The automatic rollover requirements under IRC Section 401(a)(31) - Direct transfer of eligible rollover distributions
2. Information regarding Rollovers to Roth IRAs, as provided by IRS Notice 2008-30 -Miscellaneous Pension Protection Act Changes
3. Changing the days a 402(f) Safe Harbor Special Tax Notice may remain in effect from 90 to 180, as provided by Pension Protection Act of 2006 (PPA) (Public Law 109–280—Aug. 17, 2006)
4. "Rollover rules for Roth 401(k) and 403(b) deferrals"

Here is a link to the Relius Special Tax Notice that has been updated for the law changes.

UPDATE 6/12/08: Reporting a Rollover to Roth IRA on IRS Form 1099-R

This post discusses an example. In the example, the participant is 50 years old, is requesting a distribution of his $100,000 account balance, and is electing that $25,000 be withheld for voluntary withholding. The article discusses how this scenario requires two IRS Forms 1099-R:

The first Form should report $75,000 as a gross (Box 1. Gross Distribution) and taxable (Box 2a. Taxable Amount) distribution and code G—Direct rollover and rollover contribution (Box 7. Distribution Code(s)) to indicate the rollover. Please note that it is unusual for an IRS Form 1099-R with a code G distribution to also report taxable income. Also note that this portion of the distribution is a rollover and is not subject to the IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans.

The second Form should report $25,000 as a gross (Box 1. Gross Distribution) and taxable (Box 2a. Taxable Amount) distribution and as withholding in Box 4. Federal Income Tax Withheld. Since this portion is not a rollover, code 1—Early distribution, no known exception (Box 7. Distribution Code(s)) should be used to indicate the taxpayer is under age 59 ½ and is subject to IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans.

2008 Great Place to Work Trends – Employee Ownership and Workplace Flexibility

The Great Place to Work^® Institute has released the list of 100 Best Companies to Work for 2008. Last year we discussed how over 50% of the 100 Best Companies to Work for 2007 (with stock) had broad-based employee ownership programs. While specific employee ownership data is not published with the list, it appears that the percentage of companies with broad-based employee ownership remains significant. Here are some other trends noted in the press release:

• Studies show being a great place to work is good for business, as publicly traded “100 Best” companies have consistently outperformed the S&P 500 by a wide margin. A 2007 paper "Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices," found that an “annually rebalanced portfolio of FORTUNE magazine's ‘Best Companies to Work For in America’ earned 14 percent per year from 1998 to 2005, over double the market return. The portfolio also outperformed industry- and characteristics-matched benchmarks.”
  
• 2008 Workplace Trends: Greater Workplace Flexibility & Transparency
  Trends in this year’s FORTUNE “100 Best” results include:
  
  o Companies are finding more ways to share their profits with employees – through programs such as stock options and deferred profit sharing. Of the 27,039 employees surveyed, 71 percent find the statement, “I feel I receive a fair share of the profits made by this organization” to be true. In 1998, only 56 percent did.
  o Work-family benefits continue to improve. This year 72 companies offer domestic partner benefits, 69 offer adoption assistance and 85 provide eldercare services.
  o More companies are competing for workers by offering flexible work schedules, compressed workweeks, telecommuting and sabbaticals. Eighty-four of the “100 Best” allow employees to telecommute or work at home.”

Non-Spouse Rollover Rule Changes

IRA Update: Mandatory or Voluntary? Congress Creates More Confusion on the Non-Spouse Rollover Provision under PPA 2006 provides another summary of the non-spouse beneficiary rollover rules:

"The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetimes as if they had inherited an IRA. That was the plan."

The article discusses the following:

• “So What's the Rule Now?” – “It now appears that non-spouse transfers will remain voluntary and not be mandatory for 2008.”
• “But, In General, Tell Your Clients to Do an IRA Rollover If They Can!”
• “Timeline of the Rules for Non-Spouse Direct Rollovers”

Are nonspouse beneficiary rollovers required? also discusses the history of the nonspouse beneficiary rollover rule changes.

Benefit Payment Government Filings/Net Unrealized Appreciation

If you paid any benefit payments last year, then you will have to prepare and file some government forms. The General Instructions for Forms 1099, 1098, 5498, and W-2G provides guidance on how to prepare and file the forms.

• IRS Forms 1099-R – This form must be provided to anyone who received a plan distribution (of $10 or more) during the calendar year. The participants' copies must be mailed by January 31. Copies must be filed with the IRS by February 28 (or March 31 if filing the forms electronically).
  
• IRS Form 1096 – This form must be sent as a transmittal document whenever paper copies of the IRS Forms 1099-R are sent to the IRS. If they are submitted electronically, then this form is not required.
  
• IRS Form 945 – This form is used to report federal withholding from non-payroll payments, including distributions from qualified retirement plans. The deadline is January 31. This year's Form 945 is due by January 31, 2008. However, if you made deposits on time in full payment of the taxes for the year, you may file the return by February 12, 2008.

Generally, you are required to file electronically or by magnetic media if you file 250 or more information returns.

As you are preparing the IRS Forms 1099-R, you may be processing some forms for participants that received lump sum distributions that may qualify for NUA treatment.

What is Net Unrealized Appreciation (NUA)?

Net Unrealized Appreciation (NUA) is the appreciation of company stock held in a qualified retirement plan.

What are the benefits of NUA?

IRC Section Sec. 402(e)(4) - Taxability of beneficiary of employees' trust - Other rules applicable to exempt trusts - Net unrealized appreciation provides special tax benefits for the distribution of company stock from a qualified retirement plan if certain requirements are met. Only the original cost basis of the company stock is taxed at ordinary income rates. The NUA is taxed at long-term capital gains rates at the time the company stock is sold (which is usually immediately for privately held ESOPs). Any additional appreciation after the distribution from the qualified plan to the time the company stock is sold is taxed using the long-term or short-term capital gains rates, depending on the holding period. In addition, any applicable 10% early withdrawal penalty is only applied towards the cost basis and not the NUA.

What requirements must be met to take advantage of the tax benefits?

Generally, a participant must take an in-kind lump sum distribution (within one tax year) directly from the plan. Please see the above-mentioned code section for more details.

How are distributions that qualify for NUA treatment reported on IRS Form 1099-R?

Here is a sample IRS 1099-R for your reference: 2007 Form 1099-R - Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Assuming a distribution qualifies for NUA treatment, the amounts would generally be recorded as follows:

• Box 1 – Gross distribution – This amount will be equal to the fair market value of the shares plus and cash distributed.
  
• Box 2a – Taxable amount – This amount will be equal to the cost basis of the shares and any cash distributed.
  
• Box 6 - Net unrealized appreciation in employer's securities – This amount will be equal to the difference between the cost basis and the fair market value of the shares.

When should NUA be used and when shouldn't it be used?

This article evaluates the benefits of using NUA and provides examples. The article considered the following factors in making a NUA decision:

1. Tax rates
   
2. Absolute NUA
   
3. Ratio of the NUA to the FMV of the company stock
   
4. Time Horizon
   

The article also discussed a model prepared to help evaluate the different distribution options. Based on the assumptions of the model, for short holding periods, electing NUA and immediately selling the stock and reinvesting it in a diversified equity portfolio was the best choice. For longer holding periods, not electing NUA and rolling the sale proceeds into an IRA, reinvesting them in a diversified equity portfolio was the best choice. Due to the high volatility of company stock, holding the company stock after distribution was never the best choice. The article also discussed the possibility of identifying specific shares of company stock to sell to maximize the NUA treatment while minimizing the amount required to be distribution directly to the participant.

Additional Information

This post contains another NUA discussion NUA – A Great Tax Benefit, and Lots of company stock in your 401(k)? Better learn about NUA (net unrealized appreciation) is another NUA-related article.

Kelso, Chrysler Bailout, Avis, Shared Capitalism, Tribune, Rangel Tax Proposal

Dancing With Tycoons? is an interesting article that provides a snapshot of one person's viewpoint of the history of ESOPs. The article includes discussions about the following events in the history of ESOPs:

• Louis Kelso, the author of The Capitalist Manifesto, convinced Louisiana Sen. Russell Long to provide tax benefits for ESOPs.
• The Chrysler Loan Guarantee Act of 1979, which helped bail out Chrysler, required Chrysler to establish an ESOP as part of the bailout.
• Avis employees purchased the car-rental company in 1987 for $1.75 billion (more information can be found here and here).
• A Harvard professor started the shared capitalism project.
• Sam Zell used an ESOP to facilitate the $8.2 billion buyout of Tribune Co.
• Today, the Rangel Tax Proposal would prevent most Tribune-like transactions from occurring in the future, and would also have other negative side-effects for current and future ESOP companies.

401(k) Debit Cards – How Do They Work and Are They a Good Idea

Last year we discussed the reasons to take or avoid taking a 401(k) participant loan in Should I Borrow From My 401(k) Plan?. We also discussed the development of a 401(k) Debit Card/Line of Credit. Just Put It on My 401(k) Debit Card provides more details on how a 401(k) debit card would work:

“The loan begins only after the money is removed from the account. Instead of a payroll deduction, participants are billed directly, and then pay back the loan through the same mechanisms used to repay a credit card. Depending on the employer, some may also qualify for a revolving loan -- taking out and paying back money as they need it.”

Is the 401(k) debit card a good idea? The 401k Debit Card: Probably One of the Worst Ideas Ever identifies the “So-Called Benefits”, including why it is a stretch to refer to them as benefits, and the “Obvious Drawbacks” of a 401(k) debit card:

"The So-Called Benefits"

• Provides more flexibility, encouraging participants to increase participation.
• Eases the administrative burden on the human resources department.
• Provides more flexibility for loan repayment

"The Obvious Drawbacks"

• Provides more access and quicker access to retirement funds, making it easier to make impulse spending decisions.
• Provides a method of repayment, which is billing separate from payroll deductions, that makes it less likely that participants are going to have the money and/or discipline to make monthly payments.

ESOP Communications Committee, Ownership Culture

Does Your Company Have a Communications Committee? asks ESOP companies if they have created any employee participation programs and contemplates the importance of having an employee communications committee:

"In the employee ownership community this is a bit of a contentious question and here's why. Some people strongly believe that in order for true ownership to take place, there needs to be a committee to help disseminate information, organize meetings, and answer questions about the ESOP. This committee basically acts as a gateway and one-stop-shop for all ESOP related questions. However, others don't feel it's necessary. They're all owners at the company they have access to information and can ask any question at any time making a committee unneeded.

There is no hard evidence either way but opinions are strong in this debate. Some companies attribute their success to the company's ESOP committee while others don't feel it would add anything to the company."

ESOP Communication Committees

ESOP Committee Development contains a discussion on ESOP communication committees:

"A cultural change-oriented committee is likely to be responsible to encourage and foster a strong sense of "ownership" among company employees and assist in building increased productivity and profitability. Some ESOP Communication Committees are responsible only for planning events, notices, newsletters and other forms of communication. Both of these types of committees can make a significant contribution to building an ownership culture and adding to company success.

A good ESOP Communication Committee can expand communication throughout the organization. Of particular importance in these efforts is the ability of an effective communication committee to inform managers' understanding of employees' perceptions of the meaning of ownership. In short, an effective ESOP Communication Committee helps managers understand what employees really think, rather than what the managers think employees think. Decreased misperceptions in this area are positively correlated with employees' self-identification as owners.ⁱⁱ

The specific success of the ESOP Committee is often correlated with the extent to which its mission and existence is embedded in a company-wide cultural change effort. When the group is part of a larger change in the surrounding social organization, its likelihood of success and high productivity is increased, as is the likelihood of overall improvements in financial performance of the organization.ⁱⁱⁱ Such a range of concurrent efforts at cultural changes are a common feature among many high performance organizations.^iv"

Related Information

Here are some ownership culture related posts:

• Ownership – A Three-Step Formula to Creating a Motivated Workforce
• Employee Ownership Cynics
• Creating a Supportive Environment and Cost of Building an Employee Ownership Culture
• Ownership Culture vs. Traditional Culture
• Immediately Focusing on Building an Ownership Culture

Here are some additional posts related to the Economic Performance Survey (EPS):

• The Economic Performance of ESOP Companies
• More Top Small Workplaces Coverage/Employee Ownership Month
• Creating an ESOP is a Good Business Decision

Revised IRS Forms, End of Cycle B, Two Proposed Treasury Regulations

The IRS has released a special edition of the Employee Plans News: Employee Plans News: Special Edition, January 2008. The special edition announces three new revised forms as well as a revision in progress. It also contains a reminder that the Cycle B submission period for determination applications ends January 31, 2008, and Cycle C starts on February 1, 2009. It also discusses two proposed regulations issued in December.

Revised Forms

• IRS Form 4461-A, Application for Approval of Master or Prototype or Volume Submitter Defined Benefit Plan (revised December 2007) - For more information, check out IRS Puts out Revised Application for Plan Qualification
  
• IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts - This form "reflects a change in IRS policy for taxpayers who miss taking their required minimum distribution from an IRA because of a reasonable error. Taxpayers who feel they meet the reasonable cause criteria set out in IRC §4974(d) are now allowed to not pay the 50% excise tax when they file their Form 1040. The Instructions for Form 5329, under Waiver of Tax on page six, instruct taxpayers to attach a statement of explanation, complete Part VIII of the form, make the appropriate "RC" annotation, and enter the amount they want waived on line 52."
  
• IRS Form 5558, Application for Extension of Time To File Certain Employee Plan Returns (revised January 2008) - "Due to the fact that notices regarding the approval/denial of extension requests for Form 5330 filers will be automatic beginning in January 2008, all sections below the signature and date lines have been eliminated."
  
• IRS Form 5330, Return of Excise Taxes Related to Employee Benefit Plans – This form is currently being revised. "The redesigned form, grouping the various excise taxes by due date, will streamline processing and add excise taxes brought about by the Pension Protection Act. The changes are discussed in the Instructions for Form 5330 on page one under What's New. The revised version (January 2008) will be available online on or about January 18, 2008."

Cycle B Ends January 31, 2008 - Cycle C Begins February 1, 2008

The article discusses the end of the Cycle B submission period, which is January 31, 2008:

• The end of the Cycle B submission period is rapidly approaching. The IRS will accept applications for determination letters for Cycle B individually designed defined benefit and defined contribution plans postmarked no later than January 31, 2008.
  
• Cycle B submitters are those plans sponsored by an employer with an EIN ending in "2" and "7" as well as multiple employer plans. These applications will be reviewed taking into account the requirements of EGTRRA and other changes in qualification requirements and guidance identified in the 2006 Cumulative List published in Notice 2007-3 - 2006 Cumulative List of Changes in Plan Qualification Requirements. Cycle B submissions will be required to follow the procedures in Revenue Procedure 2007-6, which does not require submission of a redlined plan document.
  
• As of February 1, 2008, the IRS will begin accepting determination letter applications for individually designed defined benefit and defined contribution plans for Cycle C; those plans sponsored by an employer with an EIN ending in "3" and "8" and governmental plans, including governmental multiemployer and multiple employer plans. These applications will be reviewed taking into account the requirements of EGTRRA as well as other changes in qualification requirements and guidance identified in the 2007 Cumulative List published in IRS Notice 2007-94 - 2007 Cumulative List of Changes in Plan Qualification Requirements. Cycle C submissions will be required to follow the procedures in IRS Revenue Procedure 2008-06 - Rulings and determination letters.
  
• Under the staggered procedures, sponsors of individually designed plans submit applications for determination letters once every five years, in 5-year cycles. Not all individually designed plans have the same cycle, so be sure that your plan is submitted within the appropriate cycle (unless you wish to submit an "off-cycle" filing). For example, Cycle C plans should not begin to submit applications until February 1, 2008 and no later than January 31, 2009.
  
• For further information on the staggered remedial amendment period for individually designed plans, including how off-cycle filings affect reliance, see Revenue Procedure 2007-44.

The Pension Protection Act Blog does an excellent job of describing the staggered remedial amendment period in One Last Look at Cycle B and Looking Ahead to Cycle C, including a discussion on the Employee Plan Determinations Quality Assurance Bulletin - EGTRRA Staggered Remedial Amendment Period and Remedial Amendment Cycle for Individually Designed Plans.

UPDATE: Additional information can be found in the following article: Cycle C determination letter submission period begins on Feb. 1, 2008

Proposed Cash Balance Regulations

The IRS and the Treasury Department released Treasury Regulation - REG–104946–07 - Hybrid Retirement Plans.

Section 430 Regulations Issued

The IRS and the Treasury Department released Treasury Regulation - REG-139236-07 - Measurement of Assets and Liabilities for Pension Funding Purposes:

"Highlights of the proposed regulations are:

• Rules for determining a plan's target normal cost and funding target under §§430(b) and 430(d) (for a plan that is not in at-risk status), including guidance relating to the application of actuarial assumptions and the plan's funding method.
  
• Rules relating to plan valuation date and the valuation of a plan assets. Under the proposed regulations, except in the case of a small plan (100 or fewer participants), a plan's valuation date is the first day of the plan year. Also, plan assets must be valued on the valuation date either at their fair market value or at the "average" value of assets.
  
• Rules relating to the interest rates to be used to determine the present value and to make other calculations (including calculations involving shortfall and waiver amortization bases) under §430. The proposed regulations reflect the special interest rate for determining a plan's funding target in the case of airlines that make the 10-year amortization election described in §402(a)(2) of PPA.
  
• Special rules related to determining the funding target and making other computations for certain defined benefit plans that are in at-risk status for the plan year. In particular, the proposed regulations provide guidance regarding the additional assumptions that apply when calculating the funding target and target normal cost for plans in at-risk status.
  

The new funding rules are generally effective for plan years beginning on or after January 1, 2008; however, these proposed regulations are effective for plan years beginning on or after January 1, 2009. Plan sponsors can rely on these proposed regulations for purposes of satisfying the requirements of section 430 for plan years beginning in 2008."

2007 Developments in Stock Drop Litigation

The January 15, 2008 Employee Ownership Update is online and discusses the following:

• New Guidance on ESPP and ISO Reporting
  
• French Finance Minister Wants to Democratize Stock Options
  
• Developments in Stock Drop Cases in 2007
  
• Quotable
  
• Innovations Award: February 1 Deadline

The Update discusses IRS Notice 2008-8 - Information Reporting Requirements Under Internal Revenue Code § 6039, including the requirement to file an information return with the IRS for incentive stock options (ISOs) and employee stock purchase plans (ESPPs). It also discusses the 2007 developments in stock drop litigation:

"The most significant development of the year was that three appeals courts each ruled that participants who have been paid out of plans and later alleged fiduciary abuses caused them to suffer losses can sue to recover their own alleged individual losses, rather than just being able to sue for equitable relief (meaning benefits would have to be restored in the plan, something of little practical value to them). Until this year, courts generally ruled that paid out employees lacked standing to sue for individual damages, but the appeals courts all concluded this left employees with no practical remedy. Just how the tricky issue of how much the damage cost the employees (assuming the court agrees there were fiduciary abuses) remains unresolved. For instance, if the stock hit a high of $85, then fiduciaries ignored information that would lead it to fall to $35, is the damage $50 per share? Is the highest value the right reference point? Might the shares have dropped some amount even absent the impact of the information? Courts will have to sort that out in the future.

The lawsuits and changes in rules for diversification in 401(k) plans have led the amount of employer stock in 401(k) plans to drop from 19% in 2002 to 11% in 2006."

Here are some related stock drop litigation links:

• Stock Drop Litigation
• Decrease in Large Public ESOPs
• Two Recent Employer Securities Court Cases
• Stock Drop Litigation
  

The Update also has a reminder of the February 1 deadline for the Innovations in Employee Ownership Award.

MBA Course in Employee Ownership

In my post titled Why the Number of ESOPs is not Growing at a Faster Rate, I stated that we need to look at what actions need to be taken to increase the ESOP growth rate. One way to increase the ESOP growth rate is by making sure that employee ownership is included in academic discussions with our next generation of business leaders and advisors. A Quiet Breakthrough discusses the first ever MBA course in employee ownership:

"It took students deep into the nature of equity as a currency available to business to achieve entrepreneurial goals; the nature of wealth creation and the rationale for sharing ownership; the techniques for creating the "stake in the outcome" for employees that makes it all work; the factors that go into creating an "ownership culture" or a "community of stakeholders" and the reasons why it makes sense financially, personally and socially"

The article also discusses the benefits of including employee ownership in academic discussions:

"To the extent that the nation's graduate schools of business begin to incorporate discussion about employee ownership into curricula, employee ownership's likelihood of finding a permanent place in the economic landscape of our country (and the world) is increased exponentially. Our generation of educators has the opportunity and the obligation to help the coming generations of business leaders, teachers and advisors learn and think positively about employee ownership."