The ESOP Association (TEA) – Wisconsin Chapter’s Spring Conference: Piecing It All Together (April 15, 2008)

The ESOP Association (TEA) – Wisconsin Chapter is holding their spring conference, Piecing It All Together, on Tuesday, April 15, 2008, at the Country Springs Hotel. ESOP Insourcing LLC is a proud sponsor of the event. I will be presenting a session on ESOP Jargon and will discuss terminology and acronyms that you will encounter throughout your ESOP experience.

Here is a link to the conference brochure: Piecing It All Together - April 15, 2008

The Wisconsin Chapter of the ESOP Association provides a local presence for Wisconsin ESOP companies and Wisconsin companies considering implementing an ESOP. The ESOP Association is a national organization, headquartered in Washington, DC, to educate and advocate employee ownership.

Let me know if you have any questions about the event or the Wisconsin Chapter. If you are planning on attending, please stop by and say hi, as I would love the opportunity to meet you.

Countering Negative ESOP Coverage with the Facts

The New Retirement Drama: ESOPs is an editorial/article about Bear Stearns and ESOPs:

• It starts by discussing the sale of Bear Stearns and its impact on employees. While stating that this situation is different than Enron, it asks, "How will retirement savings held in Employee Stock Ownership Plans (ESOPs)--such as the one at Bear Stearns--fare if more companies disappear into the mortgage morass."
  
  
• The article then discusses how employees owned 30% of the company (without putting the 30% in proper context), and appears to imply that most or all ESOP participants in the entire ESOP universe are concerned about their ESOP retirement savings.
  
  
• It then appears to imply that the Bear Stearns sale could cause future problems for companies using ESOPs as a retirement savings tool: "Observers say it's too early to determine if the Bear Stearns debacle will force other companies to reconsider ESOPs as a retirement savings tool, or if employees will call for change, but there is a precedent."
  
  
• The article concludes with another statement suggesting that Bear Stearns is causing other companies to reconsider their ESOPs: "And you can be that other ESOPs will closely follow the outcomes to determine if they need to rethink their plans."
  
  
• The article also discusses concerns about being Too Concentrated in Employer Stock ("Employees must diversify their retirement holdings. And companies must help them.") However, in the very next sentence the article concedes "That's starting to happen" and cites some positive Employee Benefit Research Institute (EBRI) company stock trends.

In other words, the article focuses on lumping Bear Stearns and ESOPs together without looking at all of the facts. It then brings up diversification as another concern before conceding that the issue is improving. To get a more complete picture, consider the following:

• The ESOP only held 3% of the company stock.
  
  
• Bear Stearns is not like Enron. Enron employees had 401(k) plans that were heavily invested in company stock. The Bear Stearns ESOP was 22% of the company's total retirement assets and was funded by the company.
  
  
• Studies have shown that a typical ESOP participant has about three times the total retirement assets of a non-ESOP participant.
  
  
• Studies have shown that ESOP companies are more likely to have another diversified retirement plan than non-ESOP companies.
  
  
• A typical ESOP participant has diversified assets about equal to those of the non-ESOP participant.
  
  
• 401(k) participants, on average, hold significantly less company stock in their accounts than they did in 1996 - "In 2006, average holdings of company stock in 401(k) plans amounted to 11 percent of total assets, down from 19 percent in 1996…Because primarily large, publicly traded companies tend to offer company stock in their 401(k) plan, only 3 percent of 401(k) plans offer company stock as an option…"7.3 percent of 401(k) participants have 90 percent or more of their 401(k) assets in company stock, while 44.5 percent have no company stock at all"

Negative Media Coverage

Bear Stearns and Negative Media Coverage expands on the ongoing negative media coverage:

Well, once again, Enron comparisons are running rampant. As you have probably heard, Bear Stearns, which is in the process of being acquired by JP Morgan Chase, had an ESOP. Bear Stearns' stock ownership among employees was no where near the level of Enron (estimates put the size of the ESOP around 3%), employees had much diversification in their primary retirement plan, a 401(k) plan, and the stock ownership was primarily among the top executives and senior executives. However, these facts have not changed the media's view and while most of the stories are now revolving around the buyout and what will happen to the stock, there are still a few negative references to the ESOP and employees' retirement savings.

The Employee Ownership Foundation post compares the media coverage to the Tribune Company buyout and discusses what the ESOP community should do when they see negative media pieces.

Ongoing Coverage

Stay current on the ongoing Bear Stearns/ESOP coverage by checking our Bear Stearns Information Page.

Non-Spouse Rollover Rules

We have been following the Non-Spouse Rollover Rule Changes since the passage of the PPA. The Pension Protection Act Blog notes that Rollovers to NonSpouse Beneficiaries Are Back With Passage of H.R. 3361 But For 2009 Instead of 2008:

Last week, the House of Representatives finally passed H.R. 3361, the Pension Protection Technical Corrections Act of 2008 (PPTCA). Since the Senate passed their version of the PPTCA, S. 1974, late last year, the Senate should make quick work of reconciling the differences between their bill and H.R. 3361, and have a version of PPTCA ready for the President to sign as early as mid-April.

For rollovers to nonspouse beneficiaries, the passage of H.R. 3361 has significant impact because of the IRS' position on rollovers to nonspouse beneficiaries.

The rule change is part of H.R. 3361: Pension Protection Technical Corrections Act of 2007, which was passed by the House of Representatives on March 12, 2008. Since the Senate passed a similar version, S. 1974: Pension Protection Technical Corrections Act of 2007, on December 19, 2007, it appears the bills could be reconciled and passed in the near future. This legislation is discussed further in House of Representatives Moves Forward on Pension Protection Technical Corrections Act.

Updates/Related Blog Posts:

• Rollovers to Roth IRAs/402(f) Safe Harbor Notice (1/24/08)
• Non-Spouse Rollover Rule Changes (1/22/08)
• Are nonspouse beneficiary rollovers required? (12/27/07)
• Non-spouse Beneficiary Rollovers (2/9/07)
• ERISA Compliance Calendar/PPA/Notice 2007-07 (1/19/07)
• Update on 409(p) Final Regulations and Notice 2007-07 (1/16/07)
• Miscellaneous Pension Protection Act Changes (1/11/07)
• Rollovers to Roth IRAs/402(f) Safe Harbor Notice (1/24/08)

Related Links:

• H.R. 3361: Pension Protection Technical Corrections Act of 2007
• S. 1974: Pension Protection Technical Corrections Act of 2007
• Employee Plans News - Special Edition, February 13, 2007
• IRS Notice 2007-7, 2007-5 I.R.B. 395 - Miscellaneous Pension Protection Act Changes
• The Pension Protection Act of 2006 (PPA)
  

• BenefitsLink Message Boards - NonSpouse Rollovers, Mandatory in 08?
  
• IRA Update: Mandatory or Voluntary? Congress Creates More Confusion on the Non-Spouse Rollover Provision under PPA 2006
• Good news gone awry - New retirement-plan rule was good news for beneficiaries, until IRS stepped in
• Revisiting Rollovers to NonSpouse Beneficiaries Before 2008
• 2007 Interim and Discretionary Amendments
• Nonspouse Beneficiary Rollover Document Change
• Definition of Spouse
• Update on Interim Amendments and EGTRRA Restatements

Open-Book Management

The latest Employee Ownership Blog post, Open Book Management – Does Your Company Practice?, discusses open-book management (OBM):

The theory behind OBM is that all employees are provided information on the financials so they can and, hopefully, will make better and more informed decisions as workers and in the case of an ESOP company, as owners. The employees are also provided with training so they can properly read and understand the financial information and then provided with a forum to discuss the information.

Each ESOP company is different in terms of what information is shared and how much. There are no hard and fast rules as to the right amount but most people in the employee ownership community can agree that the sharing of some information is important for an ESOP company to fully develop an ownership culture and mindset.

The Wikipedia open-book management page discusses the Jack Stack/SRC Holdings management technique:

The technique is to give employees all relevant financial information about the company so they can make better decisions as workers. This information includes, but is not limited to, revenue, profit, cost of goods, cash flow and expenses.

The basic rules for Open-Book Management are as follows:

• Give employees training to understand the financial information
• Give employees all relevant financial information
• Give employees responsibility for the numbers under their control.
• Give employees a financial stake in how the company performs.

In a company fully employing Open-Book Management employees at all levels are very knowledgeable about how their job fits into the financial plan for the company. However taking a company from "normal" to open is not as easy as just starting training classes on income statements and balance sheets. Employees rarely find it compelling to understand these numbers. In order to overcome this problem Open-Book Management focuses on a "Critical Number". The number is different for every company but it is a number that represents a prime indicator of profitability or break-even point. Discovering this Critical Number is a key component of creating an open-book company. Once discovered then a "Scoreboard" is developed that brings together all the numbers needed to calculate the critical number. The Scoreboard is open for all to see and meetings take place to discuss how individuals can influence the direction of the "Score" and therefore, ultimately, the direction of the Critical Number. Finally a Stake in the Outcome is provided which can be a bonus plan that is tied to Critical Number performance or it can include Equity sharing or both.

Open Book Management How-to-Guide

This Open-Book Management How-to-Guide discusses the origins of open-book management:

"The beauty of open-book management is that it really works. It helps companies compete in today's mercurial marketplace by getting everybody on the payroll thinking and acting like a businessperson, an owner, rather than like a traditional hired hand." So wrote John Case, who was a senior writer at Inc. magazine in 1995 when he coined the phrase "open-book management."

Now, years later, companies are still debating the merits of opening their books to employees and vendors alike. Many tout the benefits, such as improved bottom-line results and employee retention. Still others warn of open-book pitfalls, such as employees using their newfound knowledge against the owners.

To help you learn more about the pros and cons, we've created this guide to the best resources available on Inc.com that relate to open-book management. Learn from the experiences of other entrepreneurs before you decide what's best for you and your company.

The How-to-Guide also contains various open-book management links, grouped in the following categories:

• The Origins of Open-Book Management
• Helping Employees Understand the Financials
• The Risks in Sharing Financials
• From Hired Hand to Businessperson: Changing Employee Perception
• Further Reading

Updates/Related Blog Posts:

• Participative Management is a Key Driver to Exceptional Business Performance (3/10/08)
  Moving from a traditional hierarchal leadership model to an open-book management program for managing financial results is a significant cultural and practical change. Participative management requires….
  
  
• More LaRue, Global Equity Survey, Open-Book Management (3/5/08)
  Open-book management transforms organizations and gives them a major advantage over others who keep employees in the dark. It's not just about generating profits, cash and wealth but also about distributing it for the good of everyone involved – giving those who embrace open-book management a spirit of generosity and a willingness to openly spread the word to help each other succeed.
  
  
• Sharing Financial Information (2/20/08)
  If a company is planning on sharing financial information with employee owners, it's very important to provide the information in the proper context.
  
  
• The Connection between Employee Engagement and the Bottom Line (10/15/07)
  Of the 18 winners, 17 Bosses practice "open-book management" and are teaching employees how to read and understand financial documents.
  
  
• ESOP Companies are More Productive (4/10/07)
  ESOP companies can increase the level of participation by embracing an open-book management style and actively involving the employees (both individually and in workgroups) in the decision-making process.
  

In the News: Maintain the Culture and Say Involved in the Business/ESOPs as an Exit Strategy/On Track for Continued Growth/Strong Management-Employee Relations

Unique Home Solutions (Indianapolis, IN); Koester Cos. (Evansville, IN); Herff Jones (Indianapolis, IN); Wood-Mizer Products Inc. (Indianapolis, IN)

Employee-ownership plans increasingly common tells the ESOP story of Unique Home Solutions, an Indianapolis-based employer of 125, and cites other Indiana-based ESOP companies as examples.

Transition Plan

As the owner started planning for retirement, he knew he wasn’t just looking for the highest price. He wanted to maintain the culture he helped build and stay involved in the business. As a result, he is selling one-third of the company to the ESOP, with plans to eventually sell the rest of the company:

After all, he and his 125 employees worked hard to establish a corporate culture that has helped the service firm triple revenue in recent years—and win the Better Business Bureau's Torch Award for marketplace ethics four times…"The ultimate goal is to make [the company] completely employee-owned," said Dillon, 53. He expects to stay involved for at least 10 more years and wants to increase annual revenue from more than $18 million to $25 million by 2012.

Promoting ESOPs as an Exit Strategy

The article discusses how Indiana State Treasurer Richard Mourdock has first-hand ESOP experience that provided him the means to pursue his political career. He plans to heavily promote ESOPs as an exit strategy:

"Literally, I wouldn't be sitting here [in the treasurer's office] if it weren't for my involvement in an ESOP company," Mourdock said.

As state treasurer, Mourdock hopes to help Indiana become a leader in employee ownership plans. By the end of the month, he said, his office will roll out a "tool box" of literature to help business owners learn more about the exit strategy.

"There's a unique opportunity in the marketplace right now simply because there are so many retiring baby boomers who have the wonderful characteristic of altruism," Mourdock said, saying business owners want to repay the employees who've helped make their business.

Businesses Considering an ESOP Should Be On Track for Continued Growth and Have Strong Management-Employee Relations

The article cites Indianapolis-based Herff Jones (Indianapolis, IN), named the 2007 ESOP Company of the Year by the Indiana Chapter of The ESOP Association, as a success story. The company stresses the importance of communication, teamwork, and trust:

A successful ESOP needs "a lot of communication, some sense of history as an organization, and … some track record of success so employees are not frightened at the prospect" of owning their own company, said Mike Cheek, chief financial officer for Herff Jones. "All of those are true of our situation."

Teamwork and trust, Cheek said, also are pivotal.

"There clearly is an understanding that everyone has a part to play, and everyone is accountable for that part," he said.

The article also cites Indianapolis-based Wood-Mizer Products Inc. as “the archetype of a successful ESOP”, and stresses the importance of having a diversified retirement portfolio.

In the News: Employees Directly Benefiting from their Quality Work, 14-Hour Training Sessions

Leonhardt Manufacturing (Hanover, PA)

Platts visits employee-owned manufacturer in Hanover discusses the story of Leonhardt Manufacturing, a manufacturer of tubular products with 135 employees, and how they are nearing the second anniversary of their ESOP. The article discusses a visit from their U.S. Representative:

Platts, an advocate of ESOPs, said the ability for employees to directly benefit from quality work is the main reason he supports the concept of employee-owned business.

"You have a more direct connection to that return," he said. "It's kind of the American way."

The article also discusses the challenge of educating employees on the concept of stock ownership:

The first challenge was educating employees on the concept of stock ownership, he said.

"People don't understand what it means to be an owner," Jacobs said. "You have to gradually teach people what that means."

The company taught its employees by instituting a 14-hour training session on basic economics.

"That opened people's eyes," Jacobs said.

ESCA/Rangel Tax Proposal/Rangel Supports Employee Ownership?

A report from the Employee-Owned S Corporations of America's (ESCA's) 2008 Leadership Summit provides a political update on the Rangel Corporate Tax Proposal:

"That is what makes it so important that the S ESOP community not stir up a hornet's nest by campaigning actively and aggressively against the Rangel proposal just yet. We are working actively with staff to the Chairman to get a better sense of their intentions. Based upon that intelligence, which we are working to obtain through written submissions and several cordial discussions with Committee staff, we will make a decision about when and how to tackle this issue politically."

I find it ironic that we are discussing the Rangel tax proposal just one year after an ESCA update noted that Rangel told ESCA he supported employee ownership.

The report also discusses a meeting with members of the Treasury Department:

"In remarks to all ESCA conference attendees, Assistant Secretary Swagel observed that the tax treatment of S corporation ESOPs is similar to a consumption tax, which enhances business growth and productivity. He noted the success of the current S corporation ESOP tax structure in encouraging employee ownership among private companies….. With a major pension reform bill enacted more than a year ago and the imminent transition to a new Presidential Administration, both Morrison and Bortz indicated that Treasury guidance on qualified plans in 2008 would be relatively quiet, especially for ESOPs."

Differences between Bear Stearns and Enron

Yesterday we discussed the Bear Stearns sale and noted how a Wall Street Journal article compared Bear Stearns to Enron. Bear Stearns and Employee Ownership, by Corey Rosen from the National Center for Employee Ownership (NCEO), points out some of the differences between Bear Stearns and Enron:

Bear Stearns is not at all like Enron and some other companies several years ago where employees were heavily or primarily invested in company stock, generally in their 401(k) plans, and were left with limited or no retirement assets after their companies melted down.

• In 2007 the ESOP, which was funded by the company, had $285 million in assets. A profit sharing plan had $300 million and a 401(k) plan had $720 million. Assuming these were the only company provided retirement plans, the ESOP contained about 22% of the total retirement assets and was funded by the company.
  
  
• The ESOP held about 3% of the overall company stock.
  
  
• Employees also purchased stock on their own.
  
  
• The remainder of the company stock that was owned by employees was held in nonqualified plans that are generally used to reward key employees.

The article suggests that we need to put this in the proper context:

It is important to put this in the context of ESOPs overall. These plans currently hold about $925 billion in assets and cover about 11.2 million employees. Over 90% of ESOPs are in closely held companies, where they are often used as an ownership transition vehicle. About 40% of ESOP companies are now majority-owned by their plans, a percentage that is rising.

Studies by academics in Washington State and at Rutgers have shown that the typical ESOP participant has about three times the total retirement assets of a comparable non-ESOP participant in a comparable company, and has diversified assets about equal to those of the non-ESOP employee. The large majority of ESOP companies have at least one other retirement plan and, in fact, are more likely to have a diversified retirement plan (that is, a plan other than their ESOP) than comparable companies are likely to have a retirement plan at all. Unlike 401(k) plans, moreover, ESOPs generally make corporate contributions to all employees who have worked for a year or more, whereas 401(k) plans typically only provide any company contributions to those who defer pay into the plan. ESOP contributions are based on relative pay or a more level formula; 401(k) plans are much more skewed, being based on employee deferrals. The result is that ESOPs are much more egalitarian in their benefit distribution, particularly in providing benefits for lower-paid employees who might get little or nothing from their 401(k).

Bear Stearns, High Concentrations of Employer Stock, Statistics: Company Stock in 401(k) Plans

The Week That Shook Wall Street: Inside the Demise of Bear Stearns discusses the details behind the sale of Bear Stearns to J.P. Morgan Chase & Co. Since it is estimated that about 30% of Bear Stearns were employee owned, the issue of being Too Concentrated in Employer Stock is again being revisited. The Job/Stock Double Whammy discusses how employees that are heavily invested in employer stock are at risk of losing their jobs and their savings. It mentions how owning company stock was a part of their culture, as well as for Lehman Brothers Holdings Inc. and Merrill Lynch & Co., who reportedly are each more than 25% employee owned. The article also contains comparisons to Enron and Lucent.

The Employee Benefit Research Institute (EBRI) has released an information sheet to help put the statistics into perspective:

The recent collapse in the value of Bear Stearns shares has led to new interest in the role of company stock in 401(k) plans.

The nonpartisan Employee Benefit Research Institute (EBRI) has done extensive analysis on company stock in 401(k) plans. The primary source of data on holdings in company stock is the EBRI/ICI Defined Contribution Participant Database. The most recent annual publication from this database is for end-of-year 2006 and is available online at www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3838

The August 2007 EBRI Issue Brief reporting those results found that, on average, 401(k) participants today hold significantly less of their account assets in company stock than they did in 1996. Among the highlights about company stock from that latest EBRI/ICI report:

• In 2006, average holdings of company stock in 401(k) plans amounted to 11 percent of total assets, down from 19 percent in 1996 (see Fig. 20 in the August 2007 Issue Brief, url above).
  
• Overall, about 45 percent of 401(k) participants have company stock available to them as an option. Because primarily large, publicly traded companies tend to offer company stock in their 401(k) plan, only 3 percent of 401(k) plans offer company stock as an option (see Fig. 22).
  
• There is significant variation in company stock holdings. The EBRI/ICI database shows that, of those in plans with company stock as an option, 7.3 percent of 401(k) participants have 90 percent or more of their 401(k) assets in company stock, while 44.5 percent have no company stock at all (see Fig. 32).
  
• Among recently hired 401(k) participants in plans that offer the option, 42 percent had company stock in their accounts. This is down from 60 percent in 1998 (see Fig. 37).

Updates:

• Bear Stearns ESOP Litigation Update (8/4/08)
• Increasing the Perceived Value of Employee Ownership, Bear Stearns, Employee Ownership and the Best Companies to Work For (4/6/08)
• Countering Negative ESOP Coverage with the Facts (3/26/08)
• Differences between Bear Stearns and Enron (3/19/08)

Related Links:

• The cases against Bear Stearns
• Johnson & Perkinson Announces Filing of Employee Retirement Class Action Complaint Against The Bear Stearns Companies Inc.
• Hagens Berman Files Third Lawsuit Against Bear Stearns
• Bear Stearns: Crisis and “Rescue” for a Major Provider of Mortgage-Related Products
• A Bear swimming in the murky waters of corporate law
• AGREEMENT AND PLAN OF MERGER by and between THE BEAR STEARNS COMPANIES INC. and JPMORGAN CHASE & CO. - DATED AS OF MARCH 16, 2008
• Bear investors may seek restraining order on buyout
• Bear Stearns and Negative Media Coverage
• The New Retirement Drama: ESOPs
• When You're Invested Too Much in Work
• Bear Stearns braces for legal battles
• Here we go again.
• A Lesson From Bear: Don't Hold Large Chunks of Company Stock
• A Bear Market for 401(k) Plans
• Bear’s Ills Draw Company Stock "Investigation"
• Bear Stearns and Employee Ownership
• The Job/Stock Double Whammy
• The Week That Shook Wall Street: Inside the Demise of Bear Stearns

Four Common Ways to Sell a Company

Last month the Wall Street Journal published a series of articles on ESOPs. The Art of the Sale is another Wall Street Journal article that mentions ESOPs as one of four common ways to sell a company:

• Outright Sale – The article describes this as the simplest method to cash out. This is desirable when the owner's family has no interest in the business, if they are not prepared for the challenges of the business, or if the owner wants to maximize the purchase price (most generally a synergistic buyer). It discusses how stock sales generally benefit the seller and how asset sales benefit the buyer (liability remains with the seller).
  
  [This option is also the de facto default method and generally the only one that can be implemented without proper planning: No One Plans to Fail, But Fails to Plan]
  
  
• Management Buyout – The article notes how the sale price may be smaller due to lending concerns, and notes that it is hard to predict the company's performance under the new owners.
  
  
• Employee Stock Plan – The article discusses employee stock ownership plans (ESOPs) as another alternative, mentioning the reward to employees and the tax benefits as advantages. It discusses the third party valuation bringing a lower price (without mentioning the importance of comparing the after-tax price to properly consider the tax benefits of selling to an ESOP) and the future repurchase obligation as drawbacks.
  
  
• Recapitalization – The article suggests changing the company's capital structure to gradually sell their stake while maintaining control of the company. [Although the article did not mention it, an ESOP can also accomplish this.
  
  We recently discussed an example: In the News: Gradually Selling to an ESOP over Time].

This article provides a good overview of some of the business transition options. It is also a reminder of the benefits of succession planning.

Retirement Plan Checklist for Plan Sponsors

Getting a retirement plan checkup: A guide to self-diagnose problems provides a list of questions for plan sponsors to identify potential problems:

• Has your plan document been amended for all recent law changes?
  
• Does your plan cover a sufficient number of employees?
  
• Have you quickly deposited employee contributions?
  
• Have you provided employees with required notices and reports?
  
• Are fiduciaries protected from liability for investment elections?
  
• Do you have safeguards to prevent your plan from holding excess contributions?
  
• Have you notified the people who service your plan about any plan changes?
  
• Is your plan's operation based on the written terms of your plan document?
  
• Do you have a proper claims and appeals procedure?
  
• Are your participant communications consistent with your plan document?
  
• Are you versed in 2008 rule changes?
  

Employee Decisions Increase Profits/Large Private Company Equity Plans

The March 14, 2008 Employee Ownership Update is online and discusses the following:

• Study Shows Investors Largely Ignoring Options Impact on Accounting in Tech Sector
• The Power of Ten
• Employee Ownership Growing in Europe
• Survey of Large Private Companies Explores Equity Plan Use
  

VATEX (Richmond, VA)

The Update discusses how VATEX, an ESOP-owned supplier of promotional materials, involved employees in the decision making process and ultimately increased profits. The industry has historically used the dozen as their standard shipping unit. Using dozens was creating errors in box counts and causing a high rate of returns. Employees decided to ship by tens instead. This decision reduced errors and increased profits.

This example builds on our discussion earlier this week on the relationship between employee ownership and corporate performance in Participative Management is a Key Driver to Exceptional Business Performance. The Update shared the Vatex example to highlight the relationship between employee ownership and corporate performance:

"Getting people to work harder (trying to work faster with fewer distractions on counting by dozens, for instance) adds only a little to the bottom line; giving people the tools, incentives, and structures to make smarter decisions adds a lot."

Employee Ownership Growing in Europe

The Update discusses the number of employee owners (8.2 million) and employee owned assets (260 billion Euros or $406 billion) owned by the largest 2,500 European countries stated in the latest European Federation of Employee Share Ownership (EFES) Newsletter.

Survey of Large Private Companies Indicates More Reliance on Short-Term Incentives

The Update discusses the results of Private Company Incentive Pay Practices, an October 2007 survey and research report by WorldatWork and Vivient Consulting. The purpose was to answer "how do private companies use short and long-term incentives to motivate, retain and reward their people?":

Respondents use short-term incentives (STIs) extensively, with nearly 80 percent reporting an STI plan at their private companies. In contrast, only about one-third of respondents report having a long-term incentive (LTI) plan in place, which reflects the cost and complexity of implementing such a plan for a private company.

The large size of companies surveyed may make the results less relevant to smaller ESOP companies:

The size of responding organizations ranges from more than $5 billion in revenue to less than $100 million in revenue. The corporate status of responding organizations was primarily C Corp. (37 percent), LLC (26 percent) and S Corp. (20 percent), with a small number of subsidiaries (4 percent) and partnerships (3 percent) also participating.

The research report discusses short-term incentives, bonus plans, long-term incentives, and deferred compensation and summarizes the results as follows:

Private companies rely more heavily on short-term incentives, such as bonuses, than long-term incentives to reward and motivate employees. Where long-term incentives are used, they are reserved for the upper levels of the organization.

Private companies with LTI plans favor stock options and long-term performance awards over other vehicles. In fact, restricted stock—an increasingly popular vehicle at public companies—is used by only 14 percent of the survey respondents that report LTI plans. This indicates that private companies prefer not to grant real ownership and instead favor cash-based plans or stock options that provide liquidity under limited circumstances, such as a change of control.

Study Indicates Stock Options Accounting Reforms are Having Little Impact on Investors

The Update discusses an October study that indicates that the stock option accounting reforms are "having less impact than was expected when they were implemented":

'The Weisel report indicates that many investors are not even bothering to look at the information. Ironically, it is still common to hear advisors urging companies to find ways to minimize the apparent impact of equity plans on their income statements, even though there is not much reason to think it has any effect on share prices."

Due Date of ADP/ACP Distributions of Excess Amounts to Avoid 10% Excise Tax

While I don't have to remind any 401(k) administrators or accountants, March 15 is this Saturday. Since March 15 falls on a Saturday, when are corrective distributions required to be completed to avoid the 10% excise tax under IRC Section 4979(a) - Tax on certain excess contributions?

March 15?

The Retirement News for Employers – Winter 2008 edition appears to have clarified the issue by providing March 15 and March 17 due dates:

MARCH 15

• Application of Waiver for Minimum Funding Standard for defined benefit plans due.
• ADP/ACP distributions of excess amounts, with earnings, due to participants to avoid 10% excise tax.

MARCH 17

Note: The following usually are due on March 15, which falls on Saturday in 2008

• Forms 1042S, Foreign Person’s U.S. Source Income Subject to Withholding, and 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.
• 2007 corporate employer contributions due in order to take tax-deduction (with no corporate filing extension).

MARCH 31

• Electronic filing of Forms 1099-R for 2007 distributions due to IRS.

March 17?

In case that wasn't the answer you were looking for, Applying the 2-1/2 Month Date for Corrective Distributions discusses a different perspective:

• IRC Section 4979(f) - Tax on certain excess contributions - No tax where excess distributed within 21/2 months of close of year provides that no tax shall be imposed on any excess contribution or excess aggregate contribution distributed before the close of the first 2-1/2 months of the following plan year.
  
  
• IRC Section 7503 - Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday provides that "When the last day prescribed under authority of the internal revenue laws for performing any act falls on Saturday, Sunday, or a legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday."
  
  
• Treasury Regulation 301.7503-1(a) - Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday provides that "IRC Section 7503 is applicable only in case an act is required under authority of any internal revenue law to be performed on or before a prescribed date or within a prescribed period."
  
  
• The article states that above-mentioned statutes clearly provide that they apply to this situation: "The distribution of the corrective distributions within 2½ months after the close of the plan year is a specific act required to avoid the application of the excise tax that otherwise will apply to corrective distributions after the 2½ month date. The statutory provision clearly applies to this situation."
  

March 15?

Despite the fact the above-mentioned regulations appear to clearly provide for the next succeeding business day (March 17 this year), the article concludes by recommending the conservative approach (March 15):

"Nonetheless, the IRS recently stated that the deadline for corrective distributions is March 15, 2008. The IRS has been asked to clarify this position. However, in view of the IRS statements, practitioners should note that the IRS may not consider correction on March 17, 2008, to be timely. Therefore, the prudent approach would be for plan administrators to complete corrective distributions of excess contributions and excess aggregate contributions no later than Saturday, March 15, 2008."

2008 Dirty Dozen Tax Schemes and Scams, Including Abusive Retirement Plans, Phishing, and Frivolous Arguments

The IRS issued its 2008 Dirty Dozen list of tax schemes and scams, with phishing scams and frivolous arguments topping the list:

Phishing Scams, Frivolous Arguments Top the 2008 "Dirty Dozen" Tax Scams

IR-2008-41, March 13, 2008

WASHINGTON — The Internal Revenue Service today issued its 2008 list of the 12 most egregious tax schemes and scams, highlighted by Internet phishing scams and several frivolous tax arguments.

Topping this year's list of scams is phishing, which encompasses numerous Internet-based ploys to steal financial information from taxpayers. New to the "Dirty Dozen" this year is a scheme, which IRS auditors discovered, that relates to unreasonable and/or excessive fuel tax credit claims.

"Taxpayers should be wary of scams and promises to avoid paying taxes that seem too good to be true," Acting IRS Commissioner Linda Stiff said. "There is no secret formula that can eliminate a person's tax obligations. People should be wary of anyone peddling any of these scams."

Tax schemes can lead to problems for both scam artists and taxpayers. Tax return preparers and promoters also risk significant penalties, interest and possible criminal prosecution.

Included on this year's list are Abusive Retirement Plans. This appears to broaden the scope of last year's Abusive Roth IRAs:

The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.

Here is the complete IRS 2008 Dirty Dozen Tax Scams list:

1. Phishing
2. Scams Related to the Economic Stimulus Payment
3. Frivolous Arguments
4. Fuel Tax Credit Scams
5. Hiding Income Offshore
6. Abusive Retirement Plans
7. Zero Wages
8. False Claims for Refund and Requests for Abatement
9. Return Preparer Fraud
10. Disguised Corporate Ownership
11. Misuse of Trusts
12. Abuse of Charitable Organizations and Deductions

Here is a link to the IRS 2007 Dirty Dozen Tax Scams.

Comparing Employee Ownership to Hedge Funds, European Federation of Employee Share Ownership (EFES), British Parliament Study

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