ESOP Distribution Issues to Avoid with Plan Documents, Distribution Policies, and Distribution Paperwork

Problems To Avoid In ESOP Distributions reinforces the importance of Distribution Planning by discussing the potential fiduciary, repurchase liability, and participant claim issues that plan sponsors and fiduciaries face when designing their ESOP Distribution Policy. It focuses on three main issues:

• Designing and drafting distribution provisions – Make sure your Plan Document contemplates the IRC Section 409(o) ESOP distribution rules. Look for Conflicts Between the Plan Document and the Summary Plan Description (SPD). Be aware of the exceptions to the statutory right to demand employer securities (put option) as provided by IRC Section 409(h), including the use of the corporate articles or bylaws to restrict participants from taking a share distribution, and the importance that the provisions are drafted correctly:
  

  The Code permits an articles or bylaw restriction so that only employees of a corporation or an employee ownership trust may own shares of a company. However, we often see companies with non-employee shareholders rely on such a provision. We also find that these provisions are often in place or not properly drafted in the corporation's documents, even though the administrator or document drafters incorrectly believe that they are. Note also that corporate articles calling for "statutory close corporation" status are both insufficient for this purpose and create a whole host of corporate governance problems when there is an ESOP shareholder.

• Amendments and using distribution policies – Many ESOP advisors advocate using a separate written distribution policy to define the specifics of the distribution policy. This article discusses their concerns with using a separate written distribution policy, noting that amending the distribution policy is a change in plan terms, which can only be authorized by the plan sponsor (and approved by the board of directors). It also stresses the importance of keeping distribution changes the responsibility of the employer and not the fiduciaries.
  
• Distribution forms and administration –The article discusses the legal and communication issues with using a boilerplate distribution form and the importance of having your forms, disclosures (e.g. 402(f) Safe Harbor Notice), and cover letter(s) reviewed by your ESOP consultant and/or counsel.

This is a great topic to discuss with your ESOP advisors during the ESOP Planning process.