ESOP Planning 2008: Dividends and S Corporation Distributions of Earnings

An ESOP is generally funded by two sources, contributions and dividends. Dividends in an S corporation are generally referred to as S corporation distributions of earnings (S distributions). For purposes of this installment, dividends will refer to both dividends and S distributions unless stated otherwise, while S distributions will not include C corporation dividends. Here are some things to consider when determining your dividends, if any, for the year:

• Have you historically paid dividends? If so, what was the amount or percentage and are the employees accustomed to receiving a certain amount or percentage? If you decide to change how you use dividends, you may need to change your communication strategy accordingly.
  
  
• Why do you pay dividends? Dividends are often used as a method of funding the ESOP when the maximum deductible contribution has been made and additional funds are still needed to make the required loan payments. S distributions are often paid to non-ESOP shareholders so they can pay their share of federal and state taxes on the company's earnings. If S distributions are paid on non-ESOP shares, they must also be paid on the ESOP shares. C corporations sometimes use pass-through dividends as another benefit for the participants (If so, remember the 2009 Change in Reporting Distributions of 404(k) Dividends on IRS Form 1099-R). A few ESOPs have taken an aggressive position and tried to use deductible redemptive dividends to fund ESOP distributions, running the risk of IRS litigation.
  
  
• Are the dividends deductible? The Code provides that C corporation dividends are deductible under Section 404(k) if they are paid to all participants (regardless of their vesting status), used to make loan payments (which will release shares into the participants' accounts), or reinvested in shares (if the participant is given the option to choose between receiving a cash distribution or reinvesting in shares). S corporation distributions are not deductible.
  
  
• Are the dividends considered reasonable? C corporation dividends must be reasonable. The IRS determines the reasonableness on a facts and circumstances basis, including factors such as the percentage of total compensation, whether the company can continue to pay the same dividends on a regular basis, and whether the dividends are comparable to dividends paid by similar publicly traded companies in the industry. S corporation distributions are generally not subject to the same "reasonableness" scrutiny.
  
  
• Is the fair market value of the shares released by the dividend loan payments at least equal to the dividends used to make the loan payments? If the dividends are being used for loan payments, it is important to ensure that the shares released by the loan payments are worth at least as much as the dividend used to make the loan payment. This is generally only an issue when you have a stock value that is lower than the original cost basis of the shares, but you should perform this analysis annually to ensure that you are compliant.
  
  
• Are the dividends used to make loan payments attributable to shares purchased by the loan proceeds? Only dividends paid on shares acquired with the loan proceeds can be used to repay the loan.
  
  
• Has the dividend amount been documented in the minutes?
  

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 2008 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC, an ESOP administration and consulting firm dedicated to providing ESOP companies with a first-class ESOP experience. If you need assistance with the ESOP Planning process, please call Aaron at 800-837-3112 or email him at mailto:ajuckett@esopinsourcing.com

General Mills, Inc. v. United States, No. 08-1638 (8th Cir., January 26, 2009)

In General Mills, Inc. v. United States, No. 08-1638 (8th Cir., January 26, 2009), the U.S. Court of Appeals for the Eighth Circuit reversed General Mills v. United States, No. 06-3547, which allowed a company to use deductible redemptive dividends to fund ESOP distributions, and found that IRC Section 162(k)(1) – Stock reacquisition expenses bars a deduction.

Creating a Culture of Growth Based on Employee Ownership

Obama's Top-Three Priorities: The Economy, The Economy, and The Economy is an op-ed piece by Dr. J. Robert Beyster, the founder of Science Applications International Corporation (SAIC). He discusses the new administration and the economy, and shares his recommendation to return the economy to prosperity:

Of course, the economy as we know has good times and bad times, and the dark is always followed by the dawn. Here is my recommendation for getting out of our current economic mess and returning to prosperity: create a culture of growth based on employee ownership. Now more than ever we need to make employees true partners in our businesses. Study after study shows that employee-owned companies perform better than companies that are not. Widespread employee ownership will have a huge, positive impact on our economy.

Creating a culture of growth requires leaders to remove the organizational obstacles that get in the way of moving quickly to take advantage of changes in the marketplace. In some cases, these may be procedures and practices that have served the company well in good times, but that threaten to bog the company down in bad times. Hire smart people and then put your trust in them. Give them a stake in the business that they contribute to, and unlock their energy and ideas. Create an entrepreneurial culture, where employees have wide-ranging autonomy and authority, and are rewarded for finding and capitalizing on new opportunities for growth. And don't be afraid to experiment, and try new combinations of people and organizational structures.

For more information about Dr. J. Robert Beyster and SAIC, see In The News: Employee Ownership, Satisfaction, Competence, and Experimentation Culture. Dr. Beyster also delivered the keynote address at the 2007 Las Vegas ESOP Association Conference & Trade Show.

100 Best Companies to Work for 2009

The Great Place to Work^® Institute has released the list of 100 Best Companies to Work for 2009. We have also covered the lists for 2008 and 2007. Employee-Owned Companies Abound on Fortune Magazine's Top 100 List for 2009 announces that approximately 14% of the companies on the 2009 list are employee owned and cites how the 17th Annual ESOP Economic Performance Survey (EPS) found that 92.4% of members believed that employee ownership was good for business:

January 26, 2009 (Washington, DC) – The recently released list of top 100 companies by Fortune magazine shows that employee owned companies in the U.S. are becoming more prominent. Approximately 14% of the companies on the 2009 list are employee owned.

According to Fortune, a company has to be at least seven years old and have more than 1,000 U.S. employees to be eligible. Fortune conducts an extensive survey of employees to name the top 100 companies. Two-third of the score is based on survey responses and the rest on a Culture Audit which includes information about pay, benefits, demographics, and communications practices, among other criteria. The Great Places to Work Institute created the survey used by Fortune. A list of the top 100 companies can be found here - http://money.cnn.com/magazines/fortune/bestcompanies/2009/.

"Employee owned companies are out there doing exactly as intended, creating great places to work," said J. Michael Keeling, president of The ESOP Association. "In 2008, an economic performance survey conducted among ESOP Association members showed that 92% of companies believed that employee ownership was good for business. With this in mind, our nation's leaders should be looking to these companies and examining business practices and culture to help make our economy stronger."

One interesting observation: the CNNMoney website allows you to search by benefits, including healthcare, childcare, work-life balance, telecommuting, sabbaticals, and unusual perks. However, one of the biggest and most important benefits, employee ownership, was mysteriously left off the list.

ESOPs and Diversified Investments

Is Employee Ownership Still a Good Thing or Just Too Risky? provides three compelling reasons, with empirical support, why having a larger investment portfolio that includes a significant employee stock ownership plans (ESOP) investment is better than having a smaller investment portfolio that is 100% diversified:

1. Most ESOP companies have more retirement plans than just the ESOP, giving employees multiple tools to diversify their investments.
   
2. While only a percentage of eligible employees participate in their 401(k) plan, generally most or all employees receive an employer provided contribution in an ESOP.
   
3. ESOP contributions are about twice as high as a percentage of compensation than 401(k) plan contributions.
   

The post reiterates that ESOP participants "have about three times the retirement assets, and about the same in diversified assets (adding their 401(k) plans plus any non-stock assets in the ESOP, a fairly common occurrence in mature plans), as comparable employees in comparable companies." It also sums up why ESOPs are a good investment for employees and society:

To be sure, there are ESOPs that fail, and, in some of these companies, the ESOP has been the only retirement asset. There also have been companies where employees have lost large amounts of built-up assets in employer stock. That makes a dramatic tale, but remember that absent the ESOP, many of those employees would have had very little in any retirement plan anyway. To make ESOPs unappealing for employers would only mean that millions of employees would lose out on opportunities for a dignified retirement. Exchanging a less diversified big stash of money for a well-diversified small stash is not something most of the critics, on reflection, would eagerly do.

Rules and Regulations 2009 – Week 4

Here are links to recently published rules and regulations:

• Memorandum Concerning Regulatory Review
• IRS Notice 2009-08 – Interim Guidance Under Section 457A
• IRS Notice 2009-02 – Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates

Rules and Regulations 2009 – Week 3

Here are links to recently published rules and regulations:

• DOL Final Regulation – Investment Advice – Participants and Beneficiaries
  

2009 AACE and Poster Contest

2009 Annual Awards for Communications Excellence (AACE)

The ESOP Association recently posted their 2009 Annual Awards for Communications Excellence (AACE) brochure:

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 paner of five judges made up of both management and nonmanagement 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 32nd Annual Conference, May 6-7, 2009, in Washington, D.C. Winners will be honored at the Awards Banquet held on Tuesday evening, May 5th. All reservations and tickets should be arranged through the national ESOP Association office.

The brochure discusses the benefits of entering:

• Organizes your thoughts Preparing an entry forces you to organize your program for review by the judges.
• Helps you review As you put together your entry, you can get a good overview of your program.
• Helps you evaluate Once your program is organized, you can evaluate it in the light of what the judges will look for, and what they are likely to see from other companies.
• Generates new ideas As you organize your program for entry, new ideas come to you for augmenting and improving it.
• Shares your ideas Your entry will be displayed at the Annual Conference in May so that other ESOP companies can see what has worked for you.
• Creates an archive You'll be able to look back and determine direction, growth and results.

It also discusses the prizes:

FIRST PLACE ($1,000 VALUE)

• AACE obelisk, with engraved company nameplate
• One free registration to the 32nd Annual Conference
• Three tickets to the Awards Banquet
• Winner's certificate with custom calligraphy
• AACE Winner's Badge Ribbon for the conference and Rosette Display Ribbon
• Recognition in The ESOP Report and on the association web site
• Listing as an AACE Winner in future membership directories

RUNNER-UP

• Winner's certificate with custom calligraphy
• Two tickets to the Awards Banquet
• AACE Winner's Badge Ribbon for the conference and Rosette Display Ribbon
• Recognition in The ESOP Report

Entries must be received by March 2, 2009. We previously shared the 2008 AACE Award Winners and the 2008 AACE Award Winning Video: The Little ESOP That Did.

2009 Employee Ownership Month Poster Contest

The 2009 Employee Ownership Month Poster Contest (which is also included in the AACE brochure) has also been posted:

Although it is a separate award, a panel of five judges who also act as the judges of the famed AACE awards will select the winner of the EOM Poster Contest in March 2009. The winner of the contest will also be announced at the Eighteenth Annual Awards Banquet on Tuesday evening, May 5th, 2009, in Washington, D.C. The judging guidelines are as follows:

• Good employee-owner education of EOM

  Respect for the contributions of employee-owners

  Integration of the concepts of both employee ownership as well as the celebration of EOM into the fabric of the poster design

  Encouragement of ownership attitudes in the poster design

  Clear, simple design

  Creative use of ideas
  

  Good graphic design
  

The brochure also discusses the benefits of achieving the winning design:

• Receive one (1) non-transferable complimentary registration to The 2009 ESOP Association's Annual Conference and one (1) complimentary ticket to the Awards Banquet
• Have your company's name to appear on the poster and EOM promotional product as the designer of the winning poster
• Receive an elegant certificate of achievement at TEA's Eighteenth Annual Awards Banquet
• Receive publicity in "The ESOP Report" Praise from your colleagues upon the publicity of the prepared press release provided by TEA announcing your company as the winner of the EOM Poster Contest

Entries must be received by March 2, 2009. We previously shared the 2008 winner in the 2008 ESOP Association Award Winners.

2009 Employee Ownership Month (EOM) Idea

While you are preparing your 2009 awards, I suggest you start planning on ways to incorporate the AACE and poster contest submissions into your Employee Ownership Month (EOM) activities.

10 Plan Sponsor Resolutions

Ten Things DC Plan Sponsors Need to Do for '09 contains a podcast and checklist of 10 plan sponsor resolutions to consider:

1. Determine how much participants are paying in investment and plan administration fees.
2. Confirm that all investment funds in the lineup are appropriate.
3. Review the effectiveness of the employer contributions.
4. Determine whether your target maturity funds are appropriate for your current participant population.
5. Ascertain how effective your communication strategy is with plan participants.
6. Confirm that you are ready to comply with DOL disclosure regulations once they are finalized.
7. Review and revise your plan's investment policy statement.
8. Determine whether your plan governance structure creates unnecessary risk for the company, the board members and senior executives.
9. Review administrative procedures to ensure legal compliance.
10. Consider plan options to provide participants with an opportunity to manage their retirement income.

More WRERA Summaries

Last month we provided an analysis of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), and earlier this week we shared a Summary of Key WRERA Provisions. Here are links to two additional summaries:

Responding to Employee Benefits Provisions of the Worker, Retiree and Employer Recovery Act of 2008 discusses the defined contribution plan changes under the WRERA and provides some action items:

• 2009 Required Minimum Distributions – Plan sponsors should review their plans to determine if an amendment is needed to address this change. Amendments must be adopted on or before the last day of the plan year beginning on or after January 1, 2011. For a calendar year plan, the plan must be amended on or before December 31, 2011. Plan sponsors may want to review and possibly revise distribution notices.
  
  
• Rollovers to Roth IRAs – Distribution notices should be updated.
  
  
• Gap Period Income – Plan sponsors should review their plans to determine if an amendment is needed to address this change. Amendments must be adopted on or before the last day of the 2009 plan year.
  
  
• Non-Spouse Rollover Rules – Plan sponsors should review their plans to determine if an amendment is needed to address this change. Amendments must be adopted on or before the last day of the 2009 plan year. In addition, distribution notices should be updated.
  
  
• EACA – This sponsors with EACAs should consider whether they wish to change the default investment to an investment that is not a QDIA, and if a change is desired, they must review their plans to determine if an amendment is needed to address this change. Amendments must be adopted on or before the last day of the 2009 plan year if retroactive application to the first day of the plan year is desired.
  

It also discusses the funding shortfall, at-risk plan, and lump sum distribution changes and action items for defined benefit plans.

New Pension Bill Offers Some Relief in Light of Market Turmoil; Technical Corrections Enacted also provides a summary.

• Provisions Responding to the Economic Crisis
  
  
  • One-Year Waiver of Required Minimum Distribution Rules for Defined Contribution Plans and Individual Retirement Accounts
  • Phase-In of Pension Funding Targets
  • Temporary Relief from Freezing of Benefit Accruals for Underfunded Plans
  • Relief for Multiemployer Plans
    
    
• Technical Corrections and Other Changes Related to the PPA
  
  
  • Nonspouse Beneficiary Rollovers Made Mandatory
  • Asset Smoothing

Recap of 2008 Illinois ESOP Capitol Hill Visit

We recently discussed the The 111th United States Congress and yesterday watched the inauguration of President Barack Obama. Now is a good time to reiterate the importance of ESOP advocacy. During last year's national ESOP Association Annual Conference in Washington, DC, members of the Illinois state chapter visited Capitol Hill to meet with Congressional members (and/or their staff):

The purpose of these meetings was to talk about ESOPs and to lobby against the provision in the recently proposed Charles Rangel tax bill which seeks to impose a heavy tax burden on deferred compensation arrangements in S corporation ESOP companies and on seller/secondary lender financed S ESOP transactions…

In general, everyone we met with had a favorable opinion on ESOPs, some in fact had very strong ones. While we encountered some skepticism during our 2007 visits given the bad press the Chicago Tribune transaction was creating, no one had anything negative to say about ESOPs this year.

While nearly all knew of the Rangel tax bill, none knew of its provisions negatively impacting S ESOPs prior to the day of our meeting. We discussed with everyone our feeling that the S ESOP tax provision was likely added as a knee-jerk reaction to the Sam Zell-Chicago Tribune transaction, but was very over reaching in its impact. A little education by us certainly went a long way in each of our visits. Nearly everyone agreed the unintended consequences of the S ESOP tax provision in the Rangel bill was not good.

The recap documents their discussions, including one with then Senator, now President Barack Obama:

For the third year in a row, our chapter met with his Legislative Counsel, Ian Solomon. Although the Senator was in the office the day of our meeting, our group missed him by an hour.

We had a very thoughtful and intelligent discussion with Ian about ESOPs. He expressed to us the Senator's generally strong support for ESOPs. In fact, Ian made a connection which none of us considered when we put together our own talking points for the meeting. Ian indicated he had a conversation with the Senator that morning about his travels around the country for the presidential primaries and made a comment about his observations regarding the economic struggles of middle class and low income workers everywhere he went. As we were talking about all the great facts about ESOPs, the general performance of ESOP companies, and the retirement account balances of ESOP participants, Ian commented on how the expansion of employee ownership through ESOPs could serve as a tool to provide greater economic opportunities to middle class and low income workers across the country. We all certainly agreed.

Ian did not know about the S ESOP tax provision in the Rangel bill, but understood our concerns about it and said he would examine it more closely. He also said he would take a closer look at the ESOP Promotion and Improvement Act of 2007 sponsored by Senator Blanche Lincoln (D-AK).

The recap ended with their thoughts on the visit:

Overall, we were incredibly pleased at the results of all the visits. Our two days on the Hill provided a fantastic reminder of how critically important it is for all of us not to take the current legislation benefiting ESOPs for granted. We need to constantly remind our representatives in Washington how great they are for their constituents, keeping this issue on the top of their minds as debate begins about raising new tax revenues. We need to remember we have no one but ourselves to advocate the issues which impact us as an ESOP community and those of our fellow employees. Any opportunity that each of us gets to talk up the great benefits of ESOPs to one of our Senators or your Representative, we must all commit to take it.

Benefit Payment Government Filings

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 (which is a Saturday, so the actual due date is the next business day, or March 2, 2009) or March 31, 2009 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 (which is a Saturday, so the actual due date is the next business day, or February 2, 2009). However, if you made deposits on time in full payment of the taxes for the year, you may file the return by February 10, 2009.
  

Generally, you are required to file electronically if you file 250 or more information returns. Magnetic media is no longer accepted:

For tax year 2008 forms filed in calendar year 2009, IRS/ECC-MTB will no longer accept any type of magnetic media for the filing of information returns. Electronic filing will be the ONLY acceptable method to file information returns at ECC-MTB.

As you are preparing the Form 1099-R - Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., you may be processing some forms for participants that received lump sum distributions that may qualify for net unrealized appreciation (NUA) treatment. 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.
  

We have also discussed Reporting a Rollover to Roth IRA on IRS Form 1099-R and the 2009 Change in Reporting Distributions of 404(k) Dividends on IRS Form 1099-R.

For more information on distributions, check out our ESOP Planning 2008 series:

• ESOP Planning 2008: Distributions (1 of 4)
• ESOP Planning 2008: Distributions (2 of 4)
• ESOP Planning 2008: Distributions (3 of 4)
• ESOP Planning 2008: Distributions (4 of 4)

2009 Top Small Workplaces Nomination Deadline

Tomorrow Last Day to Nominate Companies for TSW 2009 and Enter to Win a Portfolio discusses how tomorrow is the last chance to nominate one or more small organizations to be named a 2009 Top Small Workplace and be entered into a contest to win a Winning Workplaces portfolio. The overall nomination deadline is January 30:

Nominating takes only about 5 minutes per firm, so besides being free, it's not a big drain on your time.

Want more reasons to nominate one or more firms for Top Small Workplaces 2009, our workplace recognition project with The Wall Street Journal? Check out this "Top 10 Reasons" post I wrote a while back.

Ultimately, your nominations fuel content for our website and this blog, because we strive to learn about the workplace team building and employee engagement best practices that are not only people-friendly, but which drive enduring work cultures and company growth. In tough economic times like these, the seemingly "small" stuff like this matters.

So please nominate one or more firms today or tomorrow to be entered to win our handy portfolio. The winner will be announced here late on Tuesday, January 20. And if you miss tomorrow's deadline for this promotion, I still encourage you to nominate a firm by the nomination deadline, next Friday, January 30.

Summary of Key WRERA Provisions

Last month we provided an analysis of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA). The Worker, Retiree, and Employer Recovery Act of 2008: Limited Relief and Technical Guidance for Qualified Retirement Plans provides a summary of the key provisions:

On December 23, 2008, President George W. Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 (the Act). The Act makes a number of technical corrections to the Pension Protection Act of 2006 (PPA) and amends the Employee Retirement Income Security Act of 1974 (ERISA), as well as the Internal Revenue Code (the Code). The Act also provides temporary loosening of pension funding and distribution requirements in response to the broad economic downturn and associated decline in the value of most retirement plan investments. As employers prepare plan amendments for PPA compliance during 2009, these changes need to be considered. The following is a summary of the key provisions of the Act.

• Defined Contribution Plans – General Rules
  
  
• Required Minimum Distributions (Required Minimum Distributions)
• Roth Rollovers (Rollovers to Roth IRAs)
• Automatic Enrollment
• Elimination of Gap Period Income Rule
  
  
• Defined Benefit Pension Plans – General Rules
  
  
  • Lump Sum Payments
  • Cash Balance Vesting
  • Preservation of Capital Rule Clarified
  • Extension of PFEA Amendment Date
  • Accrual Freeze Requirements
    
    
• Defined Benefit Pension PLANS – Funding RULES
  
  
  • Funding Target Transition Relief
  • At-Risk Plans
  • Asset Smoothing
  • Target Normal Cost (Plan Expenses)
    
    
• Other Significant Provisions Affecting Both DB And Dc Plans
  
  
• Non-Spouse Rollovers (Non-Spouse Rollover Rules)
• Clarification of Combined Deduction Limit for Defined Benefit and Defined Contribution Plans

Communicating in Rough Times

Communicate, Communicate, Communicate! discusses the importance of over communicating to your employees, especially in rough times:

Why? If you do not not fill in the true story, your employees will fill it in with their own story. When it is their own story, it is filled with false data, gossip and hearsay. The story will continue to build until the facts are presented. Until this happens, your organization is wasting time and resources on not solving issues. The scenario is worse when there is a sense of crisis, as we are facing today in our economy.

It also shares a link to some additional resources:

• Delivering bad news with grace and effectiveness shares some communication tips:
  
  
  • Don't attack.
  • Don't "garbage bag."
  • Be clear, but not combative.
  • Support the company line.
  • Don't place blame when things are beyond your control.
  • Maintain dignity.
  • Balance emotions when delivering bad news.
    
    
• Delivering Bad News by E-mail is more accurate, less painful, study suggests provides a different perspective on the common view that bad news should be delivered in person. It discusses Straight Talk: Delivering Bad News through Electronic Communication, a paper that investigates the possibility that electronic communication can increase honesty and accuracy in delivering negative information:
  

  Delivering bad news can be an unpleasant task, therefore people often either postpone it or mitigate its effect through positive distortion. However, delivering (and receiving) timely and accurate negative information can be critical for performance improvement and organizational learning. This paper investigates the possibility that computer-mediated communication can increase honesty and accuracy in delivering negative information that has personal consequences for the recipient. In a laboratory experiment, 117 participants delivered positive or negative personally-consequential information to a "student" (confederate) using one of three types of media: computer-mediated communication, telephone, or face-to-face conversation. Participants distorted negative information less, i.e., were more accurate and honest, when they used computer-mediated communication than face-to-face or telephone communication. There was no difference in distortion of positive information across media conditions. Participants also reported higher levels of satisfaction and comfort in the computer-mediated communication situation. The perceived quality of the relationship mediated the impact of medium on satisfaction, but not on distortion.
  

• Delivering Difficult Messages (with customers, colleagues, partners) discusses a strategy to deliver bad news:
  

  When you have bad news for a customer, colleague or partner, it is best to inform her/him as clearly and reasonably as you can. You probably succeed best by starting in terms of how you understand she or he likely feels about it…Often, an important strategy involves informing the client of the details of the situation. This is almost never your opening statement. Next is stating a combination of the bare facts ("Your site is down as there is a problem with ….") and a message of understanding his reaction ("I know that this is not what you want but we need to fix this, and it starts with ….") Once these messages have been stated and received and understood, (which may involve multiple repetitions) it may be time to move to further data"

Rules and Regulations 2009 – Week 2

Here are links to recently published rules and regulations:

• Retirement News for Employers - Special Edition, January 2009
• Employee Plans News - Special Edition, January 2009
• IRS Notice 2009-09 – Required Minimum Distributions for 2009
• Automatic Enrollment 401(k) Plans for Small Businesses
• IRS Notice 2009-03 – Relief From Immediate Compliance With 2009 § 403(b) Written Plan Requirement
• IRS Revenue Ruling 2009-02 – Permitted disparity in employer-provided contributions or benefits Plans

Increase in Stock Drop Litigation

The January 15, 2009 Employee Ownership Update is online and discusses the following:

• Stock Drop Cases Increasing Again, But Most Aren't Making Progress
• FAS 123(R) Option Assumptions: The 2007 Results
• Recoverability of Equity-Based Compensation Deferred Tax Assets
• NCEO Volunteer Opportunities
  

Here is a good explanation of stock drop litigation:

"Stock drop litigation occurs when a company stock loses value and drops in price and, as a result, the company's retirement funds which own sometimes substantial amount of company stocks (either through an employee stock ownership plan (ESOP) or an eligible individual account plan (EIAP), suffers significant losses too.

The allegation usually in such a stock drop case is that the officers of the company, who were also fiduciaries for the plan, had a fiduciary obligation to disclose certain material information about the company to the plan so that it would not continue its imprudent investment strategy of investing in the company."

Last October we discussed a new round of stock drop litigation. The Update discusses how the current economic conditions have resulted in an increase in stock drop litigation, but notes that most cases are not progressing because the courts are giving fiduciaries leeway under the Moench doctrine.

In the wake of the market collapse, a number of lawsuits are being filed by participants arguing that fiduciaries of their 401(k) plans or, less often, ESOPs should have removed company stock as an investment option and/or notified employees of impending financial problems. A number of recent court rulings, however, have given fiduciaries considerable leeway under the Moench doctrine, which states that unless the company is in imminent danger of collapse, the fiduciaries should not be held responsible provided the plan documents state that employer stock is one of the investment options or, as in an ESOP, is the sole option. Courts have come to more mixed conclusions on the issue of whether financial information should be disclosed to participants before it is disclosed to the market (this would apply only where employees are making an investment choice involving employer stock).

The new cases are likely to be even harder for plaintiffs to win because judges may be more sympathetic to the notion that few people anticipated what happened in the markets. So unless there was fraud (as at Enron and others) or an intentional effort to induce employees to buy stock when company fortunes were doubtful, plaintiffs would have to convince courts that fiduciaries should be smarter than the markets, even on a daily basis.

It notes that very few stock drop cases have been decided, with the majority being settled. It also discusses the findings of a recent stock option valuation analysis (FAS 123(R) Option Assumptions: The 2007 Results), an article about the Recoverability of Equity-Based Compensation Deferred Tax Assets when stock options and related deferred compensation instruments are underwater, and provides a list of volunteer opportunities on the members section of their website.

Recommended Procedures for Releasing an ESOP Valuation Report to Auditors

The ESOP Association's Interdisciplinary Advisory Committee on Fiduciary Issues has published a White Paper on Recommended Procedure for ESOP Companies in Response to Auditors Request for ESOP Valuation Report. It discusses conflicts that can occur when auditors review the stock valuation report, including the auditor's potential conflicts with ESOP sponsors, ESOP trustees or other fiduciaries, and valuation firms, and notes that "recent anecdotal evidence indicates the conflicts have resulted in a number of fiduciaries to release the reports, requests for indemnification by valuation firms, termination of auditors, and insistence by auditors that a valuation be performed by another firm." As a result of these potential conflicts, the Committee developed a recommended procedure for ESOP sponsors and fiduciaries to protect the confidentiality of the report and provide the appropriate legal protection while providing the auditors with the information they need:

The consensus of the Task Force is that reports can be released under circumstances where the (i) person making the request confirms in writing the confidentiality standards applicable to the review of reports, and (ii) fiduciaries and their valuation firms obtain "no sue" and/or indemnification undertakings from the person requesting the report.

The Task Force also recommends the following procedures for ESOP sponsors and fiduciaries when receiving requests for valuation reports:

1. Requests for Reports Should be in Writing. – The requester should also provide the purpose for the request.
   
   
2. Person(s) Responsible for Providing Reports. – The fiduciary or valuation firm (and not the plan sponsor) should release the report.
   
   
3. Agreements Regarding Reports. – The fiduciary or valuation firm should consider releasing the report under a written agreement which confirms the confidentiality and/or includes a release or indemnification provision.
   
   
4. Dealing With Requester's Questions. – The fiduciary should document all discussions with the plan sponsor and auditors.
   
   
5. Role of Counsel to the Fiduciary. – Counsel for the fiduciary and the plan sponsor should be involved and review any agreements.
   

Members of the ESOP Association can access a suggested form letter from the ESOP Trustee to the Auditor that contains the conditions of release of the stock valuation report.

ESOP Planning 2008: Contributions

Your ESOP contribution will generally consist of the following items:

• Cash contribution used to make ESOP loan payments (if your loan is leveraged)
• Cash contribution used to fund distributions or to build-up the cash balance in the plan
• Share contribution
  

ESOP contributions will generally come from the following sources:

• Profit sharing contribution (including discretionary and Safe Harbor contributions)
• Required money purchase contribution (as required by the plan document)
• Matching contribution (including Safe Harbor contributions)

The contribution is one of the most important pieces to the annual administrative process, and the sooner you notify your ESOP recordkeeper or consultant of your intentions, the sooner they will be able to start processing the trust accounting. If you plan on contributing the maximum deductible contribution, it is important that you inform your recordkeeper of your intent as soon as possible. When determining the amount and timing of your ESOP contribution, you will want to consider the following questions:

• What is the maximum deductible amount that you can contribute to the plan? You will need to have compiled and analyzed your census and eligibility information in order to make this determination. The Deduction Rules generally limit contributions to all retirement plans (excluding 401(k) deferrals) to 25% of the combined compensation of all eligible plan participants (limited to $230,000 per participant in 2008). C Corporations can generally exclude interest payments in the maximum deductible contribution determination. Some experts advocate and private letter rulings support that, if structured correctly, C Corporations can deduct 50% instead of 25%. Of course, the most conservative approach is to stay within the 25% deduction limits.
  
  
• What does the plan document provide for contribution provisions? In many cases the document will provide for discretionary contributions and for contributions as needed to ensure that all required loan payments are made. If there are any other provisions, they will most likely provide that a fixed percentage of compensation per participant needs to be contributed each year (also known as a money purchase contribution).
  
  
• What are the scheduled loan payments? Will you be prepaying on your ESOP loan (the loan between the ESOP and the company) or only making the scheduled payments? If so, how do repayments affect the repayment schedule? Be sure that you are following a current version of the loan's amortization schedule.
  
  
• Did you pay or do you plan to pay any distributions in the near future? If so, how are you funding the distributions? One of the most common methods of funding distributions is contributing ESOP cash to the plan and recycling the shares within the plan. Cash contributions made to the plan for this purpose must also be included in the deduction limits
  
  
• How much was contributed last year? Are the employees accustomed to receiving a certain contribution amount? You may need to adjust your communication strategy accordingly.
  
  
• Will you be making your contribution by the end of the plan year or accruing the contribution? A benefit of accruing the contributions is that you will have the flexibility of using them as either 2008 accrued contributions or 2009 contributions, which is helpful if you encounter any compliance testing issues. You will not have this flexibility if the contribution was made in 2008.
  

Here are some other important items to consider about contributions:

• The contribution amount should be documented in the minutes.
• All contributions must be deposited by the time the corporate tax return (with extensions) is filed.
• You should be able to reconcile the contribution allocated to participants to the contribution reported on the IRS Form 5500 and the contribution on the corporate tax return.
• Contribution deductibility is based on the fiscal year of the corporation, not the plan year of the ESOP. If you the two years are not the same, then you may need two sets of compensation information.
• Dividends and S Corporations of Earnings are not considered contributions. They will be discussed in the next ESOP planning installment.
  

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 2008 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC, an ESOP administration and consulting firm dedicated to providing ESOP companies with a first-class ESOP experience. If you need assistance with the ESOP Planning process, please call Aaron at 800-837-3112 or email him at mailto:ajuckett@esopinsourcing.com

Rules and Regulations 2009 – Week 1

Here are links to recently published rules and regulations:

• DOL Final Regulation - Civil Penalties Under ERISA Section 502(c)(4)
• IRS Revenue Procedure 2009-08 - Rulings and determination letters
• IRS Revenue Procedure 2009-06 - Rulings and determination letters
• IRS Revenue Procedure 2009-05 - Rulings and determination letters
• IRS Revenue Procedure 2009-04 - Rulings and determination letters

ESOP Planning 2008: Distributions (4 of 4)

Distribution planning is one of the most important components of the planning process. Even if you had a detailed plan in place when you established your plan, chances are that things have changed. You should perform a distribution analysis annually. Here are some things to consider:

• Do you have any participants who are eligible to diversify a portion of their account balances? The Code provides that participants age 55 and older with 10 years of participation (as defined by the plan or other administrative document) are eligible to diversify a portion of their company stock. They are eligible to diversify 25% of the shares that they ever owned (assuming they still own them) in the first five years of eligibility and 50% in the sixth and final year. Many plans provide more liberal diversification provisions, so make sure to check the plan document. Remember that distributions above the statutory diversification amounts are generally considered in-service withdrawals and not diversification distributions. It is important that you have identified which participants are eligible for diversification and when. Here are some issues you will have to deal with in making the diversification determination and providing the participants with the appropriate disclosures:
  
  
  • How are you going to process diversification payments? As diversification becomes an issue for your plan, you are going to need to determine how you are going to process diversification payments. You can process them in the following ways: Distribute in cash, distribute in shares (some experts advise that distributing shares is not a legitimate option), provide alternate investments in the plan, or transfer to another plan (such as a 401(k) plan) that has sufficient alternate investments. Many plan documents provide for all options, so you should make sure you have clearly documented how you will process diversification.
    
    
  • How does the plan define years of participation? Most plan documents do not define how years of participation are calculated, so this is another item that needs to be defined and documented. Many plans count all years in which a participant is in the plan, either including or excluding the years after termination. Other definitions include counting only the years that a participant has received a contribution.
    
    
  • Are you providing eligible participants with the appropriate disclosures in a timely manner? A diversification notice informing the participants eligible for diversification of their rights must be provided to participants no later than 90 days after the end of the plan year. If the allocation is final, you can send a final diversification disclosure to the participant (that will include the final amounts eligible to be diversified), and you will have satisfied the requirements. If the allocation is not completed, then you must send a preliminary disclosure (which does not need to include the amount eligible to diversify) no later than 90 days after the end of the plan year and a final diversification disclosure no later than 180 days after the end of the plan year. In some cases, the final allocation balances are still not known 180 days after the end of the plan year. While there is no formal guidance, I am not aware of any plans that have experienced any problems when they have sent the final diversification disclosures as soon as administratively feasible after receiving the final amounts eligible to diversify. Both disclosures should solicit an election on whether or not they are interested in taking a diversification distribution. You should collect a response from all participants to ensure that you have additional documentation to further demonstrate compliance. The preliminary election should be considered nonbinding, and the final election accompanied with a distribution form would instruct the plan to process a diversification payment.
    
    
• Is our plan impacted by the new diversification requirements added under the Pension Protection Act (PPA)? IRC Section 401(a)(35) was added by the Pension Protection Act of 2006 (PPA) (Public Law 109–280—Aug. 17, 2006). The rules apply to plans holding "publicly traded employer securities" and will therefore not apply to most closely held ESOPs. In our Analysis of the IRC Section 401(a)(35) Proposed Regulations we discussed how the definition of "publicly traded" impacts many ESOP definitions which could create problems for thinly traded companies.
  
  Transition guidance was provided in IRS Notice 2006-107, 2006-51 I.R.B. 1114 - Diversification Requirements for Qualified Defined Contribution Plans Holding Publicly Traded Employer Securities. The transition guidance was extended in IRS Notice 2008-7 - Extension of Transitional Relief for Diversification Requirements for Certain Defined Contribution Plans. Proposed Treasury Regulation - REG–136701–07 - Diversification Requirements for Certain Defined Contribution Plans is effective for plan years beginning on or after January 1, 2009. For 2008, plans may rely on IRS Notice 2006-107 or the proposed regulations.
  

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 2008 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC, an ESOP administration and consulting firm dedicated to providing ESOP companies with a first-class ESOP experience. If you need assistance with the ESOP Planning process, please call Aaron at 800-837-3112 or email him at ajuckett@esopinsourcing.com.

Plan Limitation Resources (1989 – 2009)

In October we provided the 2009 Pension Plan Limits. Here are some additional plan limitation resources:

• COLA Increases for Dollar Limitations on Benefits and Contributions provides the limits from 2002-2009.
  
• COLA Increases provides a table of limits from 1989 – 2009.
  
• Methodology for Calculating Cost-of-Living Increases under § 415(d) of the Internal Revenue Code is a white paper that discusses the methodology used to determine the limits and includes the unrounded numbers.

20 Team Building Strategies

20 Proven Workplace Team Building Strategies shares 20 team building strategies compiled from the Top Small Workplaces and Best Bosses winners and finalists:

1. Look for complements vs. redundancies when hiring. If you are CEO of a small organization such as a startup, look for managers who have different approaches than yours.
   
   
2. Encourage and incentivize cross training wherever possible.
   
   
3. Bring your teams together for meetings whose only goal is to brainstorm ways to work better together. Sales and marketing is a typical place to start. See 2004 Best Boss finalist Fieldglass, Inc.
   
   
4. Form team member committees and charge them with developing and enforcing company-wide policies.
   
   
5. The small team approach to client management can pay big dividends. Just ask our 2006 Best Boss honoree Rackspace Managed Hosting and 2007 and 2008 Top Small Workplaces finalist rbb Public Relations.
   
   
6. Bring in top-notch, locally available coaches on topics that will reinforce your culture and the service you want employees to demonstrate for your customers. The key is to have them become a regular sight in your workplace and be affable enough that employees come to respect them. See 2006 Best Boss winner Headsets.com.
   
   
7. Engage in daily, weekly, or monthly huddles. See 2005 Best Boss winner 1-800-GOT-JUNK? and 2008 Top Small Workplaces finalist Tasty Catering.
   
   
8. Task-based teams – as opposed to teams focused on workplace "ideals" such as "green teams" – can attack problems more directly. See 2006 Best Boss winner Seventh Generation.
   
   
9. In this economy, a great task to assign one or more teams is improving operational efficiency. Bigelow Tea did this several years ago with their shipping provider; employee input saved the company around $80,000 per year.
   
   
10. Hold quarterly lunches with your teams off site, hosted by your president or CEO.
    
    
11. Hold all-staff meetings every 1-2 months. These can feature a mix of team building exercises, sales briefings, and updates on HR benefits and policies. Encourage any and all questions; if leadership cannot or does not wish to answer them in a large-group setting, follow up with employees individually.
    
    
12. Many progressive small firms are designing their workspaces with open floor plans and no offices. This encourages impromptu sessions that foster workplace team building. See 2008 Top Small Workplaces winner Jump Associates and finalist Edmunds.com, Inc.
    
    
13. Create opportunities for senior employees to mentor junior associates (helps lower turnover of the latter). See 2008 Top Small Workplaces winner Integrated Project Management Company, Inc., and finalist Forum One Communications.
    
    
14. Do you manufacture your product(s)? Create a team to research and implement lean practices. Benefits include cost savings and improved customer attraction and retention. See 2004 Best Boss winner Berner International Corp. and 2008 Top Small Workplaces finalist HUI.
    
    
15. Give teams accountability, including in revenue generation, quality control, and hiring and firing decisions. See HUI.
    
    
16. Is your office in a beautiful environment? Do you espouse environmental values or have an eco-friendly product or service focus? Encourage team hikes over lunch. See 2007 and 2008 Top Small Workplaces finalist PRIZIM Inc.
    
    
17. Consider giving out performance bonuses on a team instead of an individual basis, based on which add the most value to clients. See rbb Public Relations.
    
    
18. Think about choosing a metaphor to instill workplace team building at a cultural level in a way that both new and seasoned employees can identify. For example, manufacturer IRMCO uses the wolf pack – "the only perfect team in nature."
    
    
19. Is your firm comfortably profitable and looking to give back? Consider implementing a foundation or project that reflects your business. The eyewear manufacturer and distributor Luxottica Group, for example, set up a foundation called Give the Gift of Sight that uses the company's existing workforce as volunteers who travel internationally to screen and prescribe recycled frames and lenses to those in poor and underserved areas.
    
    
20. Extend the team mentality to your customers, especially your best ones. Check in with them often on how you can deliver more and better value-adds to them. The goal is to get them to think of your business as an extension of theirs. See 2007 Top Small Workplaces winner Corporate Ink.