ESOP Advocacy: Another Company Visit Tool Kit

We shared a Congressional Company Visit Kit in August Recess and the Congressional Company Visit. The ESCA District Events Tool Kit is another great resource. The Tool Kit defines a district event and an in-district event:

A district event is when a Member of Congress visits your company. A typical district event will include a "town meeting" type setting where all of the employee owners will gather to hear the Member speak and then have a question and answer discussion. Often this is followed by a facility tour. A district event is a great opportunity for a policymaker from Washington to see firsthand how important employee-owned companies are to their state or district, to hear stories of success in your S ESOP company, and to begin forming a relationship that can be important to the long-term political interest of your company and other S ESOP businesses….

An in-district meeting is a meeting in the Member of Congress' hometown, or "district" office. It is similar to a meeting on Capitol Hill but because it is not so far away, it can be an opportunity for your company to bring more employees to the meeting to tell your company's S ESOP story and ask for your Senator or Representative's assistance/support. In-district meetings may involve representatives from multiple companies in the area, which makes these a great opportunity to impress on your legislator that there is significant interest in ESCA's issues from a number of companies and many employee-owners in their district or state.

The Tool Kit also contains frequently asked questions:

• How do I plan a District Event?
• What do we do once a site visit is scheduled?
• How does ESCA help?
• Is it better than a District Event?

It also provides some helpful hints for a great event, draft letters to personalize, an example of a district event schedule, and an example of a typical press release.

In addition to the district event and the in-district event, we recently discussed an example of another kind of event, a Capitol Hill Visit.

Section 415 Amendment Deadline

In our ESOP Planning 2008: Plan Documents and Disclosures installment we provided some links to some Year End Checklists. One of the themes in all of the checklists was to make sure the Code Section 415 Amendments are adopted by the appropriate deadline:

Qualified plans (including both defined contribution and defined benefit pension plans) must be amended to comply with the final regulations under Section 415 of the Internal Revenue Code of 1986, (415 amendments). The final regulations are effective for limitation years beginning on or after July 1, 2007 (e.g., January 1, 2008 for plans with a calendar year limitation year). The regulations include two types of changes.

"Mandatory" changes must generally be adopted by the later of (i) the last day of the plan year during which a plan amendment is effective, and (ii) the due date for filing the employer's tax return (plus extension) for the fiscal year during which the provision became effective.

Deadline-Mandatory Changes: Mandatory 415 amendments for plans that have a calendar year limitation year and a calendar year fiscal year must be adopted by the due date plus extensions for the employer's tax year ending December 31, 2008.

"Discretionary" changes are changes that a plan sponsor can choose whether or not to adopt and must be adopted by the end of the plan year in which they became effective.

Deadline-Discretionary Changes: Discretionary 415 amendments for plans that have a calendar year limitation year and a calendar year fiscal year must be adopted by December 31, 2008.

FAQs on the 415 Amendment: What if I haven't adopted it yet? provides a summary of the final Section 415 interim amendment:

In April 2007, the Treasury adopted comprehensive final regulations interpreting the Code §415 limit on benefits and contributions. The new regulations change the computation of the limit, particularly for defined benefit plans. The regulations also change the definition of compensation counted in computing the limit, particularly compensation paid after severance of employment (post-severance compensation). The new rules also affect an employee's ability to defer out of post-severance compensation.

The "final 415 amendment" is an amendment designed in good faith to comply with the final regulations. Virtually all qualified plans are required to adopt a final 415 amendment.

It also explains that the deadline to adopt the amendment depends on many factors, including the limitation year, the plan year, and the employer's tax year. It provides a table with examples, providing that a plan with a limitation year, plan year, and tax year of December 31 may still be able to adopt an amendment effective January 1, 2008 by March 15, 2009 and still satisfy the plan documentation requirement (but may have some IRC Section 411(d)(6)(C) anti-cutback issues to address). It also answers the following questions:

• What is the effective date of the final 415 amendment?
• Will the amendment affect plan allocations and accruals?
• What is the deadline to adopt the final 415 amendment?
• How does the anti-cutback rule impact the deadline to adopt the final 415 amendment?
• Can a document provider adopt a final 415 amendment on behalf of its clients?
• What should an employer do if the deadline has passed and the employer has not adopted a final 415 amendment for its plan?

The article suggests using the Employee Plans Compliance Resolution System (EPCRS) as provided for under IRS Revenue Procedure 2008-50 - Closing agreements if the deadline has passed:

The employer should file an application under VCP. Under EPCRS (Rev. Proc. 2008-50), the filing fee for such an application is $375, regardless of the number of participants in the plan. There is also a streamlined VCP procedure with a simple application form.

6 Ways to Improve Your Culture

Six Tips to be a Better Boss and Improve Your Culture shares six ways to becoming improve your culture and some related to dos:

1. Remember your staff are human

• Be open to doing things a bit differently
  
• Make a list of areas where your policies may be unnecessarily strict. Think about how you could be more flexible and the benefits that would bring
  
• Brainstorm with staff about areas in which they would prefer more flexibility

2. Don't tolerate tension

3. Express gratitude

4. Don't avoid the yuck

5. Be contagious

• Think seriously about the energy you put out into your workplace. Are you a grumpy complainer or do you ooze enthusiasm and laughter?
  
• Commit to actions you will take to improve the energy you contribute to the workplace

6. Listen to your team

5 Tips in Communicating the Ups and Downs of Stock Value

Explaining the Ups and Downs of Stock Value discusses five tips in communicating stock value:

1. Begin with basic knowledge
   
2. Build a line of sight to job-level performance
   
3. Implement a Process to Regularly Discuss the Business
   
4. It's a Marathon, Not a Sprint
   
5. Maximize the Value of Your Most Important Assets
   

How Public Company PE Ratios Impact an ESOP Valuation

Privately held ESOPs and public-company PE ratios discusses the impact that the price-earnings (PE) ratios of comparable public companies has on the valuation of a privately held ESOP company. It notes that PE ratios likely have further to fall and discusses what this means for ESOP companies:

Talk to your valuation firm about two things: First, ask how many years worth of earnings they use to calculate PE ratios. That applies to both your own company's earning and to earnings of the public comparison companies. Leonhardt notes that by using the trailing ten years of earnings, the S&P currently has a slightly below average PE of 14.5.

Second, pay special attention to the set of public comparison companies the valuation firm is using. It likely matters more than ever this year.

America Saves Week 2009

Next week is America Saves Week 2009:

The third annual America Saves Week is scheduled for February 22-March 1, 2009, and early reports indicate that the Week will have more participation and a broader reach than ever before.

Activities for America Saves Week 2009 are being coordinated by the America Saves campaign and by the American Savings Education Council, who are working with a large coalition to promote the savings message and foster better savings behavior. Among the many companies, agencies and organizations committed to participating are the Cooperative Extension Service, WorldatWork and the Department of Defense.

During America Saves Week 2008, over 80 national organizations and over 500 local organizations participated, reaching millions through the press and internet. Over 75,000 people attended over 1,800 events, and tens of thousands joined the America Saves campaign and committed to begin saving.

The website has many resources including a savings checklist with related links:

1. Do you know your net worth, that is, the dollar amount representing all your assets minus your debts? America Saves Wealth Calculator
   
2. Do you have a personal spending plan with specific goals and plans for achieving these goals? Department of Labor's Savings Fitness: A Guide to Your Money and Your Financial Future
   
3. Do you have a personal spending plan that allows you to save enough money to achieve these goals? NEFE's Create a Spending Plan-Draw a Spending Map So You Don't Get Lost
   
4. Do you have credit card or payday loan debt? If so, are you reducing this debt? Credit Cards: Utah State University Extension's November 2001 Financial Fitness Fact Sheet: Reducing Credit Card Debt; Payday Loans: AARP's Payday Loans Don't Pay basics
   
5. Do you spend less than your income and save the difference? InCharge's Spend Less Calculator
   
6. Do you have sufficient emergency savings to pay for unexpected expenses like car repairs and medical treatment? AICPA's Emergency Savings Calculator
   
7. Are you saving enough for a retirement where you have a desirable standard of living? Ballpark E$timate Worksheet and What Is Your R3 Retirement Readiness Rating?
   
8. Do you save for retirement at work through a 401(k) or other contributory plan? FINRA's 401(k) Investing Advice/Homepage
   
9. Outside of work, do you save automatically through regular preauthorized transfers from a checking account to saving or investment account? AICPA's Savings Calculator
   
10. Do you save a portion of tax refunds, gifts, bonuses, or other financial windfalls? Choose to Save's tips on What to Do With Your Refund?
    
11. Are you building equity in your home or other property? AICPA's Tapping the Equity in Your Home
    
12. Do you expect to pay off all mortgage loans before retirement? AICPA's Mortgage Payoff Calculator
    

The website also defines the purpose of America Saves Week:

The personal savings rate is near zero, most Americans are not saving adequately for retirement, and most lower-income households do not have adequate emergency savings for unexpected expenditures like a car repair. But with more societal encouragement and support, more Americans will be persuaded to build wealth, not debt.

During America Saves Week, individuals will be encouraged and assisted to assess their savings progress and take action to advance this progress. This encouragement and assistance will be provided by organizations and professionals with an interest in improving the financial security of individuals and families.

ASPPA also supports America Saves Week and has a webpage with resources that would be useful for your employees, colleagues, and/or clients. We also covered America Saves Week 2008.

More Analysis on the Latest General Mills/ESOP Redemptive Dividend Ruling

Corporation not entitled to 404(k) deduction for redemption of stock used to satisfy ESOP distribution obligations discusses General Mills, Inc. v. United States, No. 08-1638 (8th Cir., January 26, 2009), which found that a corporation was not entitled to an IRC Section 404(k) deduction for the proceeds from a stock redemption that were used to fund cash distributions:

The corporation maintained three employee retirement plans which included employee stock ownership plan (ESOP) components. Upon the termination of an employee, the ESOP trust was required to distribute the value of the employee's vested ESOP account. The employee could elect to receive either shares of the corporation's common stock or their cash equivalent. The trust could satisfy its cash distribution obligations by using the proceeds of redemptions of shares of common stock, or in several other ways. The corporation chose to redeem shares of its common stock held by the trust ("redemptive dividends"), and the trust then used some of the proceeds from the redemptive dividends to satisfy portions of its cash distribution obligations ("cash distribution redemptive dividends").

The corporation sought to deduct the cash distribution redemptive dividends under Code Sec. 404(k)(1), which allows a deduction for the amount of any "applicable dividend" paid in cash by the corporation during the taxable year "with respect to applicable employer securities."

The district court ruled for the corporation and the appellate court reversed, declining to follow the holding in Boise Cascade Corp. v. U.S. (9th Cir., No. 01-36086, 5/20/03.

We discussed the details of the ESOP-related issues of the original General Mills ruling and the Boise Cascaade ruling in Deductible Redemptive Dividends Used to Fund ESOP Distributions:

Original General Mills Ruling

• General Mills v. United States, No. 06-3547 (DSD/SRN, Jan. 14, 2008)
• General Mills redeemed stock to fund a portion of their cash distributions. They treated the redemptions as deductible dividends under IRC Section 404(k) - Deduction for dividends paid on certain employer securities.
• The IRS denied the deduction and sued based on IRS Revenue Ruling 2001-6 - Section 404.--Deduction For Contributions Of An Employer To An Employees' Trust Or Annuity Plan And Compensation Under A Deferred-Payment Plan and IRC Section 162(k) – Stock reacquisition expenses. The IRS lost the ruling.

Boise Cascade Ruling

• Boise Cascade Corp. v. U.S. (9th Cir., No. 01-36086, 5/20/03)
  
• The company redeemed stock of participants upon termination and either distributed the cash to participants or allowed it to be invested in another investment account. If the participant received a cash distribution, the company considered the redemption a deductible dividend under IRC Section 404(k) - Deduction for dividends paid on certain employer securities.
  
• The company amended a prior return to take the deduction. The IRS disallowed it. The district court and the appeals court ruled for the company.
  
• As a result of this case, the IRS published IRS Revenue Ruling 2001-6 - Section 404.--Deduction For Contributions Of An Employer To An Employees' Trust Or Annuity Plan And Compensation Under A Deferred-Payment Plan.
  
• While the participants were able to roll over the distributions, they would not have been able to do so had the case been resolved at the time the distribution was processed. As a result, the company could have structured their distribution policy as follows to meet the deductibility needs of the company and the rollover needs of the participant:
  
• If the participant elected a cash distribution, the cash would be treated as a deductible dividend, would not be eligible for rollover treatment, and would not be subject to IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans.
  
• If the participant elected a stock distribution, the stock would not be treated as a deductible dividend and the distribution would be eligible for rollover treatment.

Deduction for ESOP Redemptive Dividend also provides analysis on the latest General Mills ruling:

Reversing a Minnesota District Court, the 8th Circuit held that IRC Sec. 162(k)(1) barred taxpayer from deducting payments to its Employee Stock Ownership Plan (ESOP) that were used to redeem stock from employees terminating participation in the plan. In so holding, the appellate court disagreed with the 9th Circuit in the Boise Cascade case, which held that IRC Sec. 162(k)(1) did not bar the deduction under IRC Sec. 404(k)(1). That court viewed the payment to the ESOP and the cash distribution to the terminating employee as "two segregable transactions, not ineluctably linked, and entirely separate." According to the 8th Circuit, the legislative history clearly states that IRC Sec. 162(k)(1) "disallows amounts paid to repurchase stock, and in addition, all other necessary or incidental expenses." General Mills Inc. v. U.S., 103 AFTR 2d 2009-XXXX (8th Cir.).

2009 Charles R. Edmunson Scholarship

Reminder - Edmunson Scholarships Available for 2009 provides a reminder to submit your application for The Employee Ownership Foundation Charles R. Edmunson Scholarship:

The Charles R. Edmunson Scholarship offers the employers of employees who do not have a managerial role in their respective companies the opportunity to defray the costs of attending one of the Employee Ownership

Retreats or The ESOP Association's Annual Conference. Reimbursement for other employee ownership events is subject to the approval of the Selection Committee. By applying for the Charles R. Edmunson Scholarship, the employee-owned company agrees to abide by all the terms and conditions of the Charles R. Edmunson Scholarship. All applications are due by March 6, 2009. Award recipients will be selected by April 1, 2009.

The post also reminds 2008 Scholarship winners to use their scholarship before it expires in May 2009.

57% of 100 Best Companies have Broad-Based Ownership

The February 17, 2009 Employee Ownership Update is online and discusses the following:

• More Than Half of Best Companies to Work for Have Broad-Based Employee Ownership
  
• BLS Data on Stock Option Participation Show Little Change
  
• Radford Research Shows Equity Award Exchange Patterns
  

The Update notes that 57% of the 100 Best Companies to Work for 2009 have broad-based employee ownership plans:

Six of the companies—W.L. Gore & Associates, PCL Construction Enterprises, TDIndustries, Burns & McDonnell, CH2M Hill, and Publix Super Markets—are majority owned by their employees. Nine have only an employee stock purchase plan (ESPP), 11 have ESOPs, 17 have option and/or restricted stock programs covering most employees, and one has a direct stock purchase program and internal market (CH2M Hill). The number of companies using restricted stock has gone up sharply from prior years, while the number of companies with only ESPPs has declined.

The Update also discusses the results of the National Compensation Survey (NCS), an annual survey performed by Bureau of Labor Statistics:

The National Compensation Survey (NCS) provides comprehensive measures of occupational earnings, compensation cost trends, the incidence of benefits, and detailed benefit provisions. This bulletin presents estimates of the incidence of benefits for the Nation. The estimates include benefits for workers by ownership within the U.S. economy in 2008—civilian, private, and State and local government—and by various occupational and establishment characteristics. The civilian economy, by NCS definition, excludes Federal government, agricultural, and household workers.

The Employee Benefits Survey, a survey of compensation and benefits practices, found that the percentage of workers receiving stock options has remained unchanged:

The percentage of workers receiving stock options in 2008 was unchanged from previous years, according to the Bureau of Labor Statistics. Its March 2008 data show that 8% of the 107 million private sector workers surveyed received options (more may be eligible but not have received them that year). This is essentially the same percentage it has been for the last few years given the margin of error in the survey. That suggests that broad-based equity plans, contrary to conventional wisdom, are not a relic of the past.

It also provides a link to Radford's Underwater Exchange Portal, a resource for providing guidance on underwater employee stock options, and the results of a recent survey on stock option exchanges. Shareholders Demand Executive Exclusion, Value Neutrality in Underwater Stock Option Exchange Proposals, According to Aon Consulting's Radford Research provides more details:

San Jose, Calif. – February 9, 2009 – With a surge in the number of underwater stock option exchange proposals, four shareholder-friendly design features are gaining consistent institutional investor approval, according to a new study conducted by Aon Consulting's Radford Surveys + Consulting. This study identifies the exchange design elements in mutual fund voting patterns that figured most prominently in successful approvals, and analyzes voting results for specific investors, industries and timing considerations.

These four shareholder-friendly approaches include: option holder eligibility; grant eligibility; old-to-new award exchange ratios; and new award vesting requirements. Approval rates were higher when any of the four design features complied with the shareholder-friendly approach vs. non-compliance. Further, the highest approval rates (79 percent of proposals) came when all four design features followed the shareholder-friendly approach.

"Repricings elicit a negative connotation and some Directors and executives have automatically pigeon-holed them as being bad," said Brett Harsen, vice president, Radford Surveys + Consulting and study author. "This research demonstrates an approval rate of nearly 80 percent for these new responsibly-balanced proposals, and we believe that will be a surprise to many."

The following describes each of the four design features in detail:

Exclusion of Board and Named Executive Officers (NEOs)

Sixty-two percent of programs excluding Board members and NEOs gained approval, compared to only 18 percent that included them. In fact, 60 percent of the mutual funds in this analysis voted against any program brought to them that included the Board and NEOs.

Price floor above the 52-week high stock price

Starting in 2008, institutional investor advisory firm RiskMetrics Group added to their voting guidelines that no options priced under the company's 52-week stock price high should be eligible for exchange, as they have reasonable probability of coming back in the money in the foreseeable future. According to Radford's analysis of historic voting patterns against the 52-week test, this feature is the least sensitive predictor of approval rates with 59 percent approval when programs comply and 41 percent approval when they do not.

Value neutral exchange rate

Returning an equal or lesser award value to option holders as a result of the exchange clearly was a deciding factor to shareholders in the Radford study. While 54 percent of programs using approximate value-neutral exchange rates gained approval, very few (two percent) were approved using a ratio (or ratios) that added value to the employee's holdings as a result of the exchange.

Reset vesting

The Radford research also found programs that reset vesting had an approval rate of 57 percent, compared to those that mapped vesting, which saw only 18 percent approval.

While these four design elements featured prominently in successful exchange proposals, more mature organizations that are largely held by institutional investors must be careful when using recent underwater option exchanges filed with the SEC as best practices benchmarks, according to Harsen.

"Many recent exchanges filed with the SEC were executed by smaller companies that could afford to be more aggressive because they were closely held by a group of more familiar investors," notes Harsen. "For more mature companies, it's critical that they look at preferences of institutional shareholders reflective of their actual investor base."

Eliminating or Changing a Fixed Matching Formula

Last week we discussed ways to freeze or eliminate a safe harbor match. Eliminating or Reducing a Plan's Matching Formula discusses the issues related to eliminating or reducing a fixed matching contribution formula by providing 3 FAQs:

1. May an employer eliminate or reduce a fixed matching contribution formula in a traditional 401(k) plan mid-year? If so, will the employer need to fund the match through the date of the amendment?
   
2. If an employer eliminates a match (fixed or discretionary) in a traditional 401(k) plan must it provide a notice to the participants?
   
3. If an employer with a discretionary match provides a communication (e.g., notice) informing the participants of the match it will make the for the plan year, may the employer ignore the communication and not provide the match?
   

Corporate Governance: Duties of Care, Loyalty, and Obedience

When we last left our ESOP Corporate Governance discussion, we had discussed Responsibilities of the Board of Directors and More Responsibilities of the Board of Directors and shared some Board Member Job Descriptions. The Three Duties discusses the three legal duties that are the legal requirements and ethical guidelines of a Director:

1. Duty of Care – The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.
   
   The Three Duties stresses the importance of asking questions to ensure that you completely understand the issues and shares some practical director expectations:
   
   

   * Be interested in and understand the company's mission, goals and plans
   * Prepare for and actively participate in board and committee meetings
   * Review all board materials and agendas in advance
   * Be alert to potential problems and concerns
   * Request information from management, accountants and lawyers before making decisions
   * Investigate violations or irregularities in the governance of the company.
   

2. Duty of Loyalty –The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.
   
   Directors can face conflict (in fact or appearance) when they are on both sides of an ESOP transaction. The Three Duties discusses the best way to satisfy the duty of loyalty in the face of a potential conflict of interest:
   
   

   A director who has a potential conflict of interest can best fulfill the duty of loyalty and avoid an appearance of impropriety by complying with the company's conflicts of interest policy, which emphasizes disclosure (based on the idea that sunshine is the best disinfectant), evaluation by the governance committee or entire board and, finally, resolution of the issue.
   

3. Duty of Obedience – The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission.
   
   The Three Duties notes that a director should "question programs, initiatives and plans that dilute a company's mission or take it off course" to ensure that the corporate mission is upheld and perpetuated.

Rules and Regulations 2009 – Week 6

Here are links to recently published rules and regulations:

• Field Assistance Bulletin No. 2009-01 - Defined Benefit Plan Annual Funding Notice - Pension Protection Act of 2006
• Free Webcast: Getting Ready for the 2009 Form 5500 and Electronic Filing

Rules and Regulations 2009 – Week 5

Here are links to recently published rules and regulations:

• Duties of Fiduciaries in Light of Recent Events Regarding Bernard L. Madoff Investment Securities LLC

Potential Side Effect of Layoffs: Partial Plan Termination

ESOP Technical Alert provides a reminder of a potential side effect of layoffs – a partial plan termination:

In general, under the IRS's current guidelines updated in 2007, when there is a reduction in the number of active participants in your plan as a result of a corporate action (such as a layoff or the closure of a division) which involves more than 20 percent of the participant population in a given year, you will likely have a partial termination of your plan. The primary result is that all affected participants must be treated as fully vested in their accounts. That will result in an unplanned liability for the company, but more importantly, if you have a partial termination and you fail to treat participants appropriately, that could threaten the qualification of your plan.

There are numerous technical articles about this issue out there, so I won't go into the details here, but please take our strong suggestion: When you are laying off any material number of employees, you ought to have this issue investigated by someone who knows enough to advise you as to whether the layoff creates a partial termination and how you should treat the effected participants if it does. Of course, this provision should not change the right business decision, but you should be fully aware of the implications before it is set in stone.

IRS Sets New Standard Regarding "Partial Plan Termination" of Tax-Qualified Retirement Plans discusses the consequences of failing to treat a plan as having a partial plan termination. It also notes that the determination of plan termination is based on "facts and circumstances" and not a set formula:

There is no magical figure at which a partial termination is deemed to occur and, prior to the release of IRS Revenue Ruling 2007-43, the exact level at which it becomes determinative of the issue was somewhat ill defined. Notably, several cases had held that a percentage drop in plan participation standing alone may be sufficiently large (i.e., generally greater than 40 percent) or small (i.e., generally less than ten percent) to determine the partial termination question without the need for any further inquiry into the facts. Between these two extremes, although the surrounding facts and circumstances had been considered in conjunction with the percentage drop in order to decide whether the percentage drop was significant, the primary focus of the determination still had been on the percentage drop in plan participants. In this regard, the IRS, in an amicus curiae brief filed in connection with a court case addressing the partial termination issue, suggested that a tax-qualified retirement plan will generally be deemed partially terminated if at least 20 percent of the plan's participants lose coverage. From this brief and the preceding and subsequent case law, a "semi-bright line" test had developed that a percentage drop of at least 20 percent was sufficient to result in a partial plan termination.

In fact, in a very highly publicized decision in 2004, the Seventh Circuit Court of Appeals, in Matz v. Household International Tax Reduction Investment Plan, held that there is a "rebuttable presumption" that a 20 percent or greater reduction in a plan's participants is a partial termination and that a smaller reduction is not.

In IRS Revenue Ruling 2007-43, the IRS has adopted the Matz 20 percent presumption test. Thus, if the turnover rate is at least 20 percent, there is a "presumption" that a partial termination of the plan has occurred. However, the IRS notes that whether or not a partial termination occurs on account of participant turnover is still ultimately dependent on all of the facts and circumstances in a particular case. Facts and circumstances indicating that the turnover rate for an applicable period is "routine" for the employer, favor a finding that there is no partial termination for that period. For this purpose, information as to the turnover rate in other periods and the extent to which terminated employees were actually replaced, whether the new employees performed the same functions, had the same job classification or title and received comparable compensation, are relevant to determining whether the turnover is routine for the employer.

It also discusses defining the class of affected employees, counting of vested participants, and the relevant determination time period. IRS Revenue Ruling 2007-43 is discussed in IRS Issues Partial Termination Guidance.

IRS Position on Rebalancing and/or Segregation Plan Provisions

The IRS has been informally stating that they are holding approval of plan documents containing Provisions for Account Segregation and/or Rebalancing. Corey Rosen explores the issue further in ESOP Account Segregation and Rebalancing Sense and Nonsense. He discusses the issue and notes that he and many ESOP experts feel the provisions are legal:

The IRS apparently is not so sure. In informal (and I stress, only informal) conversations, they have indicated they won't be accepting letters of determination with these provisions. They won't be saying you can't do it either. It's just that their sensibilities are apparently offended here that a company might do something that is actually prudent and in line with the spirit of the law, but, under one interpretation anyway, not exactly what they see as the letter of the law saying.

The large majority of ESOP attorneys I know believe that these provisions can be justified by the law, and so do I. They also are well justified by common sense. Companies that have these provisions already do not need to change them, at least not yet. Companies submitting letters of determination could still follow these practices--no one has said it is illegal yet. But companies doing that should discuss this with their attorneys to see what possible risks there might be and if there has been any clarity coming from the IRS.

If the IRS continues to maintain this position without providing any formal guidance, it appears inevitable that the issue will be challenged, and an ESOP with reasonable and nondiscriminatory plan provisions should have a strong case.

Mid-Year Safe Harbor Changes: Freezing or Eliminating the Match and Using the Maybe Nonelective Notice

We recently discussed Reducing or Eliminating Safe Harbor Matching Contributions during the plan year. Mid-year Safe Harbor 401(k) Plan Changes contains 10 FAQs on how an employer can eliminate or freeze safe harbor matching contributions mid-year and how to use the "maybe" notice approach to have more flexibility with nonelective safe harbor contributions:

1. May an employer freeze a safe harbor 401(k) plan mid-year or, in the alternative, amend it into a traditional 401(k) plan mid-year?
   
2. What are the necessary steps to freeze or amend mid-year a safe harbor 401(k) plan which provides the safe harbor matching contribution?
   
3. May a safe harbor 401(k) plan with a safe harbor matching contribution formula and an additional matching contribution formula (discretionary or fixed) that is intended to qualify under the ACP safe harbor (ACP safe harbor match) eliminate or amend the ACP safe harbor match? May a safe harbor 401(k) plan eliminate or amend the ACP safe harbor match and not the safe harbor matching contribution formula that enables the plan to satisfy the ADP test safe harbor?
   
4. For an employer that wishes to retain flexibility over the safe harbor nonelective contribution, what plan design options are available?
   
5. What steps must the employer follow to apply the "maybe" notice approach?
   
6. May an employer apply the "maybe" notice for more than one plan year?
   
7. May an employer terminate a safe harbor 401(k) plan mid-year?
   
8. What steps must the employer follow to terminate a safe harbor 401(k) plan?
   
9. May an employer terminate a safe harbor 401(k) plan and retain safe harbor status for the short plan year?
   
10. What factors must an employer use to determine if it has incurred a substantial business hardship?
    

Potential Universe of ESOP Companies and ESOP Survey Results: 2009 Expectations and Access to Credit

The February 2, 2009 Employee Ownership Update is online and discusses the following:

• ESOP Companies Weathering Tough Times
  
• Google's Generous Option Exchange Program
  
• ESOPs and the Coming Wave of Business Sales
  
• NCEO Member Survey Preliminary Results
  

ESOP Survey Results

The Update discusses a survey of ESOP service providers to determine how their ESOP clients are handling the current economic times. The survey, which represents approximately 1,000 ESOPs, found that while 2009 is expected to be a tougher year, 93.2% of ESOP companies surveyed expect to break even or be profitable:

• Bankrupt or about to go bankrupt: 1.4%
  
• Laying off or planning to lay off 20% of more of workforce: 5.3%
  
• Breaking even: 17.1%
  
• Profitable, but no plans for hiring new people: 49.2%
  
• Profitable with plans for hiring new people: 26.9%
  

It also discusses the preliminary highlights of a NCEO survey of its ESOP membership:

• Similar to our survey in October 2008, the majority of companies report no change in their access to credit (72% and 79% for long- and short-term credit, respectively).
  
• Compared with the October survey, far more companies (38%, up from 23%) expect to shrink, but are confident about their survival, and 2% are concerned about their viability.
  
• 46% of responding companies have ESOPs that are currently leveraged.
  
• Two-thirds have internal trustees and 16% have institutional trustees.
  
• The greatest number of companies (38%) reported contributions between 4% and 10% of eligible compensation; 7% reported no contribution in the most recent year.
  

NCEO member companies can still participate in the 2009 NCEO Membership Survey: ESOP Companies.

Potential Universe of ESOP Companies

We tried to identify the potential universe of ESOP companies in Statistics: Number of Baby Boomers, Baby Boomer Business Owners, and Potential ESOP Universe. The Update discusses America's Entrepreneurialist Generation: Exit Planning and the Baby-Boomer Age Wave, a 2008 survey that found that 750,000 businesses are projected to change in 2009 and that 53% of baby boomers intend to exit in the next nine years:

ATLANTA -- White Horse Advisors, LLC, an independently-owned provider of financial advisory services to owners of closely-held businesses and retirement plan sponsors, announces the results of its 2008 Survey of Closely-Held Business Owners. The survey, titled "America's Entrepreneurialist Generation: Exit Planning and the Baby Boomer Age Wave," was conducted in cooperation with Vistage International using a random selection of business owners across the U.S. A total of 58 groups participated in the study, representing 444 survey respondents. Full survey results may be viewed at www.exitplanningresearch.com.

"The implications of these results are far reaching. We face a tsunami wave of baby boomers selling, closing or passing along their businesses in the next 10 to 20 years," said Patrick Ungashick, founding partner of White Horse Advisors. "Closely-held businesses account for nearly half of private sector payroll and approximately 80 percent of net new private sector jobs in the last 10 years. Therefore, we can expect this trend to impact not only owners, employees and families, but the economy as a whole."

The survey shows that business owners overwhelmingly recognize the importance of an exit strategy, but in nearly every important area they are not prepared for their inevitable exit. On the surface, it appears that the lack of preparation may be attributed to the belief that the need to plan for exit can wait until only a few years before the target date. However, even the oldest owners surveyed stated they are unprepared in most areas. So the true culprit appears to be procrastination and uncertainty regarding the proper steps to take. The inevitable wave of baby boomer business owners seeking to sell their businesses may face a supply and demand problem - a larger number of owners seeking to exit than the supply of buyers.

Summary results of the survey include:

* Nearly all owners say it is important to have an exit plan, but few do. The vast majority of business owners (more than nine in 10) agree that having an exit and succession strategy is important for their future as well as the future of their business. However, just shy of nine in 10 owners do not have a written, up-to-date exit plan.

* Nonetheless, half of owners surveyed have an aggressive timeframe for exiting their business, indicating that they will leave their business within the next 10 years. Owners who are 60+ years in age have the most aggressive exit planning timelines, yet two-thirds of them do not have an exit plan.

* The number of years to exit plays a role in how much attention owners have given to exit planning. Owners who consider themselves more than 10 years away from their ideal exit date have given the matter less attention than those within 10 years of exit.

* The average number of years from now to exit among owners surveyed is 7.7 years. The vast majority of owners believe that achieving their ideal timeframe for exiting their business is attainable.

* Business owners say that maintaining focus on the growth of their business is a major reason why they have not spent more time on exit planning to-date.

* At least two-thirds of owners indicate that their top three essential or important exit planning objectives include:

* Achieving personal financial security

* Maintaining harmony within my family

* Achieving the maximum value for the business

* Business owners' primary concerns around exit planning appear to be universal. Approximately eight in 10 owners say that minimizing taxes, adequately determining the value of the company, and meeting other part-owners' objectives are a 'major concern' or 'somewhat of a concern.'

* Ninety six percent of baby boomer business owners agreed that having an exit strategy was important, but 87 percent do not have a written, current exit plan.

The survey was administered between October 2007 and February 2008 by Atlanta-based CMI, a full-service marketing research company that provides clients with strategic and tactical marketing insights. Significance testing is conducted at the 95% confidence level. At this confidence level, the data from 444 surveys has a precision level of +/-4.65%.

Exchanging Underwater Employee Options

Finally, the Update discusses how Google offered to exchange underwater employee options:

Google employees will have a chance to exchange underwater stock options for new, at-the-money options under a program intended to increase retention. Several features of Google's offer are far more generous than typical option exchanges -- for example, a one-for-one exchange ratio and no minimum out-of-the-money amount for determining option eligibility. While Google's program is receiving much attention, it may not serve as a model for other companies with underwater options -- at least if their shareholders must approve the option exchange.

The Benefits of Sabbaticals

In Employee Retention Ideas, we discussed effective program one firm uses to ensure their key employees are taking a vacation. The Virtues and Challenges of a Long Break explores how many firms find sabbaticals to be worthy investments. This Journal of Accountancy article includes comments from HLB Tautges Redpath, Ltd, a 100% ESOP-Owned Accounting Firm. Here is the executive summary:

• Sabbatical programs are relatively rare in accounting, but firms that incorporate them as part of their benefits package may find that they act as a powerful recruitment and retention tool, help develop talent, serve as a visible statement of corporate values, and engender client approval—all in addition to re-energizing those who take the extended time off.
  
  
• Sabbaticals are appropriate for any size firm Small firms as well as large firms can benefit with proper planning.
  
  
• The cost of a sabbatical program depends, in part, on the level and function of the person going on extended leave. Commonly costs are calculated in terms of the salary paid and the revenues lost.
  

5 Kinds of Individual Equity Compensation Plans and their Impact on 409(p) and 409A

Stock Options, Restricted Stock, Phantom Stock, Stock Appreciation Rights, and Employee Stock Purchase Plans discusses the five basic kinds of individual equity compensation plans:

Stock options give employees the right to buy a number of shares at a price fixed at grant for a defined number of years into the future. Restricted stock and its close relative restricted stock units (RSUs) give employees the right to acquire or receive shares, by gift or purchase, once certain restrictions, such as working a certain number of years or meeting a performance target, are met. Phantom stock pays a future cash bonus equal to the value of a certain number of shares. Stock appreciation rights (SARs) provide the right to the increase in the value of a designated number of shares, paid in cash or shares. Employee stock purchase plans (ESPPs) provide employees the right to purchase company shares, usually at a discount.

When considering an equity compensation plan, remember that the plan will likely be considered synthetic equity and have an impact on the IRC Section 409(p) Anti-Abuse Testing. As a result of the testing, ESOP Companies are More Likely to Use SARSs or Phantom Stock.

You also need to make sure to consider the IRC Section 409A Nonqualified Deferred Compensation (NQDC) Plan Regulations which were effective January 1, 2009. The regulations were also modified by IRS Notice 2008-113 – Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with § 409A(a) in Operation, which provides some initial guidance on the calculation of 409A income and related taxes, and IRS Notice 2008-115 – Reporting and Wage Withholding Under Internal Revenue Code § 409A, which provides an enhanced correction program for certain operational errors.

Employee Ownership Teaching Module

We recently discussed New Approaches to Spread Employee Ownership. One of the new approaches was a new Employee Ownership Teaching Module. Employee Ownership: A Topic for the Entrepreneurship Curriculum shows "four areas in the entrepreneurship curriculum where teaching about employee ownership can 1) put a needed spotlight on this widespread and useful practice and 2) add conceptual value and rich examples for the course topics being taught," and discusses how employee ownership is underappreciated:

"Between one-third and one-half of employees participate directly in company performance through profit sharing, gain sharing, employee ownership, or stock options" (Rhokeun Park, Douglas Kruse, and Joseph Blasi, Shared capitalism: Prevalence, characteristics, and employee views of financial participation in enterprises, 2008). Employee ownership is an under-appreciated means for funding new ventures and securing employee alignment with the enterprise. EO is found in start-ups and "built to last" corporations. It harnesses employee motivation at every stage of organizational growth.

This module contains four topics:

• Employee ownership as a mechanism for new venture financing
• Employee ownership as a vehicle for incentive alignment, motivation, retention, engagement
• Employee ownership and the stability of growing firms – links to the economy-wide use of employee ownership
• Employee ownership and social entrepreneurship

It includes references to cases, articles, and books, and a related link to the Curriculum Library on Employee Ownership (CLEO):

• The Signature Group
• The new math of ownership
• The decision-maker's guide to equity compensation
• The entrepreneur's guide to equity compensation
• Keller Williams Realty
• Sportasia LTD: A community company
• The SAIC Solution: How we built an $8 billion employee owned technology company
• Creating a bigger pie? The effects of employee ownership, profit sharing, and stock options on workplace performance
• Southwest Airlines Corporation
• Whole Foods Market, Inc.
• King Arthur Flour
• Employee ownership: An unstable form or a stabilizing force?
• Employee ownership as a catalyst for change
• Equal Exchange and Wainwright Bank
• Just Us! Coffee Roasters
• A Slice of the Sun: Namaste Solar Electric Takes Employee Ownership to the Limit
• Third-Sector Development: Making Up for the Market

IRS Forms 1099-R/Cycle C Submission Deadline

As most of you that are responsible for Benefit Payment Government Filings are aware, tomorrow is the deadline to distribute IRS Forms 1099-R. Many attorneys are also well aware of the submission deadline for Cycle C employers. Feature: 2009 ERISA Compliance Calendar for DB/DC/403(b) Plans contains a calendar of key events in 2009, including the following January/February dates:

JAN 31 / Many recordkeepers require participant data for average deferral percentage (ADP)/average contribution percentage (ACP), Top Heavy, and 402(g) compliance testing to be returned by this date.

FEB 2 / Deadline for submitting individually designed plans in the third remedial amendment cycle to the IRS determination letter program (Cycle C for employers with employer identification numbers that end in 3 or 8 and most governmental plans). Note: The deadline is January 31; however, that date falls on Saturday in 2009.

FEB 2 / Form 1099Rs due to participants to report 2008 distributions. Note: The deadline is typically January 31; however, that date falls on Saturday in 2009.