Using ESOP Planning to React to Changing Times

ESOPs In Changing Times discusses how ESOP companies and fiduciaries need to “plan and react” and reiterates the importance of ESOP Planning:

• Economic Change – "The valuation process raises fiduciary and management issues, including employee communications, benefits calculations, procedural prudence, and strategic planning."
  
  
  • Look closely, communicate clearly – Revisit your assumptions and projections used in the valuation. Have your ESOP appraiser assist you in communicating the appraisal process to the participants.
    
  • Calculate realistically – Revisit valuation methods and avoid managing/manipulating the stock price to minimize fluctuations.
    
  • Think "demonstrable prudence" – Consider obtaining an independent trustee or fairness opinion as needed.
    
  • Know Your Corporate Duties Too – Ensure responsibilities are being performed by the appropriate parties. For example, the Company is responsible for the repurchase obligation. "Be sure your parties and their process, and the plan document optimally protect the company and the ESOP fiduciaries. Additionally, corporate planning may require opinions to be obtained by management in addition to those annual ESOP update opinions."
    
  • Don't wait until the last minute – Plan ahead to avoid delays and don't procrastinate. Proactively address issues and communicate with the ESOP team.
    
    
• Political Change – What impact will the upcoming political change have on tax (and therefore ESOP) policy?
  
  
  • A resurgence in tax deferred sales of companies to ESOPs? – An increase in capital gains rates could create an increase in IRC Section 1042 transactions.
    
  • Your ESOP voice counts! - "The fact that there are multiple seats on the House Ways and Means Committee that are open in this election portends a need for an active effort in educating policy makers." Inviting representatives to visit your ESOP company is most likely more effective than sending letters.
    
  • The S in revision? –"S corporations contemplating ESOPs or companies contemplating an S corporation election should seriously examine those alternatives in 2008."
    
    
• Changes In The Law – C'est LaRue? –As a result of the LaRue Decision, plan sponsors should "review their fiduciary structure and ensure their processes involving their transactions, administration valuation and other service providers are up to snuff…ESOP companies should ensure that the employer does not become the plan administrator by default or by terms of the plan. This is particularly important for corporations with outside independent directors who may not wish to be unwittingly legally responsible for fiduciary decisions. Similarly, independent fiduciaries may be advisable for many ESOP companies.
  
  
• A Resurgence of ESOPs? – There will be more than 5 million baby boomer-owned companies looking for Ways to Sell or Transition their business.
  
  
• What To Do? –"ESOP sponsors should take pause in 2008 as they handle their routine annual compliance and fiduciary matters and periodic plan amendments to assess their entire ESOP situation and look to their future plans. Note though, there really are no "routine" matters involving ESOPs. With great tax and benefits advantages, comes complexity."
  

If ESOP planning is not a part of your administration process, you should schedule an ESOP planning meeting as soon as possible to get the process started.

ESOP Planning: 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, 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.

Here are links to the previous ESOP Planning: Distributions installments:

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

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

ESOP Planning: Distributions (3 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:

• For plans that have not started to pay distributions, do you have distribution forms and the required disclosures ready to distribute to participants? Does the paperwork satisfy all the legal requirements? Is the paperwork in a format that the participants will be able to understand? Have you anticipated the questions that you will get from the participants, and have you determined your communication strategy to answer them (e.g., providing an explanation during the exit interview, providing additional paperwork to assist the participants, providing a telephone number for the participants to call with questions)?
  
  
• Are you paying distributions using the most current fair market value? If you are paying distributions to participants based on their December 31, 2006 account balances (assuming a December 31 plan year end and an annual stock appraisal), then a participant should not be paid after December 30, 2007 based on the December 31, 2006 balance. While this is the minimum requirement, you will also need to address whether the value is "stale."
  
  
• Is the fair market value that you are using an accurate reflection of the market value or has the value become "stale"? If you pay someone a distribution on December 15, 2007, based on the December 31, 2006 stock value, the value is almost 350 days old. Some experts would argue that you are not paying the participant at fair market value. Does a stock value become "stale"? If so, when? There is no clear guidance in this area, and the determination of if and when a value becomes "stale" is subjective and is based on the facts and circumstances of your situation.
  
  
• Are any participants due to receive required minimum distributions (RMDs)? The IRS requires that participants must begin taking required minimum distributions (RMDs) once they reach age 70½. The actual date that they must begin receiving RMDs is generally no later than the April 1 after the later of reaching age 70½ and the date of termination (unless you are a 5% owner, in which case you must begin receiving RMDs regardless of your termination date). They must continue to receive RMDs each December 31 until they no longer have an account balance. The value of the RMD is calculated based on actuarial tables provided by the IRS, the age of the each beneficiary (if any), and the beneficiary's relationship to the participant. You should carefully analyze the RMD status of all employees age 69 and older so you are not caught off guard. If the participant does not take the RMD each year, the participant will owe a 50% penalty on the amount her or she should have withdrawn and the plan risks becoming disqualified.
  
  
• Do you have enough cash in the ESOP to pay RMDs? Another factor to consider for RMDs is that the plan may not have enough cash to pay to the participant(s) to satisfy the RMD requirements. If this is the case, the plan will most likely have three options:
  
  
  • The stock will be repurchased (recycled) in the plan to other participants - cash will need to be contributed to the plan.
    
  • The stock will be sold and the proceeds used to pay the participants – a stock appraisal on the date of the sale will need to be obtained.
    
  • The stock will be distributed and put back to the company (or the ESOP). It is important to note that as it gets closer to December 31, it becomes more likely that the stock value may be "stale" (see above discussion) and not an accurate reflection of the actual stock value.

  This situation can be avoided if you have identified RMDs ahead of time and have a well-planned distribution policy.

Here are links to Part 1 and Part 2 of the ESOP Planning: Distributions series. The fourth installment of ESOP Planning: Distributions will be posted Friday and will discuss the following question:

Do you have any participants who are eligible to diversify a portion of their account balances?

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

ESOP Planning: Distributions (2 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:

• What is your distribution policy? The details of preparing a distribution policy are beyond the scope of this article. The purpose of this section is to provide a sample of some of the questions you will encounter when preparing your distribution policy. Creating your distribution policy is a complex process, and you should work with your ESOP counsel and advisors.
  
  
• Will distributions be paid in lump sum or in annual installments? In addition to satisfying the statutory timing requirements for offering payments to participants, if the plan opts to pay with installments, the plan must pay substantially equal periodic payments (not less frequently than annual) over a period of time not exceeding five years. If the balance exceeds a certain amount ($935,000 in 2008), then the installment period could be extended.
  
• When will participants commence receiving distributions? Will the plan mirror the statutory timing requirements or will participants be paid on a more aggressive schedule?
  
• Will the distributions be paid in stock or cash? If you are a C corporation and your charter or bylaws do not restrict the ownership of employer securities, then you are generally required to offer distributions in the form of stock. S corporations are exempted from this requirement. However, you may still elect to offer share distributions, even if they are not required. One significant benefit of offering share distributions is providing the participants with the potential of more favorable tax treatment when taking distributions (often referred to as net unrealized appreciation (NUA) treatment).
  
• If you are paying distribution in cash, where will the cash come from? You will need to use existing cash, contribute new cash to the plan, or redeem the shares (which will require a new stock appraisal as of the date of the redemption). If you contribute cash, will you have enough deduction room to include both the cash for distributions and for loan payments (if applicable)?
  
• If you are paying distributions in shares, who will purchase the shares and what will happen to them? If the company purchases the shares, will the shares become treasury or retired shares or will they be contributed to the ESOP (again)?
  
• Will the plan segregate the balances of terminated participants into cash? This strategy provides that cash from active participant accounts is used to purchase the shares from the accounts of terminated participants. The main purpose of segregation is to prevent terminated participants from sharing in the growth of the company stock.
  
• How will the company provide funding for the distributions? Once the company has selected its distribution strategy, it will have to determine how it will provide the funding.

There are many complexities to creating a distribution policy. The above-mentioned items are only some of the issues and complexities that need to be explored. The importance of a well-planned distribution policy should not be taken lightly.

• Are you aware of your future repurchase obligation? How will the company provide funding for the future repurchase obligation? You need to have an understanding of the short term and long term financial commitment needed to satisfy the future liability obligation. The most common method to obtain this understanding is by performing a "repurchase liability study." After you know your future repurchase obligation, you need to address how you are going to fund it. The details of determining and funding the future repurchase obligation are beyond the scope of this article, but it is crucial to the success of your ESOP and your company that you know your future repurchase obligation and plan accordingly.

The first installment of ESOP Planning: Distributions can be found at ESOP Planning: Distributions (1 of 4). The third installment of ESOP Planning: Distributions will be posted tomorrow and will discuss the following questions:

• For plans that have not started to pay distributions, do you have distribution forms and the required disclosures ready to distribute to participants?
• Are you paying distributions using the most current fair market value?
• Is the fair market value that you are using an accurate reflection of the market value or has the value become "stale"?
• Are any participants due to receive required minimum distributions (RMDs)?
• Do you have enough cash in the ESOP to pay RMDs?

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

ESOP Planning: Distributions (1 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:

• Will you be required to make payments to participants in the next year? Here are the rules for determining when you must begin offering participants an opportunity to request a distribution:
  
  • IRC Section 409(o) - Qualifications for tax credit employee stock ownership plans - Distribution and payment requirements requires that payments to participants that terminate as a result of death, disability, and retirement (as defined by the plan) begin within one year after the end of the plan year of the termination. For example (assuming a 12/31 plan year end), if a participant terminates after meeting the retirement provisions of the plan on June 29, 2005, the participant must be paid out after the December 31, 2005 allocation is completed (which should be sometime in 2006), and the payment must be made by December 31, 2006.
  
  
  • For other separations of service, payment is required one year after the end of the fifth plan year after the year of termination. For example (assuming a 12/31 plan year end), if a participant terminates on June 29, 2005, the participant must be paid out after the December 31, 2010 allocation is completed, and the payment must be made by December 31, 2011.
  
  
  • If there is an outstanding ESOP loan, payments to participants terminating for reasons other than death, disability, or retirement can be deferred until the close of the plan year in which the loan is paid in full.


• What distribution provisions are in your plan document? Are they more liberal than the above-mentioned statutory requirements? In many cases the distribution provisions provided in the plan document will mirror the Code's requirements, but you should review your plan document to see if there are any additional distribution provisions in your document and treat those provisions as the minimum. You should also identify if there are any other distribution requirements. Examples include in-service withdrawals, early retirement distributions, and nonstatutory diversification distributions (which are generally treated as in-service withdrawals and not diversification distributions).
  


• Do you have a written distribution policy? If not, do you have an informal distribution policy that is not in writing? It is strongly recommended to have a written distribution policy and review it regularly. Some plans prepare a distribution policy every year. This is one of the most important items of the planning process. I strongly recommend that you do not delay preparing for this item.

The second installment of ESOP Planning: Distributions will be posted tomorrow and will discuss the following questions:

• What is your distribution policy?


• Are you aware of your future repurchase obligation?


• How will the company provide funding for the future repurchase obligation?.

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

ESOP Planning: Plan Expenses

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

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

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

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

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

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

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

ESOP Planning: Plan Documents and Disclosures

One of your most important responsibilities is to ensure that your plan documents are updated as required by law and are consistent with the way the plan is actually being administered. Plan documents include, but are not limited to, the plan document, trust document, summary plan description (SPD), and loan documents. While your review of the plan documents should be an ongoing process, you generally need to make sure that any amendments or restatements are executed by the last day of the plan year if you intend for them to be effective for that plan year. You should start by answering the following questions and using your answers as a starting point to a discussion with your ESOP counsel and ESOP advisor:

• Are all your plan documents consistent? For example, does your SPD provide for different eligibility provisions than your plan document? Now is a good time to work with your ESOP attorney to resolve any conflicts.
  
  
• Are your plan documents consistent with how the plan is being administered? You need to discuss any inconsistencies with your ESOP counsel.
  
  
• Have you received any amendment recommendations from your advisors that have not been addressed? An example would be a recommendation made during the allocation process to amend the plan to improve the compliance testing results in future years. If recommendations have been made, this review is a good opportunity to revisit the recommendations and determine whether or not they are going to be made (assuming you have not already made them). If you are not going to make the changes, it is a good idea to discuss the reasons with the party who made the recommendations and ensure that everyone is on the same page.
  
  
• Do you have signed copies of your plan documents and amendments? Are they organized and easily accessible? If not, now is a good time to work with your ESOP counsel and other advisors to organize a complete set of signed plan documents. Make sure all your advisors also have a complete set of the plan documents to ensure that the plan is being administered consistently and correctly. This is also a good time to revisit your records retention procedures to make sure you will easily be able to obtain a backup copy of the plan documents, if needed.
  
  
• Do any of your documents need to be updated or restated? ERISA requires that you update the SPD every 10 years, assuming there are no plan changes. Most likely, your plan will have made some changes and you will need to update it every five years. You may have other plan documents that are either required to be or should be restated. Your review should include an analysis of which plan documents need to be restated and when.
  
  
• Are there plan provisions that are not documented that should be? Examples include a distribution policy and how your plan handles the reallocation of repurchased shares.
  
  
• What plan disclosures are required to be delivered to participants between now and your next plan documents review? Examples include the above-mentioned SPD and the annual safe harbor notice.
  
  
• Has your plan been amended for changes in legislation? Since an ESOP plan document is individually designed, it will be your responsibility to ensure that the plan document is updated for legislative changes. This post discusses a summary of ERISA legislation from the Employee Retirement Income Security Act of 1974 (ERISA) through the Pension Protection Act of 2006 (PPA). The Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006, and according to some experts, contains the most comprehensive reforms since ERISA was enacted in 1974. Here are some of the major changes provided by the PPA that are related to ESOPs:
  
  
  • Makes the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent (more favorable contribution limits, improved portability of retirement accounts, etc.)
    
  • Accelerates vesting requirements to at least a three-year cliff or six-year graded vesting schedule (There is an exception for ESOPs with a loan outstanding.)
    
  • Increases fidelity bond maximum from $500,000 to $1,000,000 for plans with employer securities
    
  • Adds additional diversification requirements for public ESOPs
    
  • Creates a requirement to provide benefit statements to participants on an annual basis (or quarterly when assets are self-directed)
    
  • Adds another 401(k) safe harbor option that allows contributions to be fully vested in two years (which may be more desirable than the existing safe harbor options that require immediate vesting).

  There were many additional changes and opportunities provided by the PPA. The ESOP Law Blog addresses six of the ESOP-related PPA provisions. PPA amendments are generally not due until the last day of the 2009 plan year. The PPA does not distinguish between required and discretionary amendments.
  

  2007 End of Year Checklists discusses a checklist of items for the plan sponsor to address by the end of 2007. If you have a different plan year, some of the due dates will be different.
  

  There may be other requirements and desirable opportunities from prior legislation that should be added to your plan documents. Contact your ESOP counsel or ESOP advisor for more information.
  

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

ESOP Planning: Allocation Timeline

The annual employee stock ownership plan (ESOP) allocation process involves many different parties as well as different moving parts. In order to complete the ESOP allocation in a timely manner, it is important to effectively manage the allocation process. One of the easiest and most effective ways to manage the ESOP allocation process is by preparing and maintaining an allocation timeline.

What is an allocation timeline?

An allocation timeline is a report that lists the various ESOP deliverables along with the responsible party and due date. The responsible party could be the Plan Administrator, Plan Trustee, internal record keeper or third-party administration (TPA) firm, accountant, auditor, valuation firm, company or qualified-plan attorney, lending institution, or plan consultant or advisor. The level of detail needed for an allocation timeline varies from plan to plan and year to year. While you could use project management software for the timeline, a spreadsheet or word processor document will be sufficient and enable you to easily maintain the timeline and share it with all parties.

What are the benefits of using an allocation timeline?

Using an allocation timeline provides you with a tool to manage the ESOP allocation process and hold all parties accountable to meeting their objectives. It also helps you keep organized by documenting all tasks in one location.

What information should be included on an allocation timeline?

While the format of each timeline will vary, here is a list of some of the common items on an allocation timeline:

• Deliverable or item to be completed
  
• Party responsible for the task (When possible, you should identify a specific person.)
  
• Date the item is scheduled to be completed
  
• Date the item is actually completed
  
• Date the item was completed last year
  
• Number of days it will take to complete
  
• Prerequisites to processing the deliverable

How do I prepare an allocation timeline?

The easiest and most effective way to prepare an allocation timeline is to identify the key deliverables and due dates and work your way backward to the start of the plan year. The most common key deliverables include reporting final account balances, delivering participant statements, conducting employee meetings, and filing IRS Form 5500. As you move backward, you will need to define how many days each item will take to complete. For example, it may take one day to organize the trust statements and one week to prepare and review the trust accounting. If you run out of days, you will either need to change the end deliverable date or look for ways to speed up some of the earlier tasks. The level of detail to include on the allocation timeline varies from plan to plan and plan year to plan year. For example, the trust accounting for one plan may be very straightforward and may only require one item (prepare and review trust accounting reports). Another plan may involve multiple loans that are paid using both dividends and contributions and you may be working closely with the accountant. In this case, you will probably want to identify the items that each party is responsible for separately, such as prepare listing of loan payments, locate minutes containing contributions and dividends, prepare and review release of shares schedules, and prepare and review complete trust accounting reports.

What are some of the best practices to effectively use allocation timelines?

• Assign an owner to the timeline. - The owner will be responsible for ensuring that the timeline is updated (not necessarily doing any or all of the updating) and that all parties are meeting their obligations in a timely manner. If a deadline is missed, this person quickly works with the responsible party to get the allocation back on target or revises the timeline accordingly.
  
• Assign an owner who is not involved with the day-to-day responsibilities of the plan. -
  While this is not always possible, it is very effective because it allows someone to stay focused on the final deliverables and not on the details of a particular item.
  
• Ensure that the appropriate company representatives are involved in the communication process. - One of the worst things that can happen is that all parties involved with the allocation process are on the same page as far as the timing but not on the same page as others at the company (e.g., the owner, senior management, the participants). If the deliverable date is going to be changed, it is essential that the change be communicated to the appropriate people in the company.
  
• Define the number of days that it will take to complete a specific project. - This will illustrate how a delay in one part of the process affects the rest of the process and will assist you in making changes in the timeline. For example, if the final allocation cannot be completed until one week after the stock value is received, and the stock value is three weeks late, then it is impossible to expect the final allocation will be completed on time.

What items should I include on an allocation timeline?

Every allocation timeline will be slightly different. If you use the timeline effectively, you will find more items are added every plan year as your ESOP matures and you become more reliant on the timeline. Plan circumstances will also dictate the specific items on the timeline. For example, if your company is frequently involved with acquisitions and dispositions, you will probably want to add a specific item to the timeline confirming that you have gathered the appropriate information. However, this item would not be relevant for most timelines. Generally speaking, the more detailed the timeline, the better.

Sample Timeline

Here is a link to a sample ESOP allocation timeline.

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

ESOP Planning

There are only 20 days, including today, remaining in 2007. Yes, that is right, only 20 days. For calendar year ESOPs, the 2007 plan year is almost over, and it is almost time to process the 2007 allocation. If you have not already done so, now is definitely the time to start preparing for the 2007 ESOP allocation process. Last year I introduced a series of ESOP Planning articles. This year I will be updating the articles and posting them on this blog. I will start today by providing an introduction to ESOP planning.

Let's start by defining planning:

"Planning is one of the most important project management and time management techniques. Planning is preparing a sequence of action steps to achieve some specific goal. If you do it effectively, you can reduce much the necessary time and effort of achieving the goal.

A plan is like a map. When following a plan, you can always see how much you have progressed towards your project goal and how far you are from your destination. Knowing where you are is essential for making good decisions on where to go or what to do next.

One more reason why you need planning is again the 80/20 Rule. It is well established that for unstructured activities 80 percent of the effort give less than 20 percent of the valuable outcome. You either spend much time on deciding what to do next, or you are taking many unnecessary, unfocused, and inefficient steps.

Planning is also crucial for meeting your needs during each action step with your time, money, or other resources. With careful planning you often can see if at some point you are likely to face a problem. It is much easier to adjust your plan to avoid or smoothen a coming crisis, rather than to deal with the crisis when it comes unexpected."

ESOP planning is planning for both the current year ESOP administration process as well as the various events that take place over the life of an ESOP. If ESOP planning is not a part of your administration process, you should schedule an ESOP planning meeting right away to get the process started. Most companies schedule planning meetings in advance and on a regular basis. You should meet at least once per year, and depending on where you are at in the planning process, you may need to meet more often. While there is no specific time that you have to conduct your meeting(s), most companies schedule them prior to the end of the plan year, at the start of the plan year, or after the annual allocation has been completed.

If you are not already, you should consider involving other members of the ESOP team (such as your internal or external recordkeeper, ESOP consultant, and ESOP attorney) in your discussions. They will be able to contribute their experience and expertise to the process as well as gain a better understanding of the timing of the allocation process and the issues that the ESOP team is facing.

Over the next few weeks, we will examine some of the different items you should consider during the review and preparation process, including the following:

• Allocation Timeline
• Plan Documents and Disclosures
• Plan Expenses
• Distributions
• Contributions
• Dividends and S Distributions of Earnings
• Appraisal of Employer Securities
• IRS Form 5500 and Plan Audit

In the News: Fastest Growing Private Companies/Controlling Their Destiny

I hope everyone has a happy and safe Labor Day weekend.

Acadian Ambulance Service (Lafayette, LA)

Companies cited for growth acknowledges Acadian Ambulance Service, a Lafayette, LA company, for being #4,463 on the Inc. 5000 Index, a list of the 5,000 Fastest Growing Private Companies in America:

"Acadian Ambulance started in 1971 with two vehicles and eight Vietnam veteran medics, said Richard Zuschlag, chairman and CEO.

The company now has about 2,600 full-time and 400 part-time employees, and a fleet of 265 ambulances, eight air ambulance helicopters and five airplanes.

One of the biggest factors in Acadian's growth has stemmed from its majority employee ownership, Zuschlag said. Seventy-five percent of the company is owned by employees, Zuschlag owns the other 25 percent. This has prompted an innovation among employees Zuschlag doesn't think he'd see otherwise.

In its first 25 years, 100 percent of Acadian Ambulance's revenue was based on ambulance trips.

"But during the last 10 years we've begun to diversify greatly, and part of that is because of employee entrepreneurship allowing us to blossom into other areas of business, like the offshore safety business," Zuschlag said."

Trachte Building Systems Inc. (Sun Prairie, WI)

Trachte Building Systems Inc., a manufacturer of pre-engineered steel buildings for the self-storage industry, sold the 220-employee company, including two subsidiary businesses, to an ESOP on August 29:

"The employee purchase of the company ensures Trachte will remain a leading employer in Sun Prairie," said Pam Klute, vice president of human resources. "The overriding benefit of an employee stock-ownership program is it allows our employees to participate in the company's growth and success." Klute is also president of the ESOP Association - Wisconsin Chapter, which represents more than 1,400 member companies.

"The officers and employees of Trachte are excited about what the future holds," said company President Jeff Seefeldt. "This purchase allows us to manage and control our destiny. We plan to continue in our commitment to serve the self-storage industry with top-quality products and services as well as expand into categories where we can leverage our core manufacturing competencies."

Prior In the News segments can be found here:

• In the News: Corporate Restructuring/The Value of Employee Ownership/Providing Quality Service/Voting for Board of Directors/Union Negotiations
  
• In the News: Constant Comprehensive Communication and Education/Long-Term Objectives/More Than 100 Millionaires
  
• In The News: Sharing Ownership and Creating a Market / Producing a Competitive Advantage / Leaving a Legacy
  
• More ESOPs in the News
  
• In The News