Accounting for the Costs of ESOPs Sponsored by Government Contractors

The Cost Accounting Standards Board (CASB) is a function located within The Office of Federal Procurement Policy (OFPP) in the Office of Management and Budget:

Administratively a function located within OFPP is the Cost Accounting Standards Board (CASB), an independent legislatively-established board consisting of five members, including the OFPP Administrator, who serves as chairman, and four members with experience in Government contract cost accounting, two from the Federal government, one from industry, and one from the accounting profession. The Board has the exclusive authority to make, promulgate, and amend cost accounting standards and interpretations designed to achieve uniformity and consistency in the cost accounting practices governing the measurement, assignment, and allocation of costs to contracts with the United States.

Effective June 2, 2008, the CASB has adopted Cost Accounting Standards Board; Accounting for the Costs of Employee Stock Ownership Plans (ESOPs) Sponsored by Government Contractors:

The Cost Accounting Standards Board (the Board), Office of Federal Procurement Policy, has adopted a final rule to amend Cost Accounting Standard (CAS) 412, ''Cost Accounting Standard for composition and measurement of pension cost,'' and CAS 415, ''Accounting for the cost of deferred compensation.'' These amendments address issues concerning the recognition of the costs of Employee Stock Ownership Plans (ESOPs) under Government cost-based contracts and subcontracts. These amendments provide criteria for measuring the costs of ESOPs and their assignment to cost accounting periods. The allocation of a contractor's assigned ESOP costs to contracts and subcontracts is addressed in other Standards. The amendments also specify that accounting for the costs of ESOPs will be covered by the provisions of CAS 415, ''Accounting for the cost of deferred compensation,'' and not by any other Standard. This rulemaking is authorized pursuant to Section 26 of the Office of Federal Procurement Policy (OFPP) Act.

The June 2, 2008 Employee Ownership Update discusses the final rule:

On May 1, after many years of uncertainty, final rules were issued by the U.S. Cost Accounting Standards Board for reimbursing ESOP companies for contributions to their plans. The final rules are very favorable to companies. An "ESOP" is defined to include any defined contribution plan designed to invest primarily in employer stock. The reimbursement is for the market value of the shares at the time a contribution is made. The cost is assignable to a cost accounting period only to the extent an allocation is made to participant accounts by the tax return filing date, including any permissible extensions. For leveraged ESOPs, the allowability of the costs follows Federal Acquisition Regulation Part 31, which allows companies to charge the costs of principal and interest on an ESOP loan provided the stock is acquired at fair market value. Dividends are allowed as a cost. The regulation does not distinguish in this regard between S and C corporations. Companies operating under an existing approved reimbursement procedure can retain that method or renegotiate under the new rules.

UPDATE 6/7/08: Cost Accounting for Government Contractor ESOPs with Cost-Plus Contracts

The rules clarify cost recognition issues related to government contractor ESOP companies with cost-plus contracts:

Moreover, when the company is a government contractor with cost-plus contracts, certain ESOP costs are reimbursable to the extent there is room in the overhead of a contract. As a result, the costs associated with the ESOP can be reimbursed by the government to the company. The issue of which costs are reimbursable however, was both controversial and ambiguous prior to final rules adopted on May 1.

The actual amount of a dividend and/or contribution to a nonleveraged or leveraged ESOP (both principal and interest) are reimbursable costs and how "reimbursable costs for the applicable cost accounting period will only apply to the stock, cash, or combinations thereof that are awarded and allocated to employee accounts within that accounting period."

It also discusses how the final rules have eliminated the distinction between a pension ESOP and a deferred compensation ESOP for cost accounting purposes.

Related Links:

• 48 C.F.R. 52.230-2 Cost Accounting Standards

• Government Contractor ESOP Cost Accounting Rules Finalized

U.S. Sugar ESOP Issues

In a complaint filed on January 31, 2008 and amended on May 2, 2008, three former U.S. Sugar Corp. employees and ESOP participants allege that their ESOP accounts were cashed out at prices lower than they should have been. The Complaint was recently discussed in major news publications and has become a major topic of discussion in the ESOP community.

UPDATE 6/25/2008: U.S. Sugar ESOP Update: Florida Purchasing U.S. Sugar Land discusses how Florida is purchasing land from U.S. Sugar Corp. and leasing it back for the next six years before turning over the land for conservation purposes, effectively shutting down the company.

UPDATE 7/2/2008: More US Sugar ESOP and California’s Franchise Tax Board (FTB) Notice 2008-4

Anaylsis

For purposes of our U.S. Sugar ESOP analysis, we will split the issues into ESOP perception issues and legal issues.

ESOP Perception Issues

Sugar workers say company cheated them on pensions was initially was posted Tuesday, May 27, 2008 on the International Herald Tribune, the global edition of the New York Times. On Wednesday the New York Times website posted an online article titled Sugar Workers, Given Shares Instead of Pension, Wonder Why Price Is So Low. Saving the most sensational headline for the print edition,
In Stock Plan, Employees See Stacked Deck appeared on the front page of the Thursday, May 29 edition of the New York Times.

The New York Times Attacks ESOPs discusses how the New York Times piece is an unbalanced article that ignores the Economic Performance of ESOP Companies and the benefits of ESOPs and employee ownership to employees, companies, and society. The post also discusses how the article is "potentially the most damaging we have seen for a very long time" and notes the influence of the New York Times on public policy:

The New York Times is very influential in New York City in shaping the opinions of public policy decision makers, one of whom is Congressman Charles Rangel (D-NY), Chair of the House Ways and Means Committee. We're sure his staff also faithfully read The New York Times.

The post also includes a copy of a letter to the editor from J. Michael Keeling, the President of the ESOP Association.

The media has a history of taking individual incidents and broadly applying them to the entire ESOP universe. A recent example of this is the sale of Bear Stearns. As with Bear Stearns, it is essential that members of the ESOP community Counter the Negative ESOP Coverage with the Facts.

If the media is looking for a balanced story, we often discuss ESOPs In the News. Here are some recent examples:

• In the News: Succession Planning, Empowering Employees, Improving Recruiting, Creating Selling Point, and Improving the Bottom Line
• In the News: More Responsibility and Better Decision-Making
• In the News: A Different Approach to Management and Compensation and Aligning Business Objectives with the Clients’ Objectives
• In the News: 2008 Innovations Award Winner, Three-Tier Reward System, 600 Hours of Management Training, and Two-Day Personal-Development Leadership Training
• In the News: Employee Retention, Distinguishing Themselves from Competition, Using Employee Input for Continuous Improvement

UPDATE 6/3/2008: The ESOP Community Comments on the U.S. Sugar ESOP shares commentary from members of the ESOP community:

• The New York Times Article Continued
• Dispatched With Prejudice
• Some comments on the U.S. Sugar story in The New York Times.

UPDATE 6/6/2008: Published Letter to the Editor Re: U.S. Sugar ESOP shares a Letter to the Editor

Legal Issues

The plaintiffs have created the US Sugar Class Action Lawsuit online case information resource, which includes an amended copy of Johnson, et al. v. White, et al., Case No. 08-80101-Civ-Middlebrooks/Johnson, and other court filings. ESOP not Sweet as Candy for Participants in U.S. Sugar ESOP provides some initial legal thoughts and contains some excellent comments from Corey Rosen, executive director of the National Center for Employee Ownership (NCEO). Rosen has also written The U.S. Sugar ESOP in Context, which discusses four key questions that the New York Times article neglected to ask:

• Should the participants have gotten the same price as the prior offer?
  
• Should the trustee have pushed for a sale of the company?
  
• Was the ESOP a "raw deal" for participants?
  
• Are ESOPs generally a good deal for employees?

Lean and Waste

What is this thing called LEAN ACCOUNTING, an article in the May/June 2008 edition of On Balance, discusses how lean principles revolve around a relentless pursuit to eliminate waste. It defines Lean and waste:

"Lean is a methodology that eliminates waste, simplifies operations and provides customers what they want, when they want at reasonable prices. Lean is not a cost reduction method. It practices shrink cycles and lead times and expedite cash collection. It does not require huge capital investments, plus it focuses on simple common sense, engages all employees and draws on their creativity."

"Waste is anything that adds costs to a product without adding value. Waste can be found anywhere and everywhere. According to lean experts, about 70 percent of work done at most businesses is waste because it does not add value to customers."

The article also discusses how eliminating waste requires an understanding of what the waste it and where to find it, and defines eight categories of waste:

• Over production
  
• Waiting
  
• Transportation
  
• Unnecessary Motion
  
• Over processing
  
• Excess inventory
  
• Defects
  
• Underutilization of Personnel
  
  

Here are some related posts:

• Five Training Points: Ownership, Participation, Open Books, Holistic Wellness, and Lean Enterprise (4/26/2008) – This post discusses lean accounting as one of five potential training points.
  
• Standardized Work and Developing Best Practices/ESOP Q&A (8/12/2007) – This post discusses how employees can be the most effective at developing best practices.
  
• Lean Enterprise Institute (5/29/07) – This post talks about the exclusion and non-participation of people at work. It also defines Lean and discusses the Lean Enterprise Institute and how eliminating waste is an easy way to build ESOP and company value.

Indiana's ESOP Initiative (IEI)

State to help employees buy out companies discusses a new Indiana State Treasury program that will subsidize bank loans with the goal of encouraging more Indiana business to sell to an ESOP.

Taxpayers will more than recoup the program's annual cost of $500,000 a year because of the tendency of ESOP companies to stay in the state and not outsource work overseas, Mourdock said. ESOPs also help workers save for retirement and create incentive at all employment levels to make the companies succeed.

"This is one more thing we can do to help existing businesses keep those jobs," he said in an interview.

The $500,000 will be taken from the $400 million to $700 million the state typically has invested in banks.

The article also discusses the risks to the taxpayers:

Mourdock said the main risk to taxpayers is the potential for companies to fail. The most likely scenario for failure would be owners' deserting the companies shortly after the sale and leaving less-experienced managers to cope.

However, he said he is trusting banks to conduct thorough credit analysis, as they would if the subsidy weren't available.

The article notes that Baby Boomer business owners are among the most obvious candidates for an ESOP.

While the Indiana Bankers Association supports the concept, they are concerned about the length of the potential loan (the program is only available for three years instead of the seven to 10 years of a typical ESOP transaction) and the education that the bankers will need to handle the complex nature of ESOP transaction.

The article notes that more than 200 ESOP companies exist in the state, and specifically mentions Herff Jones (Indianapolis, IN) and Wood-Mizer Products Inc. (Indianapolis, IN), both discussed in In the News: Maintain the Culture and Say Involved in the Business/ESOPs as an Exit Strategy/On Track for Continued Growth/Strong Management-Employee Relations, and Telamon Corporation (Carmel, IN), a technology company that formed an ESOP in 1999.

Indiana's ESOP Initiative (IEI)

The Indiana state website contains the following executive summary of the IEI:

Indiana's ESOP Initiative (IEI) was created by State Treasurer Richard Mourdock to promote and encourage the formation of new Employee Stock Ownership Program (ESOP) companies in Indiana.

ESOPs have a clear track record of creating wealth, encouraging entrepreneurial attitude, and increasing productivity. The key to retaining Indiana jobs is increasing productivity. As Treasurer Mourdock has often said, "one of the best reasons to help Indiana companies become employee-owned is that no group of employee-owners have ever, ever, ever, ever moved their company to Mexico or China!"

In order for the IEI to achieve its goals, Treasurer Mourdock is providing a $50 million investment through a "link-deposit" program to assist Indiana banks in funding ESOP transactions.

Treasurer Mourdock is also announcing that Credit Suisse, who is managing $150 million of Indiana's Public Employees Retirement Fund targeted for investment in Indiana, will consider on a case by case basis the purchasing of equity in an Indiana company for the purpose of completing an ESOP transaction.

In addition, Treasurer Mourdock has assembled an "ESOP toolbox" of resources and information for business owners and employees wanting to learn more about ESOPs and professional organizations that can assist with their creation. The ESOP toolbox will continually be updated with new information as it becomes available to IEI.

ESOP Linked-Deposit Program

The website also contains a description of the ESOP Linked-Deposit Program:

General Guidelines

A company must have their headquarters located in the State of Indiana, conduct a significant portion of their operations in Indiana, and employ the majority of their employees in Indiana while participating in the ESOP Linked-Deposit Program.

The Treasurer of State will NOT make any judgment on the credit quality of any applicant but will rely solely on the credit evaluation provided by the financial institution(s) providing the transactional loan. An applicant may not have an established ESOP prior to participating in the ESOP Linked-Deposit Program. (The program is for new ESOPs only.)

Investment Guidelines

At least 10% of ownership in the company must be transferred to the ESOP in the initial transaction. The maximum amount that will be available to a company participating in the ESOP Linked-Deposit Program will be $5 million. Funds will be deposited in the form of 12 month certificates of deposit (CDs) with an approved depository as defined by the Indiana Board for Depositories. The CDs will be renewed on a yearly basis for up to 3 years. a.The interest rate on the CDs will be determined by the Treasurer of State. i.The financial institution may charge the borrower up to 3.25% more than the rate received by the Treasurer of State on its CDs. b.CDs will be purchased by the Treasurer of State on the first and fourth Thursday of each month. The interest rate for new CDs may be adjusted on a quarterly basis at the discretion of the Treasurer of State's Office

Additional Requirements

1) A company must provide the following information to the IEI:

a)A complete business plan. b)Resumes of key managers and substantial evidence of their commitment to service after the ESOP Linked-Deposit Program is completed. c)A complete transition plan. d)Names and contact information of the firms that created the ESOP trust and did the financial evaluation of the company.

Limitations of ESOP Loans

1)Availability of funding. 2)The financial institution assumes all credit risk. In the event of default by the ESOP, the linked-deposit will be terminated at the maturity of the CDs being held by the lending institution.

Press Release

Here is a link to the press release:

State Treasurer Richard Mourdock Announces Launching of $50 Million Indiana's Employee Stock Ownership Program (ESOP) Initiative

Indiana's ESOP Initiative's (IEI) mission: Promoting Hoosier ESOPs, preserving Hoosier jobs

INDIANAPOLIS (May 08, 2008) – State Treasurer Richard Mourdock announced the designation of $50 million and the launch of IEI for the purpose of assisting Indiana businesses to become ESOP companies, which will preserve Hoosier jobs.

"It's not only critical that the state continues to bring new jobs to Indiana, but it's absolutely essential that Indiana keeps the jobs it currently has," asserted Treasurer Mourdock. "IEI's mission is to encourage Indiana businesses to become ESOP companies and preserve Hoosier jobs."

Treasurer Mourdock has placed the IEI within the Treasurer of State's Office and has created an "ESOP toolbox" of information regarding current Hoosier ESOP companies, organizations that provide professional services to ESOP companies, and educational materials about ESOP governance.

The $50 million designated for IEI and its mission is set up as a "linked-deposit" program through the Treasurer of State's Office. In the ESOP Linked-Deposit Program, the Treasurer of State will purchase certificates of deposit from local financial institutions at reduced rates of interest, and in turn the financial institutions will provide loans at reduced rates of interest to Indiana businesses becoming Hoosier ESOP companies. The initial rate financial institutions will be charging to Indiana businesses through the ESOP Linked-Deposit Program will be 4.25%. The State of Indiana will not be a guarantor or man any of the risk of default on loans made under this program.

"ESOP companies have a track record of creating wealth, encouraging the entrepreneurial spirit, and increasing productivity," explained Treasurer Mourdock. "Furthermore, no group of employee-owners has ever, ever, ever, ever moved their company to Mexico or China!"

Updates:

• Employee-Owned Top Small Workplaces, IEI, HR 333, and Broad-Based Equity Grants (5/16/08) - "Indiana State Treasurer Richard Mourdock has introduced a program to encourage banks to loan to ESOPs. The state will buy certificates of deposit from those institutions at reduced rates, increasing their funds available to loan. Banks then would loan these funds to new or existing Indiana ESOP companies for 4.25% (this is the current rate; it will change as interest rates change). The program will cost the state $500,000 annually, but Mourdock (himself a former ESOP participant) believes that the program will create a net increase in state revenues because ESOPs tend to keep jobs and business activity in the state."

IRC Section 409A Nonqualified Deferred Compensation (NQDC) Plan Regulations

Now’s the Time to Comply With NQDC Regs discusses IRC Section 409A and the related nonqualified deferred compensation (NQDC) plan regulations (see below for links to the regulations):

• What NQDC Is and Is Not
  
  • Distributions
  • Acceleration of benefits
  • Elections
    
    
• What's Covered – "The new rules apply to many common plans, including SERPs (supplemental executive retirement plans); certain SARs (stock appreciation rights); certain stock options; certain bonus and incentive deferral arrangements; certain severance arrangements; executive employment agreements that contain a deferral provision; certain split dollar life insurance; arrangements covering nonemployees such as directors; 457(f) plans; and other arrangements providing for the payment of compensation in the future. Some plans covered may not previously have been regarded as deferred compensation."
  
  
• Plethora of IRS Guidance (see below for details)
  
  
• Decisions for 2008
  
  
  • Payment elections - "You can make new elections regarding distributions dates and form during the transition period"
    
  • Linked payments – "The ability to link a payment election under an NQDC plan to an election under a qualified plan has been extended through 2008."
    
  • Grandfathering – "Clients also have to decide whether to preserve grandfather treatment for amounts deferred before 2005."
    
    
• More Regulation to Come? - "If I'm planning on making any changes in deferred compensation, I would try to do it earlier in the year rather than later"

If the Plan does not meet certain requirements, then some or all of the income deferred under the plan may become includible in gross income in the year of the failure. An additional 20% excise tax may also be imposed. The most important thing is to determine who is subject to 409A, as "the majority of the corporate agreements involved with professionals have provisions for accelerating or delaying payments, which can all trigger 409A issues."

History of 409A Regulations

Section 885 of the American Jobs Creation Act of 2004 (AJCA) added IRC Section 409A - Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans, which provides that all amounts deferred under a NQDC plan for all taxable years are currently includible in gross income unless certain requirements are satisfied, to the Code:

Section 409A provides new and comprehensive rules governing NQDC arrangements. More specifically, § 409A provides that all amounts deferred under a NQDC plan for all taxable years are currently includible in gross income (to the extent not subject to a substantial risk of forfeiture and not previously included in gross income), unless certain requirements are satisfied. Section 409A is effective with respect to amounts deferred in taxable years beginning after December 31, 2004. It also is effective with respect to amounts deferred in taxable years beginning before January 1, 2005, but only if the plan under which the deferral is made is materially modified after October 3, 2004. In other words, § 409A may implicate exams starting with the 2004 audit cycle. If § 409A requires an amount to be included in gross income, the statute imposes a substantial additional tax. Employers must withhold income tax on any amount includible in gross income under § 409A. Section 409A also provides that deferrals under a NQDC plan must be reported separately on Form W-2 and Form 1099, as applicable.

• The requirements were provided in IRS Notice 2005–1 - Guidance Under § 409A of the Internal Revenue Code. Portions of this Notice were replaced by the Final Regulations.
  
  
• The IRC Section 409A Final Regulations - Treasury Regulation (TD 9321) - Application of Section 409A to Nonqualified Deferred Compensation Plans were issued on April 10, 2007, detailed in Nonqualified Deferred Compensation: Transition to Final Regulations, and effective for tax years beginning after 2007.
  
  
• Notice 2007-78 - 2008 Transition Relief and Additional Guidance on the Application of § 409A to Nonqualified Deferred Compensation Plans extended the document compliance deadline for one year and provided additional limited transition relief.
  
  
• IRS Notice 2007-86 - Notice of Additional 2008 Transition Relief under Section 409A extended the effective date of the final regulations through the end of 2008.
  
  
• IRS Notice 2007-100 - Transition Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with § 409A(a) in Operation established the Nascent Voluntary Correction Program, which is a limited corrections program for inadvertent operational violations.
  
  
• IRS Notice 2007-89 - Reporting and Wage Withholding Under Internal Revenue Code § 409A is an extension to the 2007 tax years of the 2005 and 2006 tax year guidance provided under IRS Notice 2006-100 - Reporting and Wage Withholding Under Internal Revenue Code § 409A. It "provides guidance to employers and payers on their reporting and wage withholding requirements for calendar year 2007 with respect to amounts includible in gross income under § 409A of the Internal Revenue Code."

NQDC Audit Technique Guides

Corporate Executive Compliance contains links to audit technique guides (ATGs), including one for NQDC Plans, which agents use during the course of corporation and/or executive employee tax examinations.

401(k) Loans – The Pros and Cons of Taking a Participant Loan and the Order of Priority of Personal Loan Resources

Time to Rebut a Misconception: The Hypotheses - Retirement Plan Loans are Double Taxed is an informative article in the Spring 2008 edition of the ASPPA Journal (page 36) that ranks the order of priority for personal loan resources:

1. Home Equity Loan
   
2. Margin Securities Account
   
3. Retirement Plan Loan
   
4. Bank Loan
   
5. Credit Card Loan

The article also asserts that the theory that borrowed money is double taxed because the loan is paid back with after-tax dollars is inaccurate:

While it may be true that the interest paid by the borrower is double taxed, that simply reduces the net return paid by the participant for the loan, and that rate may be better than he or she is earning in the account had the loan not been taken.

It provides an oversimplified example, a typical example, and a pure theory example.

Should I Borrow From My 401(k)?

Should I Borrow From My 401(k) Plan? discusses reasons to take out or avoid taking out a 401(k) loan. It is important to understand the pros and cons of 401(k) participant loans and the facts and circumstances of the individual:

A good reason to take out a 401(k) loan is because:

• There is no credit check.
  
• It is convenient. For many plans you can apply online or with a telephone system in a matter of minutes.
  
• The interest you are paying is reasonable. The rate is set by the plan and is usually one or two points above the prime rate.
  
• There are no restrictions. You can borrow at any time for any reason.
  
• You are paying interest to yourself.
  
• The interest you are paying yourself is providing you with a reasonable rate of return.
  
• You do not have to pay taxes on the interest you are earning until retirement (or when you take a taxable distribution).
  
• You select which investments will be sold to fund the loan.
  

A good reason to avoid taking out a 401(k) loan is because:

• If you leave the company for any reason, you will most likely have to pay the loan in full right away. If you cannot pay the loan right away (usually within 60 days), you will be in default, taxed on the full balance, and may need to pay a 10% penalty.
  
• You may need to reduce the contributions you are making to your 401(k) plan to make the loan payments. This will ultimately reduce the amount available to you at retirement.
  
• The interest you are paying yourself could provide a smaller rate of return than the investments that the money would have otherwise been invested in. This "opportunity cost" will be compounded over time and ultimately reduce the amount available to you at retirement.
  
• The interest you are paying yourself will be taxed twice, once when you originally earned the money (e.g. from your paycheck) and again when it is withdrawn from the plan. (See above discussion)
  
• You have very limited flexibility with setting up or changing the payment terms of the loan.
  
• You are spending money that you have already saved.
  
• You may change your retirement savings mindset. The money you are saving is for your retirement.
  
• You may be charged loan fees.

Updates/Related Blog Posts:

• 401(k) Debit Cards – How Do They Work and Are They a Good Idea (1/19/08)
• 401(k) Debit Card/Line of Credit (8/16/07)
• Should I Borrow From My 401(k) Plan? (1/8/07)

Related Links

• Time to Rebut a Misconception: The Hypotheses - Retirement Plan Loans are Double Taxed

H. Con. Res. 333: Expressing continued support for employee stock ownership plans

Rep. Maurice Hinchey [D-NY] introduced H. Con. Res. 333: Expressing continued support for employee stock ownership plans on April 24, 2008. The bill is cosponsored by Rep. Dana Rohrabacher [R-CA] and has been referred to the House Committee on Education and Labor. Here is the text of the legislation:

HCON 333 IH

110th CONGRESS

2d Session

H. CON. RES. 333

Expressing continued support for employee stock ownership plans.

IN THE HOUSE OF REPRESENTATIVES

April 24, 2008

Mr. HINCHEY (for himself and Mr. ROHRABACHER) submitted the following concurrent resolution; which was referred to the Committee on Education and Labor

CONCURRENT RESOLUTION

Expressing continued support for employee stock ownership plans.

Whereas in the Employee Retirement Income Security Act of 1974, Congress codified a technique of corporate finance which utilizes employee stock ownership, officially named an employee stock ownership plan (ESOP);

Whereas in the 33 years since the statutory recognition of ESOPs, there have been ample data collected by objective research indicating that the vast majority of corporations sponsoring employee stock ownership through ESOPs are high performing companies that, among other indicia of high performing companies, have better sales, are more sustainable, pay better, and provide more retirement savings compared to similar companies that are not employee-owned; and

Whereas Congress, in more than 15 laws since 1974, has made it explicit that ESOPs are to serve the dual purpose of providing retirement savings and stock ownership for employees, as well as being a financing technique for corporations: Now, therefore, be it

Resolved by the House of Representatives (the Senate concurring), That Congress expresses its continued support for employee stock ownership plans.

The ESOP Association has issued a press release applauding the resolution:

J. Michael Keeling, President of The ESOP Association, had this to say about the Resolution: "I welcome the bi-partisan efforts of Congressman Maurice Hinchey (D-NY) and Congressman Dana Rohrabacher (R-CA). The leadership of these House senior members to reiterate the thirty plus years of support for employee ownership through ESOPs is important. Clearly, change is in the wind but a commitment by Congress to a fair and more equitable form of ownership is as important in the 21st century as in the 20th. On behalf of the 2,500 plus members of The ESOP Association, I urge all members of Congress to co-sponsor this resolution. Research has consistently shown that employee owned companies are high performing, have better sales, and provide more retirement savings compared to their non-ESOP counterparts."

Updates:

• H. Con Res 333 Update – Five Co-Sponsors (6/8/08) - There are currently five co-sponsors to H. Con. Res. 333: Expressing continued support for employee stock ownership plans, which was introduced by Rep Hinchey, Maurice D. [NY-22] on 4/24/2008:
  
  Rep Rohrabacher, Dana [CA-46] - 4/24/2008
  Rep Thompson, Mike [CA-1] - 4/30/2008
  Rep Jones, Walter B., Jr. [NC-3] - 5/15/2008
  Rep McCrery, Jim [LA-4] - 5/15/2008
  Rep Walz, Timothy J. [MN-1] - 5/15/2008
  
• Employee-Owned Top Small Workplaces, IEI, HR 333, and Broad-Based Equity Grants (5/16/08) - "Maurice Hinchey (D-NY) and Dana Rohrabacher (R-CA) have introduced House Concurrent Resolution 333, which states, "Congress expresses its continued support for employee stock ownership plans." The resolution notes that "there have been ample data collected by objective research indicating that the vast majority of corporations sponsoring employee stock ownership through ESOPs are high performing companies that, among other indicia of high performing companies, have better sales, are more sustainable, pay better, and provide more retirement savings compared to similar companies that are not employee-owned." Hinchey is one of the more liberal members of Congress and Rohrabacher one of the most conservative."

Non-Spouse Rollover Rules

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

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

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

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

Updates/Related Blog Posts:

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

Related Links:

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

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

Open-Book Management

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

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

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

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

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

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

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

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

Open Book Management How-to-Guide

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

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

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

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

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

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

Updates/Related Blog Posts:

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

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

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

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

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

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

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

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

Updates:

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

Related Links:

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