3/1/2015. Death, Disability & Retirement. Termination for Other Reasons

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1 ESOP Distributions The Rules & Realities Illinois Chapter Spring Conference Chicago, IL March 5, 2015 Barbara Clough, QPA, QKA Blue Ridge ESOP Associates Kjersti Cory Bankers Trust Company 1 Death, Disability & Retirement General ESOP Rule payment commences by end of the plan year following the plan year in which severance due to event occurred Payment may be made in lump sum or substantially equal installments (not to exceed 5) Period may be extended for large balances Greater than $1,050,000 One additional year for each $200,000 excess 2 Termination for Other Reasons General ESOP Rule payment commences by end of the fifth plan year following the plan year in which severance occurred Plan Document may allow earlier distribution if vested account balance under $5,000 Under $1,000 cash withholding $1,000 - $5,000 can be automatically rolled over 3 1

2 Retirement the Reality A Participant s Retirement Date may not match the plans definition of Retirement This disconnect can affect Timing of distribution Vesting Whether a contribution is received in year of termination 4 Retirement the Reality Different provisions between 401(k) & ESOP Plan s do not always permit a participant who terminated employment but later meets retirement provisions the opportunity for earlier commencement of payments 5 Retirement Real life situations George Lopez 74 year old participant retires but only has 4 years of participation Retirements at age 62 having to wait for the plan retirement age of 65 Participant's who turn 65 during the plan year who retire expect payout ASAP 6 2

3 Disability the Reality Your Plan s definition of Disability might not match your Participant s interpretation of their disability Not all Plan s provide: Contribution allocations to disabled participants 100% vesting to disabled participants 7 Disability the Reality Disability is not always noted as the reason for termination Important to review all documents and timing of events Confirm that the Participant meets the Plan s definition of Disability 8 Disability the Reality Plan Administrator may be informed of Disability determination after year end allocations have been finalized In event of delayed notification/determination payment may have been inadvertently delayed What if the share price has declined? 9 3

4 Disability Real life situations Barry White disabled; SSA Award letter; all documentation in house; dies before distribution is sent Sue Brown terminates employment, diagnosed with terminal illness. Is she disabled? 10 Death Distributions 409(o) provides that payments comment not later than the end of the plan year following the plan year in which separation due to Death occurred. Typically ESOPs provide payment of Death benefits during period where acquisition loan is outstanding In any event: Required minimum distribution (age 70 ½) rules apply Account must be paid in full by year end of fifth anniversary of death 11 Death the Reality Need to obtain Death Certificate Review Beneficiary Designation Form No form refer to provisions of Plan Document Remind Participants annually to review and complete beneficiary designation forms 12 4

5 Death the Reality Special Situations happen ALL the time! Death of divorced Participant Child or Trust as beneficiary Competing claims Competing claims and the Plan says: If a married Participant designates the Participant s spouse as the Participant s beneficiary, and subsequent to such designation the Participant and the Participant s spouse are divorced, such designation shall automatically be voided. In this instance the Participant s Beneficiary is 13 Death Real life situations Clint Eastwood passed away; no beneficiary; no spouse but an 8 year old child James Dean passed away; beneficiary was his girlfriend and two children; death certificate showed he had a wife Sue Brown from disability situation Her exhusband (legally divorced) obtains POA and wants to complete Beneficiary Designation naming children, but Sue dies first 14 Diversification Qualified Participant has the right to elect to diversify up to 25% of the number of shares in his/her post-1986 ESOP stock account for the first 5 years and up to 50% of the number of shares in his/her post-1986 ESOP stock account for the 6th year after satisfying the diversification eligibility requirements Qualified Participant : age 55 and 10 years of ESOP participation Election opportunity not required (but still permitted) if shares in stock account have market value of $500 or less 15 5

6 Diversification Diversification Alternatives Cash distribution Taxed as ordinary income Subject to 10% penalty for pre-age 59½ distributions Stock distribution (subject to put option if closely held company) Taxed as ordinary income Subject to 10% penalty for pre-age 59½ distributions Transfer to company s 401(k) or profit-sharing plan Rollover to IRA Offer 3 or more investment alternatives in ESOP 16 Diversification Sample Timeline Requirement/Task Identify participants eligible for diversification Send preliminary diversification forms to participants i eligible ibl for diversification Send final diversification forms to participants eligible for diversification Complete diversification distributions or transfers for participants who elected to diversify Timing Six months before year end (target: July for calendar year plan) Within 90 days after year end (preliminary i elections should ldbe made by March 31 for calendar year plan) As soon as possible after updated stock valuation and current allocations are complete Within 180 days after plan year end (target: June 30 for calendar year plan) 17 Qualified Domestic Relations Orders A domestic relations order (DRO) is an order made pursuant to state domestic relations law that relates to the provision of child support, alimony or marital property rights for the benefit of a spouse, former spouse, child or other dependent of the participant 18 6

7 Qualified Domestic Relations Orders A state authority, generally a court, must actually issue a judgment A divorce decree does NOT necessarily establish a DRO A retirement plan is not permitted to follow the terms of the order unless the DRO is determined to be a QDRO 19 Qualified Domestic Relations Orders A Qualified Domestic Relations Order (QDRO) assigns to an Alternate Payee the right to receive all or part of the benefits payable to a retirement plan participant A QDRO must include certain information and meet the requirements of 414(p) 20 QDRO Procedure Outlines steps for: Responding to an Order Testing it Approving or denying the Order Written procedure which is part of: Plan Document Separate Determination Checklist Component of Distribution Policy 21 7

8 QDRO Procedure Best Practices: Promptly acknowledge receipt Review within a reasonable time frame Utilize checklist to confirm order contains required ed elements Request assistance 22 QDRO Procedure Key Elements: Name and last know mailing address of participant and alternate payee Name of plan Dollar amount, percent of account or method of determining the benefit to be assigned to alternate payee Distribution details 23 QDRO the Realities Orders don t include key elements Benefit payments do not meet timing and options allowed by Plan Valuation date per QDRO different than plan allocation dates QDRO has language splitting based upon a period of time typically date or marriage to split Need to proceed with caution for participants who are in pay status or eligible for diversification 24 8

9 QDRO Timing of Payments When does the Plan permit payment to commence? Early distribution once order is reviewed and accepted Plan may provide payment is postponed until the earlier of two events: Earliest date Participant may receive distribution from the Plan (whether employed or not) Earliest age distribution is available after separation from service, LATER of: Date Participant is age 50, or Earliest date participant could receive distribution if he would separate from service with the employer 25 Questions & Answers Thank You! 26 9