What is an Employee Stock Ownership Plan?

Transcription

1 ESOP Administration

2 What is an Employee Stock Ownership Plan? An Employee Stock Ownership Plan (ESOP), provides employees with access to capital ownership by making them stock owners. The employee stock ownership concept operates on the premise that if employees share in the benefits of increased productivity, they will improve corporate performance. Once employees understand that their actions can have a direct effect on the success of the company, and the value of their individual ESOP accounts, they are generally more motivated to work to enhance the company s performance. In addition to providing retirement benefits for employees, an ESOP can be used as a market for company stock, as a method of increasing a company's cash flow and as a means of financing a company's growth. An ESOP is a defined contribution plan. Retirement benefits are determined based on the level of contributions made by the employer to an individual's account. What differentiates ESOPs from other defined contribution plans lies in the fact that contributions are made entirely in the form of company stock. ESOPs provide an opportunity for employees to become "owners" of the company and participate in the potential appreciation of shares acquired through the plan. Although ESOPs can serve as a primary retirement benefit plan, they are frequently an addition to an existing benefit plan structure, encompassing other defined contribution plans, such as 401(k), Profit Sharing or Defined Benefit Pension plans.

3 The Advantages of an ESOP WHY OFFER AN EMPLOYEE STOCK OWNERSHIP PLAN? TAX ADVANTAGES Contributions to an Employee Stock Ownership Plan are tax deductible. To the extent future contributions are used to repay an ESOP loan, as in the case of a leveraged ESOP, principal as well as interest is tax deductible DIVIDEND DEDUCTION Dividends paid on stock held by the ESOP are fully tax deductible when participants are eligible to take the dividends in cash or leave them in the plan for reinvestment, or when they are distributed to employees. In the case of a leveraged ESOP, dividends are tax deductible if the dividends paid on shares not yet allocated to employee accounts are used for ESOP debt service. IMPROVED PRODUCTIVITY There is evidence to suggest a connection between productivity, profitability and employee stock ownership. Research has shown that ESOP companies outperformed non-esop companies in net operating margin, sales growth, and return on equity. ENHANCED EMPLOYEE BENEFITS If you perceive your stock to be undervalued, and you wish to enhance your employee benefit program, financing a stock repurchase through an ESOP could be a cost effective as well as an appropriate strategy. AS A DEFENSIVE STRATEGY Concentrating shares in an ESOP as a defensive move can be very effective, as it allows your stock to be placed in "friendly hands." In this case, while your company will concede any potential share appreciation, you benefit from reducing outside ownership in your stock.

4 How an ESOP Works To establish an Employee Stock Ownership Plan, a firm sets up a trust to hold the assets and make contributions to it of company stock or cash which can be used to buy stock. The trustee responsible for managing the ESOP trust may be a bank or trust company, disinterested individuals, or company officers or employees. The contributions a company makes to its ESOP can be tax-deductible up to 25% of the payroll of the participants in the plan. The company can also have the ESOP borrow funds to buy new or existing shares of company stock. Stock contributions to the trust or stock purchased from the company or shareholders is allocated to the accounts of individual employees. Generally, all full-time employees with over one year of service are included in the ESOP, although there are some exceptions. Stock is allocated on the basis of relative compensation and may include a formula providing credit for years worked. ESOP accounts are subject to vesting, which means that employees acquire an increasing right to the stock in their accounts as they develop seniority. Employees must be fully vested after 5-7 years of participation in the plan. Employees pay no tax on the stock while it is in the trust. Employees approaching retirement age (age 55-60) who have at least 10 years of participation in the plan are allowed to diversify 25-50% of their account balance. Upon separation from service an employee is entitled to the full value of his or her vested account. At retirement, death or disability, distributions must begin within one year of a break in service. If the employee leaves for other reasons the distribution may be delayed for up to 5 years. Companies that are substantially employee owned may distribute cash in lieu of stock. If stock is distributed, closely held firms must offer to repurchase those shares at the fair market value. Payments to employees must be completed in the maximum of 5 years, with additional time allowed for exceptionally large payouts. Adequate security must be provided for deferred payments. The stock price in publicly traded companies is determined by the current market price being paid on the stock exchange. Closely held firms must have their stock valued at least annually by an independent valuation firm.

5 ESOP Administration PLAN SPONSOR The plan sponsor establishes the Employee Stock Ownership Plan, designing a program that will meet organizational cost and benefit objectives. The sponsor oversees, from an internal perspective, employee enrollment in the program and monitors employee terminations/distributions, reporting this census information to the Recordkeeper and Trustee on a periodic basis. TRUSTEE The plan sponsor must select a trustee to oversee the plan s assets. The ESOP trustee acts as plan fiduciary, managing the assets for the exclusive benefit of the employees. The following summarizes trustee responsibilities: > Oversee plan assets > Calculation of Dividends/Interest earned on stock > Process Distributions/Cash-Outs > Periodic Reporting to Plan Administrator/Recordkeeper to ensure accurate records ADMINISTRATOR/RECORDKEEPER At Pentegra, we commit the resources to ensure that clients receive the quality administrative support critical to the success of the plan. A flexible approach to recordkeeping enables you to choose the services that are right for you and your participants. Our recordkeeping system easily handles a wide range of provisions to fit your plan design. Pentegra provides plan sponsors with all of the components needed to successfully administer an Employee Stock Ownership Plan. PLAN RECORDKEEPING With a dedicated commitment to both accuracy and speed, Pentegra prides itself on exemplary recordkeeping services for Employee Stock Ownership Plans. We offer full recordkeeping services, including the initial establishment of employee data on our recordkeeping system. PLAN CONVERSION We handle the complete conversion of data from an existing ESOP. Pentegra will set up the existing historical plan data on our recordkeeping system. CENSUS REPORTING Each year, Pentegra provides plan sponsors with a census report, which includes each employees name, social security number, date of birth, date of hire, plan salary and employment status

6 ESOP Administration SHARE ALLOCATION Pentegra will prepare an annual share allocation report, based on data reported by the plan trustee. The share allocation summarizes the number of shares allocated to each participant annually. The plan sponsor must sign-off on the share allocation each year. DIVIDEND ALLOCATION Depending on the plan provisions and frequency of dividends, (i.e., annually, quarterly, monthly) Pentegra will prepare a dividend allocation report summarizing the amount of dividends allocated to each participant. RECONCILIATION OF PLAN DATA Pentegra will reconcile the data reported with trustee reports on an annual basis. EMPLOYEE STATEMENTS Each year, your employees will receive benefit statements summarizing transaction activity and illustrating their benefit under the plan. EMPLOYER LEVEL REPORTS Along with employee statements, plan sponsors receive Share Allocation, Share Distribution and Census Data reports, providing you with a streamlined flow of information that presents a coordinated view of your plan data. PROXY LABELS Upon request, Pentegra will prepare proxy labels for clients. COMPLIANCE TESTING By performing compliance testing annually, Pentegra helps ensure that your plan continues to meet IRS guidelines. Pentegra performs Section 415 Limitation testing, which ensures that contribution limits under the plan are not exceeded, as well as combined plan testing, which applies when an employee participates in more than one type of plan. On an annual basis, Pentegra will also perform top-heavy testing to ensure compliance with IRS regulations FILING Pentegra will prepare an annual form 5500 filing for the plan year based on data reported by the plan trustee. Although Pentegra prepares the 5500, the employer, as plan sponsor, has final sign-off and filing responsibilities. CONSULTING Pentegra provides technical guidance and consulting support needed to address plan design issues to ensure that the program continues to meet overall compensation and benefit objectives. Our experienced staff can help you gain perspective on the issues surrounding retirement plan management.

7 Administrative Responsibilities PLAN SPONSOR RESPONSIBILITIES > Plan Design > Preparation of Plan documents > Summary Plan Descriptions > Maintain plan forms (enrollment, beneficiary, distribution, Termination) > Report changes in employee data to Plan Administrator/ Recordkeeper TRUSTEE RESPONSIBILITIES > Monitor Plan assets > Calculate Dividends/Interest earned on Stock > Prepare 1099's > Report Plan Data to Plan Administrator/Recordkeeper ADMINISTRATOR/RECORDKEEPER RESPONSIBILITIES > Plan Conversion/Set-Up > Participant Recordkeeping > Share Allocation > Dividend Allocation > Employee Statements > Data Reconciliation > Compliance Testing (415 Limitation Testing, Top-Heavy Testing, Multiple Use Test) > IRS Form 5500 Package > Calculation of Age 70 1/2 Minimum Distributions > Plan Sponsor Level Reporting Pentegra Retirement Services B12-3/05

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