ESOP Participant Information

Participant Discretionary Diversification

In order to allow employees to “hedge their bet” and decrease their exposure to a drop in the value of their employer’s stock as they near retirement age, Congress amended the law to provide that a participant who is age 55 and has 10 years of participation in the ESOP can compel diversification of up to 25% of the stock portion of his ESOP account starting in his first year of eligibility and then in the 6th year move that up to 50%.

Participant Distributions

Focusing now on ESOP distributions to existing participants, the law extends considerable flexibility.  When a participant leaves because of retirement, death or disability, benefits must commence in the year following the triggering event and continue in equal increments for up to the following 4 years.  But, where a participant leaves because of other than retirement, death or disability, the commencement of distributions can be delayed for up to 5 years—and then paid over the next 5 years starting in the 6th year, so that the company can actually have 11 years within which to fund its ESOP so that it can complete the payment process.  But, in deference to the fact that banks don’t like to see borrower monies used to redeem stock before they are paid, and to encourage banks to make ESOP loans, Congress enacted a provision allowing no payments to be made on stock that was acquired with debt until that debt has been paid in full.  The IRS has, however, (perhaps incorrectly) taken the position that this provision applies only to payments due from C corporation ESOPs.

It must be recognized that even though payments may not be required for some time, they should be planned for.  I suggest that a sinking fund be set up and funded.  Frequently key-man life insurance is used as a segment of this funding process.

Annual Appraisal Requirement

As previously noted, the law requires that the ESOP’s company stock be appraised annually, and the worth of the stock that has been allocated to participants’ accounts must then be communicated to them in writing.

Click here for ESOP – A Superb Planning Device

Leave a Reply

Your email address will not be published. Required fields are marked *