Ohio Employee Ownership Conference April 29, 29 2011 ESOP Administration ‘Gotchas’ and dH How T To A Avoid id Th Them Thomas E. Potts,, Jr.,, CPA Fiduciary Trust Services, Inc. 5140 Commerce Circle Indianapolis, IN 46237 (317) 888-1400 tom@phfcpas.com www.fiduciarytrustservices.com Lynn y Archer,, Partner Barnes & Thornburg, LLP 225 South Sixth Street, Suite 2800 Minneapolis, MN 55402 (612) 333-2111 Lynn.archer@btlaw.com www.btlaw.com Pete Shuler, Partner Crowe Horwath LLP 10 West Broad Street, Suite 1700 Columbus, OH 43215 (614) 280-5208 pete.shuler@crowehorwath.com www.crowehorwath.com Rebecca Hoffman, Director Director-Consulting Consulting Principal Financial Group 896 King William Drive Charlottesville, VA 22901 (434) 975-3787 Hoffman.Rebecca@principal.com www.principal.com B Benefits fit off Plan Pl Qualification Q lifi ti { { Employer deduction for contributions when made Tax deferred f retirement savings z z { Trust doesn’t generally pay tax on income Benefits eligible for rollover Benefits of S corporation ESOP structure 2 I Impact t off Plan Pl Disqualification Di lifi ti { { { { { Employer p y loses deduction for nonvested contributions z Generally, deduction taken by employer when amounts become vested Employees recognize current income as amounts vest Trust recognizes taxable income on earnings (interest, dividends, capital gains) Distribution made during nonqualified years z Not eligible for rollover z Excise tax may apply for any amounts rolled over that exceed eligible IRA contribution amount z Tax deferred retirement savings Termination of S corporation status and related benefits 3 Impact of Plan Disqualification (cont.) { As if the rest wasn’t enough Termination of S corporation status and related benefits z z Company reverts to C corporation C corporation p taxes due 4 Pl D Plan Documentt { { { Follow the terms of your plan document Make sure SPD matches plan M k sure combined Make bi d plan l provisions i i are coordinated z z { HCE top paid group Top heavy Compliance with IRS rules and regulations 5 E l Employee D Data t C Collection ll ti { { Employee data is the foundation Make sure it is accurate z z z z z z { Dates Hours Military leave status Family relationships Allocation restriction information due to Section 1042 elections Compensation Common mistake – allocation eligibility determination error due to submission of incorrect dates/hours 6 C Compensation ti { Many different forms and purposes Section 415 regulation amendment { Common mistakes: { z z z z z Not accounting for the changes made by the Section 415 regulations g Gross vs. taxable Exclusions from eligible compensation Mid-year compensation Group term life insurance 7 R hi Rehires { { { { { Re-entry Vesting Restoration of forfeitures Future installments Reverse segregation 8 B Benefits, fit Rights Ri ht and dF Features t { { { Benefits, Rights and Features (BRFs) Benefits Creativity might run afoul of nondiscrimination rules Watch areas: z z z z z Excluding specific participants from recycle/purchase transactions Targeted reshuffling Excess diversification Segregation policies Distribution policies 9 E Excess A Annuall Additi Additions { { { Prevention or correction Prevention = reallocate under the ESOP Correction = qualification failure, correct under EPCRS z z EPCRS preferred approach is to return deferrals and forfeit associated match Questionable availability of self correction program 10 Oth Common Other C ‘G ‘Gotchas’ t h ’ { { { { Vesting – Remember vesting percent adjustments when distribution occurs in year of termination Required minimum distributions (RMDs) – don’t forget about the 5% owner rule and the death RMD rule Updated beneficiary forms Bonuses to S S-corp corp participants expensed when paid – no accrual 11 SC Corporation ti A Anti-abuse ti b T Testing ti { { { Prevention is key! Do NOT add synthetic equity structures without knowing impact Determine the impact of all equity, synthetic equity and ESOP transactions BEFORE taking such action 12 EPCRS O Overview i { { { Program overview Self correction VCP 13 IRS A Audits dit { Generally Gene all more mo e “technical compliance” audits a dits which require large amounts of data: z { { Annual administrative tests, employee account statements plan sponsor tax returns & payroll statements, records, Forms 5500 The ESOP document compliance is less integral to the review,, since the current determination letter cycle program agents are very thorough in their review of each plan every 5 years Common Gotchas: z Inadvertent partial termination due to layoffs 14 DOL A Audits dit { { If you o have ha e an S-corp S co p ESOP, ESOP count co nt on a DOL a audit dit A self-audit can be very helpful to identify and correct issues with: z z z { Specific ttransactions ansactions Specific audit initiative subject matters Payment of expenses from plan assets Common Gotchas: z Using non-ERISA loan documentation and terms for an exempt loan (e.g. recoupment of fees of collection), lack of accurate records of who was serving as Trustee at what time, ESOP stock valuations and how they are reviewed by ESOP trustees 15 Plan Governance - Who is Calling th Sh the Shots? t ? { Pl Plan document d silent il or ambiguous bi z z z z { { Stock purchases Recycled shares Sources applied to repayment of the loan Distribution timing, method, and form Who is making these decisions at your company? Look to your plan document and trust agreement for roles and responsibilities 16 Ad i Advisor S Selection l ti { ESOPs are not the same as other qualified plans z { An extra set of p plan q qualification rules Good signs when picking advisors z z Significant g ESOP p practice ESOP related association involvement Authored ESOP articles { Conference speakers { Association advisory committees { 17 Q Questions? 18