ESOP Administration Horror Stories Presented by: Pete Shuler Justin W. Stemple Crowe Horwath LLP Warner Norcross + Judd LLP Note during introductions that this is not a session on 409(p) or 1042 – which can be horror stories deserving of their own sessions.

Eligibility

Excluded Employees IRS-approved (union; leased employees; nonresident aliens with no US income) Related employers? Part-Time/Seasonal? Can they be excluded? Can they have different entry provisions? Non-benefitting? Excluding certain groups of employees

Rehires Previously a participant? Previously met requirements but did not enter? Vested? Breaks in Service?

Temp to Hire Leased Employees Service Crediting?

Contributions & Allocations

Compensation Testing Allocation 415 Compensation Inclusions Exclusions Taxable Fringe Benefits Severance Others? (e.g., bonus, commissions)

Forfeitures Reallocate Reduce contribution Pay expenses Mr. Forfeiture

USERRA Make-Up Contributions Compensation assumptions

Incorrect Share Release Calculations Not adhering precisely to the loan document The interest is often calculated incorrectly. There are many interest formulas that are different in very subtle ways Not recording prepayments correctly Not recording accrued payments correctly Incorrect formulas P v. P&I

Distributions

Qualified Domestic Relations Order QDROs allow a distribution while employed to an alternate payee (i.e., ex spouse) Divorce Judgment v. QDRO Sample QDRO Sham divorce?

Distribution Mistakes Overpayment Generally due to eligibility for diversification and distribution (or RMD and distribution) – and both are paid Paid from the wrong source Cash distributions (recycling) paid directly by the company Redemptions of stock distributions paid by the ESOP

Distribution Mistakes Withholding on stock distributions/redemptions Redemption proceeds paid in the form of a note Permissible by law but almost impossible to do correctly

Distribution Mistakes Incorrectly paying out participants who have been converted to cash because only the vested portion was converted and paid to them Assume: 100 shares - 60% vested and $10 per share @ termination

Distribution Mistakes 60 shares are converted to $600 in cash and, 5 years later, the cash is distributed to the participant The stock doubles to $20 per share at the time of the distribution, so the correct distribution amount is: ((40 share * $20/share) + $600 cash) = $1,400 * 60% = $840 And the participant is underpaid by $240

Missing Participants or Beneficiaries Steps to Locate If unsuccessful.... Check plan document Forfeiture Escheat IRA rollover / PBGC Missing Participants program upon termination of plan

Slayer Statute Plan Language ERISA State Law Federal Common Law

Miscellaneous

Fair Market Value Acquisition of Stock Recycling Redemption from Participant Redemption from ESOP

Controlled Group Parent-Subsidiary Brother-Sister Affiliated Service Group Treated as single employer Participation/coverage Valuation issues

ERISA Fidelity Bond 10% of Plan Assets; update annually Min. $1,000 Max. $1,000,000 (for plans with employer securities) 401(k)/ESOP NOT THE SAME AS FIDUCIARY LIABILITY INSURANCE

Other Scary Things No plan for or understanding of the repurchase obligation Benefit Levels – Massive or spikey ESOP loan terms set too short KSOPs – Coordinating forfeitures and mandatory payouts

Other Scary Things Unrecognized partial plan terminations Points-based allocation methods that consistently fail nondiscrimination testing PTE 80-26 Loans – Difficult to handle correctly

Don’t Forget! Please fill out your evaluation for this session You can find it in the Conference App or ask for a paper version

Warner Norcross + Judd LLP Questions ? Pete Shuler Crowe Horwath LLP 10 W. Broad Street, Suite 1700 Columbus, OH 43215 614.280.5208 pete.shuler@crowehorwath.com Justin Stemple Warner Norcross + Judd LLP 900 Fifth Third Center 111 Lyon Street, NW Grand Rapids, MI 49503 616.752.2375 jstemple@wnj.com 16823636 These materials are for educational use only. This is not legal advice and does not create an attorney-client relationship.