Age 55 Diversification 18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin Swerdlin & Company Friday, April 16, 2004

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company What We Will Discuss  Basic Rules  Examples Timeline Election Forms Acting on Election  Diversification Calculations  Sticky Issues

Basic Rules

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Age 55 Diversification  Code Section 401(a)(28)(B)  Allows participant to diversify out of company stock.

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Eligibility 10 years of participation in plan Age 55

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Stock Eligibility  Shares of company stock acquired by trust after December 31, 1986  May be allowed with respect to all shares

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Election Period  6 year period  Begins when participant meets eligibility requirements

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Elections Able to diversify 25% of qualifying shares First 5 Years Final option to diversify up to 50% of qualifying shares 6 th Year

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Computing Shares Total of allocation shares that have ever been eligible for diversification Any shares that have been previously diversified - minus

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Exceptions  Not required if shares in participant’s company stock account have a market value of $500 or less Market Value $500 <

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Timing of Elections  Must be granted to participant within 90 days of close of plan year during which he meets requirements

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Implementation  Within 90 days after the last day of the 90-day election period

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Alternatives  Company may implement diversification elections by:  Making a distribution of the diversified shares or  Providing at least 3 investment options within the ESOP (or another plan)

Corporation Effective Date of ESOP: January 1, 1980 Diversification Occurs: Age 55 and 10 years of participation KL Corporation also sponsors a 401(k) Plan

Leon Kelso Date of Birth: January 1, 1935 Date of Participation: January 1, 1995

Diversification Procedures Timetable DescriptionDue Begin discussions regarding alternatives to comply and requirements. Two years before plan is subject to diversification. Review plan document as it relates to diversification. One year before plan is subject to diversification. Send preliminary diversification election forms to participants eligible to diversify. If final allocation report and stock valuation are completed, send final forms instead. Within 90 days after the end of the plan year. Send final diversification election forms to participants eligible to diversify. As soon as possible after allocation and stock appraisal are completed. Complete diversification for those choosing to diversify. Within 180 days after the plan year end (provided final allocation and stock appraisal are completed by that date).

Diversification Timeline LK Attains Age 55 01/01/1990 Joins Plan 01/01/1995 Preliminary Explanation 01/01/ years plan participation (eligible for diversification) 12/31/2004 Preliminary Election Form 01/01/2005 Returns Preliminary Form 03/31/2005 (90 days) Appraisal and Allocation Complete 04/15/2005 Final Election Form 04/30/2005 Execute Transfer 06/30/2005 (180 days)

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Election Forms Preliminary 2004 Diversification Election Notice

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Election Forms Final 2004 Diversification Election Notice

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Election Forms Final 2009 Diversification Election Notice

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Acting On The Election  Transfer to KL Corporation 401(k)  Take Cash  Taxed as ordinary income and subject to any applicable penalties  Roll over to IRA  Take Stock  Put Option is available (closely held)

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Diversification Calculation If the plan allows the participant to diversify more than the number of shares required under the Code, there are no provisions under the Code or regulations allowing those shares to be deducted from the amount available for diversification during the qualified election period. However, they must be included in determining the total number of post 1986 shares allocated to the participant's account.

Sticky Issues

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Determining Years of Participation Vesting: 1,000 hours of service in a plan year Eligibility: 1,000 hours during initial year of employment and anniversaries thereof – or – if fewer than 1,000 hours during initial year of employment, measurement period reverts to plan year 1,000 hours of service within a 12-month period General year of service definition Active Employees

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Determining Years of Participation  Code is unclear  Conservative approach: As long as a terminated participant has a vested benefit remaining in the plan, he/she is considered to be a “Participant” under the Internal Revenue Code; therefore, for each plan year that they have a vested balance, they have a year of participation for diversification purposes What About Terminated With a Vested Account Balance?

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Determining Years of Participation  There is no clear guidance; however, the conservative approach is to count years of participation from entry in the older plan. What Happens When Plans Merge? Merges existing 401(k) into ESOP Right Away: Participants may have 10 years of participation if you include their years in the 401(k) plan Employer sets up new ESOP

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Determining Years of Participation  Recommendation  In both instances, draft documents to specifically define years of participation for diversification purposes.

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company What About Reshuffling?  Each participant has same proportion of shares and cash  How do you keep track of shares?  Administratively maintain separate “buckets” for post 1986 shares  For qualifying participants, diversify within the plan and transfer diversified shares to cash investment  Any other suggestions?

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Deadline Dilemmas  How do you meet the 90 Day and 180 Day deadlines?  Offer a preliminary diversification election form based on prior year information  Upon completion of appraisal and allocation, provide a final election form based on final information

18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin, Swerdlin & Company Deadline Dilemmas  What if you miss the deadline?  Creates an operational error for the plan.  Correct the problem so that the plan is in the same position it would have been had the error never occurred; offer the participant the diversification right at the price that would have been paid when the election should have been made