1. 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.

2. Eligibility

3. 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

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

5. Temp to Hire
Leased Employees
Service Crediting?

6. Contributions & Allocations

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

8. Forfeitures
Reallocate
Reduce contribution
Pay expenses
Mr. Forfeiture

9. USERRA
Make-Up Contributions
Compensation assumptions

10. 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

11. Distributions

12. 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?

13. 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

14. 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

15. 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 termination

16. 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

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

18. Slayer Statute
Plan Language
ERISA
State Law
Federal Common Law

19. Miscellaneous

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

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

22. 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

23. 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

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

25. 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

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