Exploring Special Plan Types MaryAnn Geary Senior

Transcript:Exploring Special Plan Types MaryAnn Geary Senior:
Exploring Special Plan Types MaryAnn Geary Senior VP Administration, BPAS What is an ESOP? An Employee Stock Ownership Plan (ESOP) is a qualified defined contribution retirement plan that is designed to invest primarily in employer securities Type of ESOPs Leveraged and non-leveraged About 75% of ESOPs are leveraged 4 Company sets up ESOP Trust Company makes annual tax-deductible contributions in cash or stock to ESOP Cash used to buy stock from current shareholders Shares allocated to employee accounts within the ESOP based on salary. ESOP holds stock for employees and annually notifies them how much they own and how much stock is worth. Employees receive stock or cash after they retire or leave company, a vesting schedule applies Source Morgan, Lewis Non – Leveraged (1) Lender lends to company (2) Company lends to ESOP (3) ESOP buys stock from existing shareholders (4) Company makes annual tax-deductible contributions to ESOP. (5) The ESOP then in turn repays lender (6) Employees receive stock or cash when they retire or leave (vesting applies) Source Morgan Lewis Leveraged ESOP ESOPs - Advantages Provides ownership mentality for employees which could result in increased productivity Provides for the continuity of the company and the employees Can be leveraged Possible business succession tool Allows seller to sell in stages, providing a gradual withdrawal while allowing heirs, key employees or others partial ownership interest in company Can provide tax advantages to corporation and selling stockholder ESOPs - Advantages Can be leveraged Creates market for stock of a closely-held company Creates a ready buyer for company and allows business to be sold on owner’s terms Can obtain tax deductible financing for corporate expansion including acquisition of new company assets Can be used to finance mergers and acquisitions with tax deductible loans to buy stock ESOPs - Disadvantages Complicated with high start-up costs compared to other plans Loan repayments for a leveraged ESOP create an annual contribution obligation Only allocation methods allowable are pro-rata. ESOPs can not be cross tested or integrated Owner must adjust to sharing ownership with the employees Increased fiduciary liability Participant account balances are not diversified initially If the company fails…… Key Words What is a KSOP? A KSOP is a term of art for an ESOP that includes a 401(k) feature KSOPs may be invested in employer stock in elective deferral accounts, matching accounts, employer discretionary accounts or any combination of the three Advantages of