Employee Stock Ownership Plans PDF

Employee Stock
Ownership Plans
presented by
Amy L. Cavanaugh, CPC, QPA, QKA
on behalf of the
ASPA Education and Examination
Committee
ASPA Education Web Course
1
Welcome!
Presentation is part of a series of
discussions on advanced
consulting topics
Today’s session will be about 2

hours long and cover over 100
slides
ASPA Education Web Course 2
This session focuses on:

Distinguishing characteristics
Leveraged and nonleveraged ESOPs
Allocating shares in leveraged ESOP
Nondiscrimination
Corporate financing
Tax advantages
ESOP repurchase liability
About the Presenter
Amy L. Cavanaugh
fSelf-employed pension consultant
fLives in Albany, NY
fOver 23 years in the pension field
fASPA member
fASPA E&E committee member since 2000
fFrequent speaker at conferences
fAuthor of many articles on pension matters
fAuthor of Coverage and Nondiscrimination
Answer Book
About the Presentation
Educational pension course offered

over the internet (i.e. web course)
Brought to by the American Society of

Pension Actuaries (ASPA) Education
and Examination (E&E) Committee
About ASPA
National professional society
Dedicated to the private pension system
Over 5,000 pension professionals

Ð Actuaries, consultants, administrators, trust
officers, investment advisors, etc.

ASPA’s Purpose
Preserve and enhance the private

pension system
Educate pension professionals
ASPA’s E&E Committee

Responsible for educating pension professionals
Has developed separate professional courses of

study for actuaries, consultants and administrators
Programs consist of several courses and

corresponding examinations
Professionals may earn certificates of completion

and be awarded professional designations
Presentation’s Purpose
Prepare candidates for the C-4

examination administered by ASPA
Educate anyone interested in learning

about ESOPs

Topics to be Covered
ESOPs in general
Leveraged ESOPs
Allocation of shares
Coverage and Nondiscrimination
Diversification
Distributions and Taxation
Learning Objectives
Define measurable behavior
Describe conditions on behavior
Set level of performance
In Other Words, Learning

Objectives
Define what to study
Clarify the depth of knowledge needed
Measure your mastery of a topic

ASPA Learning Objectives
Designed for each chapter in the study

guide
Should be used to help define the

parameters of your course of study
Learning Objectives
ESOP Lesson

14
#1 - Identify and describe the

distinguishing characteristics
of ESOPS

15
#2 - Compare and contrast the
differences between a leveraged
and a nonleveraged ESOP

16
#3 - Describe the two allocation

methods used to allocate shares
within a leveraged ESOP and be
able to perform necessary
allocation calculations

17
#4 - Explain and demonstrate

how the nondiscrimination
requirements of IRC §401(a)(4)
and coverage requirements of
IRC §410(b) are applied to ESOPs

18
#5 - Describe the corporate financing
and employee relations objectives
that may be accomplished by
establishing an ESOP

19
#6 - List at least four tax advantages

a shareholder of a closely
held corporation may receive
by establishing an ESOP

20
#7 - Describe the impact the

ESOP repurchase liability may
have on the sponsor and list
three ways to mitigate the impact

21
#8 - Describe the special tax
advantages and rules applicable
to ESOPs sponsored by
S Corporations

22
After This Lesson, You Should Be

Able To:
Explain the different types of ESOPs
Explain how a leveraged ESOP works
Perform coverage and nondiscrimination
testing on an ESOP
Describe the corporate tax implications of
sponsoring an ESOP
Explain the diversification requirements
Explain the special distribution rules
ESOPs In General
Type of defined contribution plan
Employees become owners of employer

stock
Required by law to invest primarily in

the securities of the employer
Employer Security
Readily tradable common stock with
highest combination of voting power
and dividend rights
Non-callable preferred stock

fmust be freely convertible
fconversion price must be reasonable
Reasons to Establish ESOP
Meet employee benefit objectives
Special corporate financing
Uses borrowed funds to finance stock

purchase
Employee Benefit Objectives

Provide stock-based incentives in a qualified
plan context
Alternative to non-qualified stock plans
Supplement or replace conventional qualified
plans
KSOP can be created to combine an ESOP
with company stock offered through a 401(k)
plan
Corporate Finance Objectives
Obtain financing to be repaid with tax deductible
contributions
Market for stock of closely held corporations
IRC §1042 transaction to transfer ownership from a
selling shareholder of a closely held company
Employee buy-out of a company
Buy back stock from the open market and put it
employee hands as part of a takeover defense
Collective bargaining to obtain corporate ownership
in exchange for wage/benefit concessions
General Operation
Contributions of employer stock are
allocated to accounts within DC Plan
Participants who are 50 with at least ten
years participation in ESOP are able to
diversify
Distribution generally in ER stock
Plan must be designated an ESOP
Two Types
Leveraged
fIssuance ESOP
fBuy-out ESOP
Non-leveraged

Leveraged ESOPs
Plan borrows from lender to acquire

ESOP shares
Lender could be:

flending institution
femployer
Issuance ESOP
Method of financing newly issued

shares of stock in a company
Purpose is to create tax advantaged

financing
Buy Out ESOP
ESOP used to fund the acquisition of

stock from a selling shareholder
Can create IRC 1042 tax advantages for

seller

Loan Operation
Loan proceeds can only be used to
acquire stock
Loan from employer to plan to acquire
ESOP shares
fexempt from prohibited transaction rules
Loan is repaid
fwith cash contributions or dividends on
acquired shares
Interest Rate
Must be reasonable
May be variable
Loan must be for specific term

fdemand only upon default
Release of Shares
Generally loan is collateralized with

ESOP stock
Stock is released as loan is repaid
Two methods
Two Methods to Allocate Shares
Principal + Interest Method
Principal Only Method
Principal + Interest Method
Allocate shares in proportion to loan

payments for the plan year compared to
total of all loan payments
Loan payment
Total loan payments
Principal + Interest Steps

Determine principal and interest
payments for plan year
Determine total principal and interest for
remaining term of loan
Determine number of shares in
suspense account at the beginning of
the plan year
Apply formula
Principal + Interest Example
The Facts:
fLoan Amount $750,000
fInterest 5%
fTerm 15 Years
fLevel annual Payment = 72 256.72
fShares = 15,000
Year One
f15,000 shares X $72,256.72 = 1,000 shares
$1,083,850.80
Principal + Interest Example

Year Two
f14,000 shares X $72,256.72 = 1,000 shares
$1,011,594.80
Year Three
f13,000 shares X $72,256.72 = 1,000 shares
$939,338.08
Principal payments for the plan year

Total principal payments

Principal Only Method Steps
Determine principal payments for plan

year
Determine loan balance for plan year
Determine number of shares held in
suspense at beginning of year
Apply formula
Principal Only Formula
Principal paid Shares in

Outstanding X suspense
loan balance @ PYB account at
beginning
of plan year
Principal Only Example

The Facts:
fLoan Amount $750,000
fInterest 5%
fTerm 10 Years
fLevel Annual Principal Payment = 75,000
fShares = 15,000
Year One:
f$75,000 X 15,000 = 1,500 shares
$750,000
Requirements
Loan term
fmust not exceed 10 years
Annual loan payments
flevel amortization
Interest
fmay not exceed standard amortization
Loan Repayment Comments

Principal and Interest Method
fequal loan payments = level release of shares
fequal principal payments = front loaded release
of shares
Principal Only
fequal loan payments = back loaded release of
shares
fequal principal payments = level release of
shares
Special §415 Rules
Exempt Amounts:
fContributions to pay loan interest
fForfeiture allocations of leveraged shares
One Third Rule Applies
fOnly available if no more than 1/3 of
contributions are allocated to HCEs
Annual Additions
Calculated based on dollar amount of

loan repayment/contribution
fnot on the share value
Dividends paid to participants are not

considered annual additions
Coverage
ESOP portion of plan disaggregated for

ratio percentage test under 410(b)
freferred to as mandatory disaggregation
ESOP portion not disaggregated for
average benefit percentage test
faverage benefits percentage test
Nondiscrimination
Mandatory disaggregation
May not use permitted disparity
May not use in age / service weighted
formulas
fmay not be cross tested
fno uniform points plan
ESOP and non-ESOP contributions
tested together under 401(k) and (m)
Deduction Limits
Interest payments are fully deductible
feven in excess of DC 25% limit
fprovided no more than 1/3 of
contributions allocated to HCEs
Dividends used to repay acquisition
loan are deductible
Allows tax deductible loan repayments
in excess of 25% limit
Two Uses of Dividends

loan
Pass-through dividends to plan
participants
fdirectly
fthrough plan
Dividends Used to Repay Loan

Corporate deduction if dividends used
to pay off acquisition loan
Dividends on both unallocated and
allocated shares can be used to repay
loan and qualify for deduction
Deduction is allowed even if unallocated
shares are collateral for acquisition loan
Dividends Repay Loan
If dividends on allocated shares are

used to repay loan
fparticipant must receive employer shares
equal in value to dividend that would have
been paid to the participant
ffor non-leveraged shares acquired after
10/4/89, no deduction available
Pass-through Dividends
Corporations can take a tax deduction

for cash dividends paid on ESOP shares
Deduction is taken in the corporate tax
year in which the participant receives
the dividend
Dividends are deductible only if paid
currently to participants
Two Options
Dividend can be:
fpaid directly to participants by the
corporation
fheld in the ESOP and paid within 90 days
after plan year end
Participant may elect to receive
dividend in cash or to reinvest in ESOP
shares
Retaining Dividends
Dividends may be retained in the plan

as earnings
Does not qualify for deduction
More Dividend Rules
Plan should specify dividend

reinvestment policy
Participant consent is not required to
distribute dividends
Dividend pass-through can be automatic
or at election of Corporate Board or
ESOP fiduciary
Distribution of Dividends
Distribution of dividends doesn’t violate

early distribution restrictions in money
purchase plans
Distributed dividends are taxable to
participants
Not subject to 10% early distribution
excise tax
Operational Issues
Document should specify mechanics:
fwhether pass-through is automatic or not
fwhich participants are eligible
fwhether non-vested shares are eligible
fhandling of allocated vs. nonallocated
shares
fcash vs. stock dividends
fforfeitures
Voting Rights
Allocated shares only, no pass through on
unallocated shares
Full pass through registration class shares
fif acquisition loan tax advantaged
Pass through on non registered shares
fmore than 10% of plan assets; or
fissues of corporate organization and structure
If fiduciary votes shares
fERISA fiduciary standard applies
Diversification Requirements
Required
femployees age 55 with 10 years of ESOP
participation
For five years
fup to 25% of account may be diversified
each year
Sixth year
fup to 50% of account can be diversified
Plan Must Offer
Three diversification options other than

employer stock; or
Allow distribution of cash or stock
Appraisal of Stock
Independent appraisal may be required
Value must be determined at least

annually
Non-tradable stock must be subject to a

put option
Independent Appraisal
Required for all ESOP purposes if stock not
traded on established market
The appraiser should not be paid a fee based

on closing a transaction or percentage
An accountant performing audit work not be

considered independent
Contents of Report
DOL Regs. specify the substantive

content of the appraisal report
Regs. also specify when a control

premium can be paid in a transaction
Reorganization
ESOP fiduciaries should obtain special

valuation opinions in transactions
involving buyouts and other corporate
reorganization
Value of Shares
Must be determined at least annually
More frequently for certain transaction

purposes
fdiversification
f1042 transaction
Transactions between ESOP and
Party-in-interest
If publicly traded but not on a national
exchange
f the current bid and ask prices of parties
independent of the issuer and any parties-
in-interest
If not traded on a recognized market,
trustee or other fiduciary must make
good faith valuation
Distributions

71
Disposition of Shares
Publicly-traded company
femployees may sell their distributed
shares on the market
Privately held firm
Ð put option
Ð exercisable at fair market value for benefit
distribution purposes
Timing of Distributions
Distributions due to normal retirement
disability or death
fmust begin by the end of the plan year
following the year of termination
Distributions due to other termination of
employment
fmust begin by the end of the sixth plan
year following the year of termination
Special Distribution
Requirements (if leveraged)
Defer to end of plan year in which loan
has been repaid
Distributions must be complete by later
of:
fend of plan year following plan year in
which loan is repaid; or
fdate distribution would be required but for
this special rule
Form of Distribution
Lump sum or installments
finstallments must be at least annually
over a period no longer than five years
beginning with the first installment
distribution
Distribution in stock unless:
fparticipant elects cash
fbylaws restrict
Installment Distributions
Payments in substantially equal amounts
fOver a period to start within one year for a retirement
distribution
Within five years for a pre-retirement distribution
fNot to exceed five years in duration in either
case
Sponsor must provide "adequate security"
Pay interest to the ESOP participant on the unpaid
balance of an installment distribution
Installment Payments
Must also include on the unpaid balance
fadequate security
freasonable interest
Based on stock price at original
exercise date
f not be impacted by future price changes
Extension of Installment Period
Additional year for each $100,000 or

fraction thereof by which balance
exceeds $500,000
findexed annually
fmaximum period is 5 years
Permits 6 payments to be made
Participant Rights
Participant must have right to demand
distribution in whole shares
Participant must have right to sell thinly
traded assets to employer
fat fair market value
Corporation by-laws may restrict
ownership by non-ees
frequire immediate sale to employer
Put Option Part of Installments
Payment must be made within 30 days

of exercise
The option price for each installment

will change, based on current price at
time of exercise
411 (d) (6) Exemption

Ordinarily, right to receive stock or cash
would be a IRC §411(d)(6) protected
benefit
ESOP can modify distribution options if
nondiscriminatory
Employer may retain some discretion
fordinarily not allowed

Elimination of Form
If ER stock becomes readily tradable
fcan eliminate cash option
IF ER stock ceases to be readily
tradable
fcan eliminate stock option
If sale of all assets and purchaser
continues plan
fcan eliminate stock option
Right of First Refusal

Distribution of non-tradable shares may
include a “right of first refusal”
Requires participant to put the shares to

issuer at fair market value before selling
or transferring to others
Put Option
Gives recipient the right to require the
employer to repurchase all or any
portion of stock
ffair valuation formula
Can not bind the plan but plan may
assume employer obligation
fPrudent man rule applies

Put Option
Stock not readily traded must be
distributed with a put option
Exercisable during one of two periods:
f60 days following the date of distribution
f60 days in the following plan year after a
new valuation is determined and the
participant is notified
The participant must receive a notice
More on Put Options

If the put option part of a total
distribution to a participant within one
taxable year of the participant:
fMust begin within 30 days of exercise
Payment options:
flump sum
finstallments (at least annually) over a five
year period
Taxation

87
Net Unrealized Appreciation
Deferred taxation on gain in shares
fbased on difference between price shares
were purchased at and price at date of
distribution
If distribution is a lump sum and is due

to termination of employment or
received after age 59-1/2
Unrealized Appreciation
Unrealized appreciation is not taxable
until sold or put option is exercised
Unrealized appreciation is taxed as
long-term capital gain
A participant may elect to have
unrealized appreciation taxable at the
date of distribution
Based on average cost of shares
Current Taxation
Unrealized appreciation taxed currently
ftaxable as short or long-term capital gains
depending on holding period
Deferred to date of sale
ftaxable at fair market value of stock at the time
of distribution
Unrealized appreciation after distribution
ftaxable as short or long-term capital gain

Withholding
Mandatory 20% withholding is only
required > $200 cash is distributed
The withholding amount cannot exceed the
cash distributed
No withholding is required for pass-through
dividends
No withholding is calculated on unrealized
appreciation
IRC 1042 Transactions

92
Tax advantages for Shareholders

of a closely held corporation
Referred to as IRS 1042 transaction

Gain on shares sold to ESOP may be
tax-deferred
Provided certain requirements are met
fstock
fseller
Stock Requirements
Common stock
Domestic corporation
No stock outstanding that is readily
tradable on an established exchange
fat least one year before and immediately
after sale
Requirements for Special Tax

Treatment
Shares must be held at least 3 years
ftack on prior owner's holding period if gift or
inherited
Would have otherwise been subject to long-
term capital gains tax
Shares sold cannot have been received from
qualified plan or through stock option or
purchase subject to IRC §83
Can not be a S corporation
Post Transaction
ESOP must own at least 30% of
corporate equity
Proceeds of sale must be invested in
“qualified replacement property”
Replacement securities must be
purchased no earlier than 3 months
prior to sale or later than 12 months
following sale
Qualified Replacement
Securities
Within replacement period seller must

purchase qualified replacement
securities
Replacement period
f15 months total
f3 months before transaction
f12 months after transaction
Qualified Replacement Property

Securities
fstock or bonds
US operating companies
Passive investment income does not
fexceed 25% of gross receipts or
fmore than 50% of whose assets are used
in the active conduct of a trade or
business
Shareholder
Must not inherit the replacement
securities
Must obtain notarized “statement of
purchase” within 30 days of purchase
fFiled with seller’s federal income tax
return
Must obtain employer’s consent
Basis of Replacement
Cost minus pro-rata share of tax

deferred gain
Basis “stepped up” if held until death
Restrictions on Allocation
Shares sold to ESOP may not be

allocated to:
fselling shareholder
ffamily members
fany shareholder owning more than 25% of
any class of stock
Additional Rules
Another qualified plan cannot be used

to allocate amounts subject to
allocation restriction
fany restricted allocation is subject to
current taxation
50% excise tax applies to restricted
allocations
Restrictions on Disposition
10% excise tax applies to a disposition

of any of the shares acquired by the
ESOP within 3 years after the sale
Exemption for benefit distributions
Certain tax free reorganization are tax
exempt
“ESOP Benefit Distributions”

Certain tax-free reorganizations
ESOP must provide a written consent to

the election
Consent must be filed with federal

income tax return
Repurchase Obligation

105
ESOP Repurchase Liability
Important it not publicly traded

Mitigate the impact
fdiversification
fdistribution
Exercise put options
fcreates a corporate financial liability
Sources of Funds
Cash flow
Sinking funds
COLI
Debt
Third Parties
Public Offering
Nine Steps
Define objectives Determine if COLI
Project should be used
requirements Determine
Cash contributions mechanics of
Analyze cash flow repurchase
Consider sinking Explore borrowing
fund objectives
Explore 3rd parties
Objectives
Sell business?
Go public?
What are the goals of the business?
Project Liquidity Requirements
Timing and magnitude

Considerations
fturnover
fdiversification
fmortality and morbidity
20 year projection
Cash Contributions
If intend on keeping ESOP going
Can be expensive
Deductible contributions

Cash Flow
Will it be sufficient to cover repurchase
obligation
Useful if small percentage of stock is in

ESOP
Would require no further funding

“Sinking Fund”
If repurchase varies from year to year
If future obligations will be large
Systematic set aside funds
Smooth out year to year fluctuations
Long term funding strategy
Compound investments
Match assets to liabilities
COLI
Life Insurance
Contingency funding
Cash values offer source of funds
May offer a tax advantage depending
on:
fcorporate tax bracket
fstructure of the insurance product
Mechanics of Repurchase
Two options
fcontribute cash
Ð tax favored
fredeem stock
Ð fewer tax advantages
Borrowing Funds
Sponsor may borrow funds to meet

isolated, short-term “spikes” in
repurchase liability
Taking sponsoring corporation public

eliminates repurchase liability
Third Party Solutions

Especially if stock value is increasing
Large repurchase obligations
Sale of business
Internal market
ESOPs and S Corps

118
ESOPs and S Corps
Fewer tax advantages
Special nondiscrimination rules
Three Special Provisions
No 1042 tax treatment
No increased Limits for tax deductions

fprincipal and interest deduction
Can not deduct dividends

S Corp Compensation
Only W-2 wages are considered as

eligible compensation
Not self-employment income
S Corp Deduction Rules

No special deduction rules
Deductions for principal and interest on acquisition
loan is not allowed in excess of the 25% of eligible
compensation limit
No deduction is allowed for pass through dividends
No deduction is allowed for dividends used to repay
an exempt loan
Dividends on allocated shares cannot be used for
exempt loan repayment
Special Allocation Rules

No allocation
fto disqualified persons
fin nonallocation years

Disqualified Person
Deemed to own at least 10% of the

ESOP shares
“Family Unit” is deemed to own at least

20% of the ESOP shares
Family Attribution
Includes:
fthe participant’s spouse
fparticipant’s siblings
fancestors
flineal descendants, and any of their
spouses
flineal descendants of the participant’s
spouse and siblings, or their spouses
Nonallocation Year
Plan year of an S-Corp ESOP in which

disqualified persons own at least 50% of
the S-Corp stock
The IRC §318 attribution rules apply,

with special modifications
Prohibited Allocation
Prohibited allocation treated as a

deemed distribution
fSubject to a 50% excise tax
First Year
Prohibited allocation is deemed to

include all shares of the disqualified
person(s)
Regardless of whether allocated in the

“nonallocation year”
Calculating Shares Allocated
In addition to shares allocated to the

participant’s account, the participant is
deemed to own a number of the
unallocated shares proportional to the
participant’s most recent share
allocation

Effective Date
Plans established after March 14, 2001,

these rules are effective immediately
Otherwise the rules are effective for the

first plan year beginning on or after
January 1, 2005
Tax Considerations of S-Corp

ESOPs
S-Corp wholly owned by an ESOP has

no income tax liability
S-Corp ESOP cannot take part in an IRC
§1042 transaction
ESOP can provide stock-based
incentive compensation to S-Corp
shareholders
Distribution Rules
May distribute benefits without the right
to elect shares
Right to take shares can be amended

out if corporate status changes
fwould normally be considered a cutback

Merger or Termination

133
Reasons for Terminating an ESOP

Sale of Employer
No longer meeting ER/EE needs
Volatile stock price
Complete distribution of stock from plan
fno longer an ESOP
Cessation of contributions
Conversion to another type of plan
Termination Considerations
Stock distribution rights can in some
instance be eliminated in case of plan
termination

Corporate Acquisition
Types of transactions
fstock purchased by a buyer
fmerger
fpromissory note
Tender offer
frequires vote from plan participants
Review Questions

137
What are the main reasons for

establishing an ESOP?

What are the main reasons for
establishing an ESOP?
Employer tax advantages
Employee benefits
Prevent takeover
Shareholder tax advantages

What are the main types of

ESOPS?
What are the main types of

ESOPS?
Stock bonus
Non-leveraged ESOP
Leveraged ESOP
KSOP
What is the primary feature of a
leveraged ESOP?
Loan
fEmployer
fBank
Repayment triggers allocation of shares
fPrincipal
fPrincipal and Interest
What are the coverage and non

discrimination rules that apply to
ESOPs?
What are the coverage and non

discrimination rules that apply to ESOPs?
Mandatory disaggregation
No permitted disparity
No cross-testing

What are the special 415 rules?
What are the special 415 rules?
Exempt Amounts:
fContributions to pay loan interest
fForfeiture allocations of leveraged shares
One Third Rule Applies
fOnly available if no more than 1/3 of
contributions are allocated to HCEs
What are the special deduction

rules?

What are the special deduction
rules?
Interest payments are fully deductible

feven in excess of DC 25% limit
loan are deductible
One-third rule applies
What are the diversification

rules?
What are the diversification

rules?
Who
f55 and 10 years of ESOP participation
What
f25% of 5 years
f50% in 6th year
Where
f3 other investments
fcash
fanother plan
Explain a 1042 Transaction
Explain a 1042 Transaction

Shareholder can sell shares to ESOP
and avoid current taxation
Not available in S-Corp
Shares must be held at least 3 years
ESOP must own at least 30%
Must reinvest in “qualified replacement
property”
What is repurchase liability?

What is repurchase liability?
Employer may have to buy shares back
Must have a plan
Could sell to others or fund within
What are the special rules for S

Corps that establish ESOPs?
What are the special rules for S

Corps that establish ESOPs?
No 1042 treatment
No increased deduction
No dividend deduction

The 60 Second Review
Can you:
fDescribe the primary benefits of establishing an
ESOP
fExplain the types of ESOPs
fDescribe the special ESOP rules
fExplain diversification
fDetermine if a transaction satisfies 1042
fExplain the special rules that apply to S corps
that establish ESOPS
Did you say yes?

Did you say no?
Don’t Be Alarmed
Use the study guide
Return to the reading
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This concludes the ASPA E&E Web Course

ESOPs
presented by:
Amy L. Cavanaugh, CPC, QPA, QKA

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Today’s session will be about 2

This session focuses on:

About the Presentation

Educational pension course offered

Brought to by the American Society of

Dedicated to the private pension system

Over 5,000 pension professionals

ASPA Education Web Course 6

Preserve and enhance the private

Educate pension professionals

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ASPA’s E&E Committee

 Has developed separate professional courses of

 Programs consist of several courses and

 Professionals may earn certificates of completion

ASPA Education Web Course 8

Prepare candidates for the C-4

Educate anyone interested in learning

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Define measurable behavior

Describe conditions on behavior

Set level of performance

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In Other Words, Learning

Define what to study

Clarify the depth of knowledge needed

Measure your mastery of a topic

ASPA Education Web Course 12

Designed for each chapter in the study

Should be used to help define the

ASPA Education Web Course 13

ASPA Education Web Course

#1 - Identify and describe the

ASPA Education Web Course

ASPA Education Web Course

#3 - Describe the two allocation

ASPA Education Web Course

#4 - Explain and demonstrate

ASPA Education Web Course

ASPA Education Web Course

#6 - List at least four tax advantages

ASPA Education Web Course

#7 - Describe the impact the

ASPA Education Web Course

ASPA Education Web Course

After This Lesson, You Should Be

Employees become owners of employer

Required by law to invest primarily in

Non-callable preferred stock

Reasons to Establish ESOP

Meet employee benefit objectives

Special corporate financing

Uses borrowed funds to finance stock

Employee Benefit Objectives

ASPA Education Web Course 30

Plan borrows from lender to acquire

Lender could be:

Method of financing newly issued

Purpose is to create tax advantaged

ASPA Education Web Course 32

Buy Out ESOP

ESOP used to fund the acquisition of

Today’s session will be about 2

Educational pension course offered

Brought to by the American Society of

Dedicated to the private pension system

Over 5,000 pension professionals

Preserve and enhance the private

Educate pension professionals

Has developed separate professional courses of

Programs consist of several courses and

Professionals may earn certificates of completion

Prepare candidates for the C-4

Educate anyone interested in learning

Define measurable behavior

Describe conditions on behavior

Set level of performance

Define what to study

Clarify the depth of knowledge needed

Measure your mastery of a topic

Designed for each chapter in the study

Should be used to help define the

Employees become owners of employer

Required by law to invest primarily in

Non-callable preferred stock

Meet employee benefit objectives

Special corporate financing

Uses borrowed funds to finance stock

Plan borrows from lender to acquire

Lender could be:

Method of financing newly issued

Purpose is to create tax advantaged

ESOP used to fund the acquisition of

Can create IRC 1042 tax advantages for

Loan must be for specific term

Generally loan is collateralized with

Stock is released as loan is repaid

Principal + Interest Method

Principal Only Method

Allocate shares in proportion to loan

Principal payments for the plan year

Determine principal payments for plan

Calculated based on dollar amount of

Dividends paid to participants are not

ESOP portion of plan disaggregated for

Dividends used to repay acquisition

If dividends on allocated shares are

Corporations can take a tax deduction

Dividends may be retained in the plan

Does not qualify for deduction

Plan should specify dividend

Distribution of dividends doesn’t violate

Three diversification options other than

Allow distribution of cash or stock

Value must be determined at least

Non-tradable stock must be subject to a

The appraiser should not be paid a fee based

An accountant performing audit work not be

DOL Regs. specify the substantive

Regs. also specify when a control

ESOP fiduciaries should obtain special

Must be determined at least annually

More frequently for certain transaction

Additional year for each $100,000 or

Payment must be made within 30 days

The option price for each installment

Requires participant to put the shares to

If distribution is a lump sum and is due