If it hasn’t happened to you already, you may have a future encounter with not being able to locate a former ESOP participant with a vested account balance. This can especially occur when there is a delay in paying the distributions to the ESOP participants due to participants moving to a new address and not providing notice to the Plan Administrator. When this happens, there are a couple of steps you should follow.
My previous blog post discussed the Importance of Tracking Cost Basis in ESOPs. Today I want to expand on this topic and discuss how S Corporation Basis Adjustments apply to ESOPs and impact cost basis as well.
In my previous blog post regarding Net Unrealized Appreciation (NUA) tax benefits for ESOP participants, I mentioned the cost basis of stock distributions is taxed at the individual’s ordinary income tax rate. In order to accurately determine the NUA on a stock distribution, the cost basis has to be tracked as part of the plan administration process.
Now that we are mid-way through 2012, I thought it would be a good time to write a series of blogs on ESOP Distributions, as most calendar year plans are in, or will soon be in, their ESOP distribution processing season.
Fidelity bonding requirements were established with The Employee Retirement Income Security Act of 1974 (ERISA) “to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who “handle” plan funds or other property.” The U.S. Department of Labor (DOL) released Field Assistance Bulletin No. 2008-04 on November 25, 2008 to provide guidance on the plan bonding requirements. Since ESOPs are subject to ERISA, they must comply with the fidelity bonding requirements as well.
Since an ESOP is a qualified defined contribution plan, it needs to follow the vesting rules described in IRC Section 411(a)(2)(B), which provides a plan must use a schedule at least as beneficial as the 3-year cliff vesting schedule or the 6-year graded vesting schedule for employer discretionary contributions.
An employee stock ownership plan (ESOP) is a type of qualified retirement plan that buys, holds, and sells company stock for the benefit of the employees, providing them with an ownership stake in the company. The ability of the ESOP to purchase company stock Creates an Internal Market and Built-In Buyer.
ERISA §101(a) requires the plan administrator to furnish the Summary Plan Description (SPD) to each participant covered under the plan and to each beneficiary who is receiving benefits under the plan. The SPD informs participants of the material provisions of the plan, how to make a claim for benefits, and what their rights are under ERISA.