Employee Stock Ownership Plan Review Worksheet

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Mon, Aug 08, 2011
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Employee Plans News - Issue Number: 2011-5 – June 22, 2011 discusses how EP Determinations has formed the ESOP Cadre and is changing some procedures for reviewing ESOPs submitted on IRS Form 5300 – Application for Determination for Employee Benefit Plan during Cycles C - E:





  • Practitioners who have submitted applications for multiple ESOPs, and who receive a letter from a determination specialist requesting plan amendments to a particular plan, may determine the applicability of that request to all other plans filed by the practitioner's firm and submit a single response that would apply to some or all of the amendments to the firm's pending ESOP Form 5300 applications. Include the letter from the determination specialist requesting the amendment(s) and provide a separate copy of the amendment to each affected plan, identifying the plans to which the proposed amendments apply.



  • EP Determinations developed a revised, streamlined worksheet (rev. 08/11) to review ESOPs in their initial review stage. Plan sponsors and practitioners may use the worksheet as a tool to design ESOP plan documents.


Plan sponsors are reminded that if all the requested information is not received by the date stated in the letter, the application may be closed and returned to the sponsor without further review.



Here is the Employee Stock Ownership Plan Review Worksheet:





  1. Does the plan document formally designate the plan as an ESOP and provide that it will invest primarily in Qualifying Employer Securities ("QES")? Reg. 54.4975-11(a)(2) & 11(b).



  2. Does the plan define QES in accordance with IRC 409(l)?



  3. If the employer chooses to exclude forfeitures and interest from the calculation of annual additions, does the plan provide that such may only be excluded if no more than 1/3 of the employer stock is allocated to a highly compensated employee and applicable to an exempt loan? IRC 415(c)(6).



  4. Does the plan give each participant the right to direct the trustee to vote the allocated securities in accordance with IRC 409(e)(3)?



  5. Does the plan provide that a participant has a right to demand distributions in the form of employer securities? IRC 409(h)(1)(A).



  6. Does the plan provide that an employee is entitled to diversify a portion of his or her account as required by IRC 401(a)(28)(B)? Note: Response to Technical Assistance Request #2 (Nov. 3, 2009).



  7. Does the plan comply with IRC 401(a)(28)(C) with respect to non-readily tradable stock? If the plan has contributions subject to IRC 401(k) or (m) or if the ESOP constitutes a portion of another plan, does it comply with IRC 401(a)(35)?



  8. Does the plan define the term "loan" and "Exempt Loan"? Reg. 54.4975-7(b)(1)(ii) and (iii). A "loan" refers to a loan made to an ESOP by a disqualified person ("DQ") or a loan to an ESOP which is guaranteed by a DQ. "Exempt Loan" refers to a loan that satisfies the provisions of Reg. Section 54.4975-7(b).
    ___
    reasonable interest rate;
    ___
    specific term & not payable on demand;
    ___
    primarily for the benefit of participants;
    ___
    used only to acquire QES, repay loan or prior loan;
    ___
    securities not subject to a put, call or other option or buy/sell arrangement;
    ___
    without recourse & only collateral = QES acquired with loan(s);
    ___
    no right to assets other than collateral, contributions & earnings on collateral;
    ___ c
    ontributions and earnings accounted for separately until loan is repaid;
    ___
    securities acquired will be added/maintained in suspense account; and
    ___
    shares are released from encumbrance using general rule or special rule.


  9. Sale of stock in suspense account. Does the plan not:
    ___
    provide for an exempt loan to be paid off prematurely by the sale of stock held in the suspense account?
    ___
    contain language relating to the allocation of the "excess" amounts remaining after the payoff of the loan?
    ___
    contain language relating to whether the "excess" amounts shall or shall not be treated as annual additions?


  10. Does the plan provide that a participant is entitled to elect to commence distribution after attaining NRA, death, or disability (within 1 year) or separation from service (within 5 years) no later than required by IRC 409(o)? Exception for portion account with financed shares – until loan is repaid in full (but not past RMD date).


  11. Does the plan provide that if a portion of the account is forfeited, qualifying employer securities must be forfeited only after other assets? If more than one class, must forfeit the same proportion of each such class. Reg. section 54.4975-11(d)(4).


  12. If a C corp ESOP allows for the distribution and or reinvestment of dividends into employer securities, is the participant fully vested in those securities? If a plan sponsored by a C or S corp allows the use of dividends/S corp distributions for the loan pay down, does the plan provide for the reimbursement of the dividends/S corp distributions on allocated stock by allocating stock of equal value to the participant's account?


  13. Does the plan provide that when a participant is entitled to a distribution from a plan whose stock is not readily tradable on an established market, the participant has a right to require the Employer to repurchase the stock under a fair valuation (Put Option)? IRC 409(h)(1)(B) & (5) and Reg. 54.4975-7(b)(10).
    ___
    exercisable 60 days following distribution and additional 60 days next year;
    ___
    substantially equal periodic payments (annually) beginning not later than 30 days and not exceeding 5 years; and
    ___
    adequate security and interest.
    For S corps, see Response to Technical Assistance Request #1 (Nov. 3. 2009).


  14. If the plan allows the employer the right of first refusal, is it in accordance with Reg. 54.4975-7(b)(9)? Does it lapse no later than 14 days?


  15. Does the plan provide that the protections and rights regarding the put option and buysell arrangements are non-terminable? Reg. 54.4975-11(a)(3)(ii).


  16. Does the plan contain reshuffling or rebalancing provisions? If so, do they follow the guidelines? Note: Response to Technical Assistance Request #4 (Feb. 23, 2010).


  17. If an S-Corp; does the plan comply with IRC 409(p)? Define (include) the following:
    ___ Disqualified person;
    ___ M
    ember of the Family;
    ___
    Attribution rules of IRC 318(a) (as modified);
    ___
    Prohibited allocation;
    ___
    Non-allocation Year;
    ___
    Deemed owned shares;
    ___
    Deemed 10% shareholder;
    ___
    Synthetic Equity;
    ___
    Impermissible Allocation; and
    ___
    Impermissible Accrual.
    Note: Response to Technical Assistance Request #3 (Dec. 9, 2009).


  18. If an S-Corp, does the plan contain language for prevention of a nonallocation year that provides for the transfer of stock from the ESOP to a non-ESOP portion of the plan or to another plan (language which conforms to final Regs. under IRC 409(p))? Note: Response to Technical Assistance Request #5 (October 8, 2010). If the plan is silent, offer plan sponsor the chance to add appropriate language.

Topics: Compliance, ESOP, Plan Document, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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