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Determine Eligibility and Perform Preliminary Compliance Testing
January 31, 2007

Today we will continue our discussion of the allocation process. After the census information has been organized, the next step is to determine eligibility and perform the preliminary compliance testing. The following items are completed during the eligibility process:

  • The census information is cleaned and any data conflicts are resolved.
  • The eligibility status and compensation eligible for an allocation are determined for all employees.
  • The vested service of each participant is updated

When the eligibility is finalized, the eligible compensation amounts are used to determine the maximum contribution and to perform the preliminary compliance testing.

Using Rebalancing to Comply with IRC Section 409(p)
January 30, 2007

If you missed yesterday's post, we discussed rebalancing (a.k.a. reshuffling). Today we are going to discuss a more recent use or suggested use of rebalancing – using rebalancing as a 409(p) prevention or fail-safe method.

The ESOP Association's Advisory Committee on Legislative and Regulatory Issues had an informative article in the December 2006/January 2007 edition of the ESOP report magazine. One of the primary plan design features discussed was using rebalancing (the authors used the term "mandatory diversification") to reduce the risk of violating 409(p). Assisting in managing the company's repurchase obligation and insuring all participants fully participate in the ESOP were both mentioned as additional benefits of using rebalancing.

While using rebalancing sounds like a great idea, there may be a problem with this strategy.

Could Rebalancing Be Considered Discriminatory (Under IRC Section 401(a)(4))?

The above-mentioned article cites a meeting with the Department of Treasury as a reason that 401(a)(4) may not be an issue:

"William Bortz, Associate Benefits Tax Counsel, Department of Treasury, indicated in a recent meeting that if mandatory diversification was a plan design feature, that such design feature would not be seen as discriminatory (under IRC § 401(a)(4)), and would be an acceptable method of reallocating stock in an ESOP plan. This is similar to the unit method of accounting which the IRS has approved for many years."

However, this statement appears to be contradicted by the following statement in this article, referring to a discussion with the same source (and perhaps at the same meeting):

"One option that does not seem viable, Acheson emphasized, is reshuffling or rebalancing participant accounts, such that S corporation stock held in DQP accounts would be sold within the ESOP. In fact, Acheson said, at a Feb. 22 meeting of the S Corporation Association, William Bortz, associate benefits tax counsel at the Treasury Department, said that Treasury would not approve reshuffling."

Using rebalancing as a prevention strategy was also discussed in this article. Here is what was said about the discrimination requirements:

"Whatever you do in this regard must satisfy the basic nondiscrimination requirements of ERISA, but since you will most likely be discriminating against the highest-compensated employees to fix these problems, that will most likely not be a problem."

All of the above articles/discussions were most likely written/conducted prior to the issuance of the final regulations. Let's take a closer look at the final 409(p) regulations:

  • "Any methods of preventing a nonallocation year must satisfy applicable legal and qualification requirements, including the nondiscrimination requirements of section 401(a)(4) (including the rules at § 1.401(a)(4)-4 relating to benefits, rights and features), and implementation of these methods must be completed before a nonallocation year occurs."

    This appears to clarify that any rebalancing must be tested under IRC Section 401(a)(4).
  • "A commentator described another method of preventing a nonallocation year under which stock of a participant is exchanged for cash or other assets, which are already in the accounts of other participants in order to change the stock holdings among participants before a nonallocation year occurs, but which does not change the overall stock holding of the ESOP trust. This method has been referred to as reshuffling. The commentator requested that relief from the nondiscriminatory availability requirements be extended to this method."

    This appears to clarify that they are specifically addressing rebalancing/reshuffling.
  • "Absent a special rule for applying the nondiscrimination requirements of section 401(a)(4), it will be difficult for a plan to prevent a nonallocation year through reshuffling without violating section 401(a)(4). The right of each participant to have or not have a particular investment in his or her account (either as a participant-directed investment or as a trustee-directed investment) is a plan right or feature that is subject to the current and effective availability requirements of §1.401(a)(4)-4. Accordingly, if assets in the accounts of one or more non-highly compensated employees (NHCEs) are mandatorily exchanged, then, in the absence of other relevant factors, the plan would generally be expected to fail to satisfy the nondiscriminatory availability requirements of §1.401(a)(4)-4."

    This appears to reiterate that any rebalancing must be tested under IRC Section 401(a)(4).

  • "The IRS and Treasury Department do not believe that it would be appropriate to provide a special rule that would materially weaken the standard for nondiscriminatory availability of participant rights to a particular investment under the plan."

    This appears to indicate that rebalancing will not receive a "special rule". The 2004 regulations contained a "special rule" stating that "a transfer of the S corporation securities held for the participant under the ESOP into a separate portion of the plan that is not an ESOP or to another qualified plan of the employer that is not an ESOP" will not fail to satisfy the nondiscrimination requirements as a result of the transfer.

Of course, this raises questions about the future of rebalancing. This post discussed an article that raised these questions further.

"In response to a comment, the IRS said that companies could not address a nonallocation year problem by targeted reshuffling (also called rebalancing) of shares within the accounts of the employees whose accounts hold too much stock and replacing it with cash from accounts of other employees. Many ESOPs do this on a plan-wide basis for reasons unrelated to the anti-abuse rules. The IRS, however, said that this involuntary movement out of assets already held by employees, even though they are replaced by other assets with the same value, was, absent special circumstances, a violation of the "current and effective availability" requirements of ERISA. This language only has specific application to how companies deal with anti-abuse issues. The question remains, however, whether the IRS would apply this same logic to any plan that uses rebalancing for other purposes. Experts we consulted generally believe it does not threaten such practices, provided that plan language has already been carefully drafted and submitted to the IRS enabling it, but some experts have always contended that rebalancing violates ERISA."

As you can see, there are many questions that still need to be answered. If any of the rebalancing information discussed yesterday or today is relevant to your plan, you should contact your ESOP counsel and advisors to discuss further.

January 29, 2007

What is rebalancing?

You may have heard of the terms rebalancing and reshuffling. Both are terms that refer to a step in the ESOP allocation process that adjusts the cash and shares of each participant's account. After the adjustment, all participants will have the same proportion of each account (e.g. 23% cash and 77% stock). The rebalancing transaction is usually the last step of the allocation process and is processed like an internal repurchase of shares, where cash is taken from the accounts of some participants to purchase the shares of other participants. Just like a repurchase, the value of each participant's account stays the same, but the mix of cash and shares changes accordingly. The rebalancing provisions should be clearly defined in the plan document.

The ESOP blog discussed rebalancing and provided examples in 3 separate posts. It also suggested two ways to communicate rebalancing to participants:

  • "One possible benefit to this participant is the increased diversification of his account. As a long term participant, he may be nearing retirement and that is the time when it may be prudent to diversify his holdings.
  • Another possibility is to stress that the ESOP was designed to share ownership with "all" and when all employees receive substantial stock allocations, corporate performance improves."

Why use rebalancing?

One of the main reasons that rebalancing is used is to fix or prevent a group of participants (usually those with the highest seniority and sometimes referred to as "the Haves") from owning the majority of the shares of the ESOP while the rest of the participants ("the Have Nots") own very little if any of the shares. This situation tends to occur with mature, non-leveraged ESOPs.

More recently, rebalancing has been used or suggested for another purpose, which we will discuss tomorrow.

Extending the IRS Form 5500
January 25, 2007

If you will be extending your IRS Form 5500, a new version of IRS Form 5558 and Instructions was released this month. This file is a "Fill in Form" that will enable you to input your information and save the form to a local directory. Here are some things to remember about the extension process from the IRS and DOL websites (as of the date of this post):

  • A signature is not required if the extension is for Form 5500 or Form 5500-EZ.
    • The Form 5558 is filed on or before the normal due date of Form 5500 or 5500-EZ for which this extension is requested, and
    • The extension date is no more than 2 ½ months after the normal due date.
  • Approved copies of Form 5558, requesting an extension to file Form 5500 or Form 5500-EZ, will not be returned to the filer from the IRS. However, a copy of the extension request that was filed must be attached to your filing.

  • If you do not already, you should consider using a delivery method that will provide you with confirmation that the IRS Form 5558 has been received.
  • Send Form 5558 to:
    Internal Revenue Service Center
    Ogden, UT 84201-0027
  • Form 5500 and Form 5500-EZ filers can use the extension of their federal income return instead of Form 5558, if all the following conditions are met:
    • The plan year and the employer's tax year are the same;
    • The employer has been granted an extension of time to file its federal income tax return to a date later than the normal due date for filing the Form 5500 or Form 5500-EZ; and
    • A photocopy of the IRS extension of time to file the federal income tax return is attached to the Form 5500 or Form 5500-EZ. An extension granted under this exception cannot be extended further by filing a Form 5558 after the normal due date of the Form 5500 or Form 5500-EZ.

Organizing the Census Information
January 23, 2007

One of the most important items that you will need to organize and provide to the internal or external recordkeeper is the census information. Unless this is the first year of your ESOP, you will most likely have an established file format to follow when organizing the census information. If the information is requested in a format that would cause you a lot of additional time and effort, you should discuss this with your recordkeeper. Here is a general list of the items you will need to include in this file:

  • Name (ideally split by first, middle, and last name)
  • Social Security (or other identification) number
  • Dates of birth, original hire, current hire, and current termination
  • Gross wages
  • Either eligible wages per the plan document or excludable wages (e.g. bonuses, commissions) so the eligible wages can be calculated
  • Other qualified plan contributions (split by item, e.g. 401(k) deferrals, 125 deferrals, employer matching contributions, matching forfeitures, other plan contributions, other plan forfeitures)
  • Hours worked during plan year

Here are some things to consider when providing the above-mentioned information:

  • If the original date of hire and the current date of hire are not the same, then enough information should be provided so the relevant employment history can be determined. This certainly includes all dates of hire and termination in the current year.
  • All employees should be provided. You should be able to reconcile the wages to the IRS Form W-3 and IRS Forms 941. You should be able to reconcile all other totals to source documents as well.
  • If your plan only considers compensation while a participant and you have quarterly or semi-annual participation dates, it would be helpful to split the wages by the applicable period (if the information is easily attainable).
  • If your plan considers the hours in the first 12 months of employment (and in some cases each additional 12-month period), you should also provide the hours during that 12-month period (if the information is easily attainable).

In addition, here are some additional items that you should provide, if applicable and possible:

  • Division information
  • Employee status (e.g. actively employed at the end of the plan year, not actively employed at the end of the plan year, not actively employed at the end of the plan year as a result of death)
  • Address (street address, city, state, and zip)
  • Gender
  • Beneficiary(s)
  • Any other relevant information

As mentioned above, if providing any of this information is challenging, you should discuss this with your recordkeeper or consultant to figure out the most efficient and effective way to obtain and provide this information. They may have some suggestions that will simplify the process or determine that the information is not needed for the administration of your plan.

The earlier this information is organized, the earlier the eligibility can be finalized, the maximum contribution can be determined, and the allocations can be processed. Your goal should be to have this information organized between 15 to 30 days after the end of the plan year.

ERISA Compliance Calendar/PPA/Notice 2007-07
January 19, 2007

Here is an ERISA Compliance Calendar/Checklist for 2007. According to the checklist, the following items are due by January 31:

• Form 1099Rs due to participants to report 2006 distributions.

Note: Many recordkeepers also require participant data for average deferral percentage (ADP)/actual compensation percentage (ACP), Top-Heavy, and 402(g) compliance testing to be returned by 1/31.

• Form 945 due to IRS (reporting of income tax withheld from distributions).

We discussed IRS Forms 1099-R and 945 earlier this month.


The IRS has an information page about the Pension Protection Act of 2006 (PPA). It contains links to Information on the PPA, Newsletter Articles, Published Guidance, and Other Information

Here are some more links to articles about IRS Notice 2007-07:

IRS Issues "Grab-Bag" of Guidance on PPA Distribution Issues

Legal Alert: IRS Publishes PPA Distribution Guidance "Grab Bag"

Summary of ERISA Legislation
January 18, 2007

Here is a Chronological Summary of Major Post-ERISA Benefit Legislation. It starts with the Employee Retirement Income Security Act of 1974 (ERISA) and goes through the Pension Protection Act of 2006 (PPA).

Update on 409(p) Final Regulations and Notice 2007-07
January 16, 2007

In Corey Rosen's latest Employee Ownership Update, he discusses the final Section 409(p) Anti-Abuse Regulations. Here are some of the items he discusses:

  • The final regulations are effective for plan years beginning on or after January 1, 2006. The old rules apply to prior plan years.
  • Penalties for a nonallocation year include losing ESOP and qualified plan status, assessment of excise taxes, and voiding of the S election.
  • Family attribution rules were simplified.
  • The plan document can provide for a transfer of assets to a non-ESOP component of the plan or a separate plan to avoid a nonallocation year if certain requirements are met.
  • Plans cannot avoid a nonallocation year by reshuffling (a.k.a. rebalancing). This raises the question of whether or not reshuffling is allowable in any situation.

We will be adding a 409(p) section to our site in the upcoming weeks.

Last week we discussed Notice 2007-7 - Miscellaneous Pension Protection Act Changes. Here are some additional summaries for your reference:

Guidance on PPA Provisions Relating to Hardships, Non-Spouse Beneficiary Rollovers, Vesting, and Distribution Notice Periods

IRS Issues Notice 2007-7 Providing Guidance on the Pension Protection Act of 2006

Rollovers to IRAs now possible for plan beneficiaries

Organizing the Trust Accounting Information
January 15, 2007

One of the keys to completing the annual ESOP allocation in a timely manner is organizing the trust accounting information as soon as possible. Here are things to consider when organizing and preparing the trust information to be sent to the internal or external recordkeeper.


Account statements with ESOP activity should be organized and forwarded to the recordkeeper in a timely manner. In most cases trust statements are available within 15 days after the end of the plan year.


Supporting schedules should be provided, preferably in electronic format, for any other account activity not reported in the account statements as well as for information in the account statements that requires more detail. Here are some examples:

  • Schedule of Contributions – This schedule should contain the contributions, split by date, and include the amount and value of the contribution, breakdown between cash and shares, and what the proceeds were used for. See the discussion below for more details.
  • Schedule of Dividends (or S Distributions of Earnings) – This schedule should contain the dividends, split by date, and include the amount and what the proceeds were used for.
  • Schedule of Loan Payments – This schedule should contain the loan payments, split by date, and include the amount and the source of the funds (e.g. current cash contribution, current dividend, and existing cash balance).
  • Schedule of Distributions Paid –This schedule should contain the distributions, split by participant, and include the participant's name, social security or other identification number, gross distribution amount, and breakdown between cash distributed and shares distributed. The distribution totals should equal the total distributions according to the account statements and any difference should be reconciled. In order to simplify the preparation of the benefit payment government filings, you may wish to include more information in this schedule.
  • Share Transactions – This schedule should reconcile the shares in the trust (allocated and unallocated) from the beginning of the year to the end of the year. It will most likely contain shares purchased, sold, and distributed. It should contain the participant's name, social security or other identification number, and the amount and value of the shares transacted. If the purchase involved an ESOP loan, the support documents should be provided (e.g. Loan and Pledge Agreement, Amortization Schedule, and Promissory Note, Section 1042 documentation (if applicable))


Although the Schedule of Contributions is listed above, it is also worthy of mentioning separately. The determination of the final contribution is an important piece of the trust accounting puzzle. Since many contributions are accrued, the account statements may not reflect the final contribution amount. Therefore it is crucial to finalize that number as soon as possible so the recordkeeper can proceed with the trust accounting. Here are a couple of scenarios that may simplify the determination:

  • If all you are contributing to the plan is your scheduled loan payments and/or contributing cash necessary to fund the distributions that took place during the year, determining the final contribution should be easy. Make sure you communication your intentions to your recordkeeper so they can provide you with the amount.
  • If you would like to maximize your contribution, you will need to again need to notify your recordkeeper so they can provide you with the maximum contribution amount.

Even if you know that you will not make the contribution until later in the year (you have until the extended tax deadline), you will most likely need to know what the amount will be to proceed with your tax and financial accounting as well as the appraisal process. It is important to share this information with your recordkeeper as well to keep the allocation process moving.

If your accountants are not already assisting you with the contribution determination, you should also make sure that they are aware of the final contribution, as the valuation firm may be waiting for them to finish their work in order to complete the appraisal process.

If you are not sure about what your contribution will be or how the contribution determination process works, you should discuss it with your ESOP recordkeeper or consultant, as they will be able to answer your questions and guide you through the process so you can make the final determination.


The last thing that is needed to finalize the trust accounting is the stock appraisal. In order to keep the process moving, the trust accounting and the allocations are generally processed on a preliminary basis until the stock appraisal has been finalized. In most cases (but not all cases) the final value will only impact the ending value and not the cash and share allocations.

What is an ESOP?
January 13, 2007

I often get questions from my wife, relatives, and friends about my profession. When I start talking about ESOPs, it quickly becomes apparent that they, as well as most people that do not work in the profession or participate in an ESOP, do not even know what an ESOP is. So, what is the best way to quickly explain the definition of an ESOP to someone without a financial background?

The acronym ESOP stands for employee stock ownership plan. Merriam-Webster's online dictionary defines an ESOP as "a program by which a corporation's employees acquire its stock". While that is a good start, I think more information is needed.

Motley Fool has a page dedicated to many retirement plan definitions, including ESOPs and other terms mentioned below. Here is their definition of an ESOP:

An ESOP is a qualified defined contribution plan in which the assets are invested mostly in qualifying employer stock. Usually, purchases of this stock are funded by employer contributions made to the plan based on total employee compensation. The plan may permit purchase of stock by employees as a plan option. When combined with a 401(k) plan, an ESOP is sometimes called a KSOP. On leaving the firm through separation or retirement, the participant will receive all vested interests in the form of the actual shares in the account. Alternatively, he or she may demand a cash distribution in lieu of the shares.

While I agree with the definition, I think it is too wordy for a simple definition. Here is my simple definition of an ESOP:

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 one term that you may be asked about is qualified retirement plan. Most people participate in or are familiar with a 401(k) Plan. A 401(k) Plan is a good example of a qualified retirement plan that most people are familiar with.

Let's compare my definition to the definitions provided by the leading employee ownership organizations:

The National Center for Employee Ownership (NCEO)

An employee stock ownership plan (ESOP) is a type of defined contribution benefit plan in the U.S. that buys and holds company stock. ESOPs are often used in closely held companies to buy part or all of the shares of existing owners, but they also are used in public companies. Related to ESOPs are Section 401(k) plans, which may be used alone or in conjunction with ESOPs to hold company stock. Note: ESOPs have nothing to do with stock options

This first sentence of this definition is very similar to mine. In fact, at one point I had the defined contribution plan in my definition, but ultimately removed it to simplify the definition for those without a financial background. I also liked the note that ESOPs have nothing to do with stock options, as people often think of ESOPs as employee stock option plans instead of employee stock ownership plans.

The ESOP Association

An Employee Stock Ownership Plan (ESOP) is an employee benefit plan which makes the employees of a company owners of stock in that company. Several features make ESOPs unique as compared to other employee benefit plans. First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, an ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, "leveraged ESOPs" may be used as a technique of corporate finance.

One thing that separates this definition from all of the other definitions we looked at is the ownership component.

How have you quickly explained ESOPs to someone without a financial background?

Prepare Timeline and Agree on Dates with All Parties
January 12, 2007

We have previously discussed reviewing the prior timeline and allocation process. Using the information gathered from the review as a starting point, it is time to prepare the allocation timeline and obtain the buy-in of all parties. It is essential that all parties be engaged in the process to ensure that they are fully committed to the deliverables and dates.

Some companies find it effective to prepare a draft timeline prior to the pre-allocation planning meeting and to discuss, modify, and finalize it during the meeting. Other options include having the timeline finalized prior to the planning meeting or separating the preparation and discussion of the allocation timeline from the planning meeting altogether. You can find an example of an allocation timeline here.

Miscellaneous Pension Protection Act Changes
January 11, 2007

Notice 2007-7 - Miscellaneous Pension Protection Act Changes was released yesterday and provides guidance on some of the PPA provisions in a Q&A format. Here are the provisions covered:

  • Interest rate assumptions for lump sum distributions
  • Hardship distributions
  • Early distributions to public safety employees
  • Rollovers for nonspouse beneficiaries
  • Distributions to pay for accident or health insurance for public safety officers
  • Relating to vesting of nonelective contributions
  • The notice and consent period for distributions
  • Distributions from IRAs to charitable organizations

Plansponsor.com has a brief summary of some of the provisions.

Reviewing the Prior Timeline and Allocation Process
January 9, 2007

In our ESOP Planning series we often made reference to the allocation process. While the allocation process varies from plan to plan, there are fundamental steps that occur for all ESOPs every plan year. We have compiled a sample allocation timeline that illustrates the main steps of the ESOP process. Last week we discussed conducting a pre-allocation planning meeting and processing benefit payment government filings. Over the next few weeks we will discuss the remaining steps of the allocation process. Today we will discuss reviewing the prior timeline and the allocation process.

It is very important to take a step back and review the administration process from the prior allocation. You should identify what parts of the process worked and what parts of the process need improvement. Here are some good questions to ask:

  • Did you have a detailed service timeline in place for the 2005 plan year? If the answer is no, then you should make sure to prepare one for 2006. To assist you with the creation of the 2006 timeline and to assist in the review of the 2005 allocation process, you should try to reconstruct the 2005 timeline, at least the key deliverables (e.g. census processed, trust processed, stock appraisal approved, allocation completed, audit completed, statements issued, meetings held, IRS Form 5500 completed and filed, distributions paid). Reviewing your files and prior emails should help with this process.
  • Were you satisfied with the timing and quality of the allocation process last year? You should recognize the internal and external parties for the great job that they did. For the areas that you were dissatisfied with, you should identify each problem that was encountered and the steps that have been taken to ensure that they are not going to happen again. You should break down the problem areas into sub-deliverables and manage those areas of the allocation process more closely. Performing a more-detailed analysis may also identify bottlenecks that can be addressed to improve the process. If you continue to experience the same timing and quality issues every year, it is important to work with the involved internal and external parties to ensure they have the training and resources that they need.
  • Are there any circumstances that will change the timeline in 2006? For example, was there an acquisition in the year that will delay the time it takes to gather the information? Or, does the company want to hold employee meetings earlier this year?

You will find your knowledge and experience with the allocation process in prior years to be invaluable in preparing for the current allocation process.

Should I Borrow From My 401(k) Plan?
January 8, 2007

Should I borrow from my 401(k) plan? This is a question that you may get from time-to-time from participants or even family and friends. While the answer in most cases is no, it is important to understand the pros and cons of 401(k) participant loans and the facts and circumstances of the individual. To help you answer this question, I put together a list of reasons to take or avoid taking out a 401(k) loan.

A good reason to take out a 401(k) loan is because:

  • There is no credit check.
  • It is convenient. For many plans you can apply online or with a telephone system in a matter of minutes.
  • The interest you are paying is reasonable. The rate is set by the plan and is usually one or two points above the prime rate (currently 8.25%).
  • There are no restrictions. You can borrow at any time for any reason.
  • You are paying interest to yourself.
  • The interest you are paying yourself is providing you with a reasonable rate of return (currently 8.25%).
  • You do not have to pay taxes on the interest you are earning until retirement (or when you take a taxable distribution).
  • You select which investments will be sold to fund the loan.

A good reason to avoid taking out a 401(k) loan is because:

  • If you leave the company for any reason, you will most likely have to pay the loan in full right away. If you cannot pay the loan right away (usually within 60 days), you will be in default, taxed on the full balance, and may need to pay a 10% penalty.
  • You may need to reduce the contributions you are making to your 401(k) plan to make the loan payments. This will ultimately reduce the amount available to you at retirement.
  • The interest you are paying yourself could provide a smaller rate of return than the investments that the money would have otherwise been invested in. This "opportunity cost" will be compounded over time and ultimately reduce the amount available to you at retirement.
  • The interest you are paying yourself will be taxed twice, once when you originally earned the money (e.g. from your paycheck) and again when it is withdrawn from the plan.
  • You have very limited flexibility with setting up or changing the payment terms of the loan.
  • You are spending money that you have already saved.
  • You may change your retirement savings mindset. The money you are saving is for your retirement.
  • You may be charged loan fees.

There are many online sources of information about 401(k) loans, including the following:

Warning: 401(k) loans are hazardous to your wealth

401k Plan Loans - An Overview

Concerns with Benefit Statement Good Faith Guidance
January 6, 2007

I previously discussed the participant statement good faith compliance provided by FAB 2006-03. ASPPA asap No. 06-44 discussed the FAB in detail and also expressed some of their concerns, including concerns about the safe harbor timing requirements (45 days):

The new requirements for benefit statements are effective for plan years beginning after December 31, 2006 (for non collectively bargained plans). The DOL guidance provides a safe harbor of 45 days after the end of the period to provide the statements. Thus, the first statement for calendar year plans will be due no later than May 15, 2007, for participant-directed plans, February 14, 2008, for other defined contribution plans, and February 14, 2010, for defined benefit plans… Meeting the 45-day time frame for providing statements will be a serious problem, if not a virtual impossibility, for large numbers of plans. As one example, plans that use the 1,000 hours of service method may not have the necessary information to determine vesting status prior to the end of the 45-day period. Perhaps a bigger problem is for those administrators who prepare statements on an accrual basis. The employer may not have decided on the amount of the contribution for the relevant plan year before the statements are required to be distributed, and may defer that decision to as late as the due date for its tax return, September 15 (corporate) or October 15 (self-employed) for calendar year taxpayers with extensions. Even if every employer actually made its contribution decision by year-end (and only a small percentage do), it does not seem feasible for service providers to get all of their year-end work done in time to distribute benefit statements by February 14 following the year-end. It is unclear from the FAB whether the DOL actually contemplated these issues in issuing the FAB.

The vesting and accrual basis concerns discussed above will certainly affect ESOPs. In addition, ESOPs with privately held employer securities also have appraisal concerns. The appraisal concerns are very similar to the accrual basis ones discussed above. The final appraisal will most likely not be available at the end of the 45-day period. Even if it is available, it will not be feasible to complete the allocation, perform the necessary compliance testing, and distribute benefit statements within the 45-day safe harbor period.

While the safe harbor standard is not a requirement, it is nonetheless something that you will want to comply with if at all possible. We will keep you posted as more guidance is provided.

In addition to the post referenced above, you can find more information about FAB 2006-03 in this post or in the following summary:

EBSA provides guidance on periodic pension benefit statements

Pre-Allocation Planning Meeting
January 4, 2007

One of the most important steps of the allocation process is the pre-allocation meeting. This meeting is ideally conducted 1-2 months prior to the start of the plan year. If your plan year has started and you have not yet conducted a pre-allocation meeting, I strongly recommend that you have one, as you would still find it to be effective and beneficial. The Plan Administrator and ESOP advisors will most certainly be involved, but you should also consider involving other parties that could add to the process, such as ESOP counsel, trustees, accountants, etc. If this is your first planning meeting or if you have not met since last year, you should allot more time for the meeting. You will spend the majority of the meeting reviewing last year's allocation process and finalizing this year's timeline (to maximize the meeting's effectiveness, a discussion draft should be prepared prior to the meeting). In addition to the timeline, you will want to discuss any other outstanding planning issues and set the date for the next planning meeting.

To assist you with the planning process, I recommend that you check out the ESOP Planning section of our website (listed in our main menu). It addresses some of the different items you should consider during the pre-allocation meeting.

Benefit Payment Government Filings
January 3, 2007

If you paid any benefit payments in 2006, then you will have to prepare and file some government forms. The General Instructions for Forms 1099, 1098, 5498, and W-2G provides guidance on how to prepare and file the forms.

o IRS Forms 1099-R – This form must be provided to anyone who received a plan distribution (of $10 or more) during the calendar year. The participants' copies must be mailed by January 31. Copies must be filed with the IRS by February 28 (or March 31 if filing the forms electronically).

o IRS Form 1096 – This form must be sent as a transmittal document whenever paper copies of the IRS Forms 1099-R are sent to the IRS. If they are submitted electronically, then this form is not required.

o IRS Form 945 – This form is used to report federal withholding from non-payroll payments, including distributions from qualified retirement plans. The deadline is January 31. This year's Form 945 is due by January 31, 2007. However, if you made deposits on time in full payment of the taxes for the year, you may file the return by February 12, 2007.

Generally, you are required to file electronically or by magnetic media if you file 250 or more information returns.

Retirement Contributions – Pre-Tax vs. After-Tax
January 2, 2007

Happy New Year!!

I often get asked whether money for retirement should be contributed using pre-tax dollars or after-tax dollars. A Washington Post article discusses this issue, and includes the following quotation:

"...an individual is always going to be better off putting dollars that aren't matched into a Roth or a medical savings account, anything that says you won't pay taxes when it comes out"

While there are many factors to consider and the decision of how to invest your retirement dollars should be based on your individual facts and circumstances, you should definitely consider using after-tax dollars as part of your retirement strategy. In fact, some financial planners advocate using after-tax dollars to provide your retirement portfolio with some "tax diversity".

There are online calculators that are available to assist those who would like to use real numbers. I looked at the following calculators from The Motley Fool and from the CCH Financial Planning Toolkit. The key thing to remember when using the calculators or performing your own analysis is to include the tax savings from using pre-tax deferrals in your calculations.

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