An employee stock ownership plan (ESOP) can offer great benefits to both the company and its employees. Participants improve their retirement financial security while the company gets tax benefits that can boost the bottom line and support long-term growth.
But proper plan administration and compliance are critical to achieving those benefits. As a qualified retirement plan under the Employee Retirement Income Security Act of 1974 (ERISA), an ESOP requires strict attention to rules regarding recordkeeping, compliance testing, document retention, and third-party administration.
Human resources departments often wear many hats and handle a wide range of employee-related needs. From recruiting and onboarding, to compensation and performance management, to maintaining workplace culture and regulatory compliance, HR teams already have a lot of responsibilities.
That can make staying on top of ESOP recordkeeping and compliance tasks challenging and time-consuming. Tracking participant data, performing nondiscrimination testing, meeting filing deadlines, and keeping up with evolving regulations is often beyond the experience and knowledge of many HR professionals. A specialized ESOP third-party administrator can be a lifesaver.
Here’s what every ESOP company’s HR leadership should know about working with a TPA.
Your ESOP is Worth an Investment of Time & Effort
Tying wealth-building opportunities to company performance creates a shared incentive that’s hard to match without employee ownership. ESOP companies that excel at harnessing concentrated focus on profitability invest time and energy into cultivating ESOP ownership culture and employee engagement, and that effort almost always starts with HR.
ESOPs are required to monitor and track years of service, allocations, dividends, and more for each participant. Annual nondiscrimination and coverage testing are required, with reporting deadlines that need to be met to maintain qualified plan status.
The complexities of ESOP administration, compliance reporting, and participant recordkeeping can overwhelm an HR team. Plus, your level of involvement with ESOP administration can make you an ESOP fiduciary. These are just two key reasons that partnering with a trusted TPA may be one of the smartest moves you can make.
Third-Party ESOP Administration
Proper ESOP administration ensures optimal plan operation, compliance, and outcomes. A specialized ESOP TPA can provide:
- Expertise in complex ESOP administration and regulatory requirements
- Guidance in updating plan document design as regulations change
- Full-service participant processing and recordkeeping
- Timely testing, reporting, and filing to maintain compliance at all times
- Technology and tools to make recordkeeping and tracking easier and more efficient
- Resources to help you meet fiduciary and compliance duties
- Practical recommendations and training to optimize employee engagement
When selecting a TPA, it’s smart to look for decades of experience and long-tenured specialists. Inquire about specialized technology capabilities they can offer, and be sure to ask for client references. A good TPA should be able to point you toward enthusiastic customers willing to talk about their service experience.
Can you do it all on your own? If you have the expertise, resources, and specialized software, sure. Your company may achieve some cost savings on TPA fees, and you might feel a measure of control over your plan data. Just be sure you’re fully aware of the requirements, as well as the risk and responsibility for errors or violations that could arise.
1. Participant Processing and Recordkeeping
Accurate, up-to-date participant data is the foundation of a properly administered ESOP, and includes:
- Maintaining historical employment, eligibility, and payroll records for each plan participant
- Tracking years of service and participation with regard to eligibility and vesting
- Managing enrollments, exits, and beneficiary designations
- Generating and distributing participants’ annual statements showing balances, vesting percentages, and share allocations
- Calculating and executing share repurchases and distributions
2. Allocations of Contributions & Forfeitures
One core task a TPA often handles is annual share allocations to eligible employees’ accounts. The ESOP plan document articulates an allocation formula, which usually factors in compensation and/or years of service. The ESOP company’s contributions to the plan, whether in cash or shares, must also be accurately recorded and tracked.
When a participant leaves the company before they’re fully vested, they forfeit the non-vested portion of their ESOP account. The TPA helps ensure that forfeitures are correctly handled and reallocated based on provisions in the plan document. TPA tasks often include:
- Assistance with annual valuation to determine fair market value of ESOP shares
- Allocating all company contributions, dividends, and forfeitures according to the plan document
- Tracking cost basis and share price history for company stock
- Maintaining detailed records of each participant’s account
- Reconciling plan assets and liabilities
3. ERISA Compliance
Compliance testing and monitoring are necessary to demonstrate and document that your plan follows all required rules and regulations. A specialized TPA’s expertise in this area eliminates headaches and helps ensure completion and documentation of all requirements, including:
- Annual nondiscrimination and top-heavy testing
- Contribution and allocation limits
- Eligibility and minimum coverage requirements
4. Key Filing Requirements & Deadlines
Proper regulatory filings are crucial for ESOP compliance. Missed deadlines can lead to penalties. Key filings include:
- Form 5500 — annual filing by the plan administrator detailing finances, participation, and operations, due seven months after end of plan year
- Form 1099-R — reports distributions to participants for tax purposes and must be furnished to participants by January 31
- IRS Discrimination Testing — results of annual testing must be filed with the Internal Revenue Service, with due date based on tax filing
In addition, when a company decides to terminate an ESOP, Form 5310 Application for Determination for Terminating Plan must be filed at least one year before ESOP termination.
5. Record Retention Policies
Maintaining proper documentation is vital for ESOP compliance. Under ERISA, records related to plan disclosures must be retained for a period of at least six years. But many ESOP-related records are often held longer, even indefinitely, such as:
- Plan determination letters
- Plan documents, amendments, summary plan descriptions, and summaries of material modifications
- Annual valuation reports, appraisal reports, fairness opinions, and other related documents
- Stock purchase agreements
- Minutes of trustee meetings, board meetings, and ESOP committee meetings
- Resolutions, consents, and other documentation related to plan governance
- Accounts of fiduciary decisions
A TPA can help your team comply with requirements by:
- Ensuring record retention policies comply with IRS, DOL, and other requirements
- Designating specific locations and formats for storing records
- Limiting access to confidential employee records
Should You Partner With an ESOP-Specialized TPA?
You’re well aware of the tremendous benefits an ESOP can offer both your business and your employees. You also know that ESOP administration often involves complex recordkeeping, testing, and compliance requirements—and if your HR teams are already strapped for time attending to recruiting, hiring, and other employee-focused demands, it can be especially tough to keep up with complex regulations and tasks like nondiscrimination testing, data tracking, and filing deadlines.
Selecting a TPA with demonstrated ESOP expertise, rather than relying on a general benefit plan administrator, means your team gets the benefit of extensive ESOP-specific knowledge and awareness of evolving regulatory demands. You also benefit from knowing your ESOP’s optimally designed and operated for the company’s best possible outcome—not only minimizing compliance and fiduciary risks, but also maximizing recruiting and retention value.
You can trust a seasoned third-party administrator who specializes in ESOPs will provide the experience, technology, resources, and guidance to help you optimize your company's ESOP and ensure even the most complex compliance needs are met.
With an expert ESOP TPA as your guide, you can feel confident knowing that your company's ESOP is in good hands. Your participants will benefit from smooth, compliant operations and you can focus on your other responsibilities, knowing your ESOP Partners TPA is handling every detail.
Get a clear-eyed view of the details and deadlines, for a deeper understanding of TPA value or to start crafting your DIY ESOP administration plan. Download our free planning workbook. Just click below to get your personal copy.