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Age 55 Diversification
18th Annual Ohio EmployeeOwnership Conference
Presented by Dorn SwerdlinSwerdlin & CompanyFriday, April 16, 2004
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
What We Will Discuss
Basic Rules Examples
• Timeline• Election Forms• Acting on Election
Diversification Calculations
Sticky Issues
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Age 55 Diversification
Code Section 401(a)(28)(B)
Allows participant to diversify out of company stock.
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Eligibility
10 years ofparticipation
in planAge 55
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Stock Eligibility
Shares of company stock acquired by trust after December 31, 1986
May be allowed with respect to all shares
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Election Period
6 year period
Begins when participant meets eligibility requirements
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Elections
Able to diversify 25% of qualifying shares
First 5Years
Final option to diversify up to50% of qualifying shares
6th Year
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Computing Shares
Total of allocationshares that haveever been eligible
fordiversification
Any shares that have been previouslydiversified-minus
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Exceptions
Not required if shares in participant’s company stock account have a market value of $500 or less
Market Value $500<
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Timing of Elections
Must be granted to participant within 90 days of close of plan year during which he meets requirements
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Implementation
Within 90 days after the last day of the 90-day election period
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Alternatives
Company may implement diversification elections by:
Making a distribution of the diversified shares or
Providing at least 3 investment options within the ESOP (or another plan)
Corporation
Effective Date of ESOP: January 1, 1980
Diversification Occurs:Age 55 and 10 years of participation
KL Corporation also sponsors a 401(k) Plan
Diversification Procedures Timetable
Description Due
Begin discussions regarding alternatives to comply and requirements.
Two years before plan is subject to diversification.
Review plan document as it relates to diversification.
One year before plan is subject to diversification.
Send preliminary diversification election forms to participants eligible to diversify. If final allocation report and stock valuation are completed, send final forms instead.
Within 90 days after the end of the plan year.
Send final diversification election forms to participants eligible to diversify.
As soon as possible after allocation and stock appraisal are completed.
Complete diversification for those choosing to diversify.
Within 180 days after the plan year end (provided final allocation and stock appraisal are completed by that date).
Diversification TimelineLK
Att
ain
s A
ge 5
5
01/0
1/19
90
Join
s P
lan
01/0
1/19
95
Pre
lim
inary
Exp
lan
ati
on
01/0
1/20
04
10 y
ears
pla
n
part
icip
ati
on
(elig
ible
for
div
ers
ificati
on
)
12/3
1/20
04
Pre
lim
inary
Ele
cti
on
Form
01/0
1/20
05
Retu
rns P
relim
inary
Form
03/3
1/20
05
(9
0 da
ys)
Ap
pra
isal an
d A
llocati
on
C
om
ple
te
04/1
5/20
05
Fin
al Ele
cti
on
Form
04/3
0/20
05
Execu
te T
ran
sfe
r
06/3
0/20
05
(180
day
s)
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Election Forms
Preliminary 2004
Diversification Election Notice
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Election Forms
Final 2004 Diversification Election Notice
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Election Forms
Final 2009 Diversification Election Notice
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Acting On The Election
Transfer to KL Corporation 401(k)
Take Cash Taxed as ordinary income and subject
to any applicable penalties
Roll over to IRA Take Stock
Put Option is available (closely held)
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Diversification Calculation
K L
Number Diversified
Cumulative Shares
Diversified
(567.500) (567.500)
(7.500) (575.000)
(6.250) (581.250)
(3.750) (585.000)
0.000 (585.000)
(595.000) (1,180.000)
L. KelsoPlan allows participants to "diversify" 25% of their shares after 5 years of plan participation.
A B C D E F G H I J
Diversification Year
# Post 1986 Shares as of Beginning of
Year
# Shares Allocated During the
Year
Post 1986 Shares
Previously Dist in 2000
Post 1986 Shares
Previously Diversified
Total Post 1986 Shares
% Available for Diversificaiton
Maximum # Available for
Diversification
Less # Shares Previously Diversified
Net Available for Diversification
1 2,000.000 20.000 250.000 0.000 2,270.000 25% 567.500 0.000 567.500
2 1,452.500 30.000 250.000 567.500 2,300.000 25% 575.000 (567.500) 7.500
3 1,475.000 25.000 250.000 575.000 2,325.000 25% 581.250 (575.000) 6.250
4 1,493.750 15.000 250.000 581.250 2,340.000 25% 585.000 (581.250) 3.750
5 1,505.000 0.000 250.000 585.000 2,340.000 25% 585.000 (585.000) 0.000
6 1,505.000 20.000 250.000 585.000 2,360.000 50% 1,180.000 (585.000) 595.000
If the plan allows the participant to diversify more than the number of shares required under the Code, there are no provisions under the Code or regulations allowing those shares to be deducted from the amount available for diversification during the qualified election period. However, they must be included in determining the total number of post 1986 shares allocated to the participant's account.
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Determining Years of Participation
Vesting:1,000 hours of service in a plan year
Eligibility:1,000 hours during initial year of employment and anniversaries thereof – or – if fewer than 1,000 hours during initial year of employment, measurement period reverts to plan year
1,000 hours ofservice withina 12-month
period
General yearof servicedefinition
ActiveEmployees
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Determining Years of Participation
Code is unclear Conservative approach:
As long as a terminated participant has a vested benefit remaining in the plan, he/she is considered to be a “Participant” under the Internal Revenue Code; therefore, for each plan year that they have a vested balance, they have a year of participation for diversification purposes
What About Terminated With a Vested Account Balance?
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Determining Years of Participation
There is no clear guidance; however, the conservative approach is to count years of participation from entry in the older plan.
What Happens When Plans Merge?
Mergesexisting
401(k) intoESOP
Right Away:Participants may have 10 years of
participation if you include
their years in the 401(k) plan
Employer sets up
new ESOP
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Determining Years of Participation
Recommendation In both instances, draft documents to
specifically define years of participation for diversification purposes.
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
What About Reshuffling?
Each participant has same proportion of shares and cash
How do you keep track of shares?
Administratively maintain separate “buckets” for post 1986 shares
For qualifying participants, diversify within the plan and transfer diversified shares to cash investment
Any other suggestions?
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Deadline Dilemmas
How do you meet the 90 Day and 180 Day deadlines?
Offer a preliminary diversification election form based on prior year information
Upon completion of appraisal and allocation, provide a final election form based on final information
18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company
Deadline Dilemmas
What if you miss the deadline? Creates an operational error for the
plan.
Correct the problem so that the plan is in the same position it would have been had the error never occurred; offer the participant the diversification right at the price that would have been paid when the election should have been made