Employee Ownership Blog - Why?
Well, why not one more? We’ve been saying for years how important it is to foster discussion about employee ownership and how it will make American businesses better, more successful and now we’re heeding our own advice. This blog is dedicated to spreading the message about employee ownership and we know the best way to spread that message is to get our members talking.
Is your company struggling with repurchase obligations? What are you doing?
Comments
1. anonymous said...
We are a company that recently amended our ESOP plan document to institute segregated accounts.
Our ESOP has been in existence for several years, it is about 75% employee owned since the last Serial Block sale of stock.
Business results were good over the past five years resulting in favorable Stock Growth.
Management wishes the benefit of the stock growth go to the active participants driving the financial results, rather than reward
terminated participants that no longer contribute their effort.
Year to year the Board of Directors declared the discretionary ESOP contribution.
Most years it exceeded the aggregate total of Diversification, Termination, and Retirement Distributions.
It generally takes 4 to 5 months after our fiscal year end to complete the Stock Appraisal and plan year end administration.
When the contribution is funded by the Company:
1.The ESOP trust uses a portion the of contribution to payoff the scheduled ESOP loan installment.
2.Money is left in ESOP checking account to fund anticipated Distributions ( Based on the aggregate of Distribution paperwork calculated by our
Third party administrator)
3. Any residual balance is transferred into our OIA investment portfolio.
With the implementation of Segregated Accounts is is their a fiduciary responsibility to fund the OIA account sooner?
Logic
Since terminated participants no longer have a Capital Stock Account and the benefit derived from Capital Stock growth, is there a fiduciary
obligation to fund the OIA account sooner?
Regardless of the OIA investment mix, should that discretionary contribution be funded so the invested assets are employed 12 months of the subsequent
year rather than the 7-8 months following completion of the annual administration.
A short term investment could be made until the aggregate Diversification, Termination, and Retirement Distributions are calculated.
3. anonymous said...
Segregated accounts shift the CSA account balances of terminees to active participants.
The OIA accounts balances of active employees are used within the trust to purchase the stock of terminees.
Segregated accounts are not helpful if you make Lump Sum Payouts for all participants.
If you require Multi year payouts for large account balances, Segregated Accounts shift a Terminee's CSA Account balance into OIA. The terminee no longer benefits from Growth in ESOP Stock value, but also is no longer subject to a decline in ESOP Stock value.
If the aggregate CSA account balances of terminees exceed the OIA account balances of active employees you might need to make an additional Cash contribution to the trust to fund the shortage.
Our third party administrator said segregated accounts have to be applied prospectively and retroactively. When implemented, if you have prior year terminees already being paid out over multiple years, their remaining CSA account balances must be segregated. The cash required for segregated accounts for some companies is almost the same as making Lump Sum distributions.
Before implementing segregated accounts you need to analyze the CSA and OIA balances of all participants in your plan, to determine if it is feasible.
Retirees being paid out over multiple years have to be treated like all other terminees, their CSA accounts also have to be segregated. No distinction is made.
If you have retirees that spent their entire work career with your company, and you want them to have the benefit of growth in the ESOP stock value while being paid out over multiple years segregated accounts are not the answer.
4. Sharon said...
We are a small (35 employees) private closely held company whose has had an ESOP since 1988. Our ESOP has owned 100% from inception and have always had our Plan docs to incorporate the provision for segregated accounts. As a mature ESOP company we have had the opportunity to deal with alot of issues over the years. The segregated accounts have worked well for us and as anonymous has commented you may have to fund a deficit if the balance in your SIA exceeds the OIA of the active. Another way to reward the so-called long timers is to declare a dividend. The dividend is allocated based on account balance rather than covered comp. Are there other mature 100% ESOP companies out there that can share their experience with the SIA?
5. wondering said...
why would an esop company start making lump sum payoffs to retired employees who thought they still had years of installment payments yet to be made?
6. Dedicated employees said...
Thanks for this discussion, we are also experiencing this kind of problem. I wanna know if how did you solve it.
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2. K said...
What exactly is accomplished by instituting segregated accounts? We also struggle with terminated participants receiving the benefit of the increased stock growth. I'm very interested to find out how you solved this. Also, are you a publicly traded company? Thanks very much.
10/3/2007