Blue Ridge ESOP Associates Industry News

The Importance of a Distribution Policy

Posted by Jessica Sinnen

Sep 8, 2017 2:00:00 PM

Does your company need a written distribution policy?  The purpose of this article is to provide a high level overview of the importance of a written distribution policy and topics to consider. 

Your Plan Document will discuss the requirements for paying out distributions to plan participants once a distributable event occurs - death, disability, retirement, termination, QDROs or diversification.  Some plans also allow for in-service distributions, dividend pass-through, and hardship withdrawals, which you may want to include in your policy. The provisions listed in the document generally fall along the statutory guidelines, which are the maximum payout terms allowed by the Internal Revenue Code (IRC). Your written distribution policy should address form, method and timing of distributions payouts.

A distribution policy may be part of the plan document, yet most times it is a separate document. A separate document allows for easy modification when the need arises. Qualified plans are subject to IRC Section 411(d)(6) regarding distribution requirement modifications, however ESOPs are an exception to this rule as long as they are updated in a “non-discriminatory” manner. Along with the plan document, the IRS may request to review the policy as part of their determination review process.     

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Topics: Plan Design, Distributions

The Impact of 401(k) Plan Design on Company Culture

Posted by Tom Roback, Jr.

Oct 22, 2015 9:07:00 AM

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Topics: Plan Design

Does Your ESOP Have a Mirror Note

Posted by Jon Williams

Apr 2, 2015 12:51:00 PM

It would be quite disturbing to a person to wake up, look in the mirror and see the reflection of someone else. However, this is what happens when a leveraging transaction is set up, expected to be a mirror note, but the provisions of the note are not at all identical. You might be thinking that this is ludicrous, how could this happen to an ESOP? The answer is a lot more common than you would think. Understanding the ESOP loan is extremely important and vital to maintaining a compliant Plan.

It is very common for an ESOP to purchase shares through a leveraged transaction. It is also very common to see a two part transaction agreement between three entities: the Company, the ESOP and a financial institution. In stage one, a financial institution will lend the money to purchase the ESOP shares to the Company with a loan agreement, from this point on referred to as the External Note (aka Company Note). The second stage is the loan agreement between the Company and the ESOP to purchase the shares, from this point on known as the Internal Note (aka ESOP Note). In this scenario you have two separate loan agreements. When the provisions of the loan agreements are exactly identical, you have what is called a mirror note.

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Topics: Plan Design

401(k) Pre-approved Plans – It’s Restatement Time

Posted by Dolores P. Lawrence, CPA, QKA

Jul 3, 2014 4:25:55 PM

401k_roadsignIf you are a sponsor of a 401(k) or profit sharing plan, it is likely that your plan documents are in the “pre-approved” category (prototype plan document or volume submitter). Such plans are subject to six-year restatement cycles. The next restatement cycle, referred to as the PPA Restatement period, opened May 1, 2014.

A restatement is a complete re-writing of your plan document to incorporate changes in laws that have occurred since the end of the prior cycle. This includes the Pension Protection Act (PPA), the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) as well as other changes.

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Topics: Plan Design

How Do I Get More Employees to Actively Participate in Our 401(k) Plan?

Posted by Jessica L. Angell, QKA

Jul 3, 2014 3:59:50 PM

You just received the dreaded call from your friendly 401(k) TPA – your Average Deferral Percentage (ADP) test is failing…again! Some of your Highly Compensated Employees (HCEs) will be disappointed to learn that money they deferred will be returned to them and is taxable.

A common reason for a failed test is a low employee participation rate among the Non Highly Compensated Employees (NHCEs). The million dollar question is: “How can I increase employee participation?” Follow some of these tips and you may be on the road to passing the ADP test soon!

  • Educate your new employees. Do you currently provide your new employees with information about the 401(k)? We’re not just talking about handing them an enrollment packet and a Summary Plan Description (SPD) along with their other new hire paperwork, but really promoting the plan to your new employees. Examples include group meetings, posters in common areas of the workplace, emails, payroll stuffers and other communication to actively promote the plan.

  • Educate your current employees. Hold meetings with employees right before or in conjunction with your benefit open enrollment. Employees need to be reminded about the need to save for retirement at least annually. Sometimes new employees don’t initially enroll in the 401(k) plan because they are either overwhelmed with all the new hire paperwork or decide to wait until they can assess their financial situation. They may not realize they can begin deferring at a later time. If you have a “hands on” financial advisor, he or she may be willing to assist in this area. Ideally, your financial advisor would explain plan features and assist with enrollment. Provide illustrations on how a small amount deferred today can compound over time. If you have a match, explain it! The following example demonstrates the power of a 25% match rate: Would you put $1.00 into a Coke machine if you could get the machine to dispense $1.25? That’s what happens when contribute to our 401(k) plan.

  • Provide Automatic Enrollment. Amend your plan to provide that new employees are automatically enrolled at a pre-determined percentage of pay (e.g. 3% default rate) unless they make an affirmative deferral election. Studies show that automatic enrollment increases participation when coupled with suitable default investments and matching contributions. For example, provide a 6% default contribution rate with a default target date fund that is matched to the employee’s expected date of retirement. Pair automatic enrollment with an annual 1% increase in the default deferral rate.When you initially adopt automatic enrollment, consider applying it to new participants AND existing participants who are not currently contributing to the plan.

  • Provide a match. A match has strong appeal, even when the company only matches a dime on the dollar. The larger the match, the bigger the impact on enrollment. Consider a stretch match. If you need for employees to contribute 5% of pay on average in order to pass ADP testing, consider a match formula like 20% of the first 5% of pay contributed.

  • Simplify enrollment. Provide key information about the plan. Ensure that the investment menu and enrollment materials are not overwhelming. Highlight a default investment option or the plan’s target date funds or risk-based asset allocation funds (i.e., conservative portfolio, moderate portfolio, etc.)   Consider the need for materials in Spanish or other languages. When possible, take enrollment TO employees if they work at various sites.

  • Re-evaluate investment options. Employees may be more willing to defer if the plan offers investments that meet their personal objectives – as long as the list of options is not too long. Participants will postpone enrollment if they are looking at a menu of 40 options. Including target date funds may be a draw for your employees with less experience in making investment decisions.

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Topics: Plan Design, 401k Participation

ESOPs : Time to take a look

Posted by Tom Roback, Jr.

Jun 12, 2014 9:34:28 AM

Employee Stock Ownership Plans (ESOPs) seem to be generating more interest from business owners lately. While ESOPs have similarities to 401(k) plans, there are big differences. ESOPs have the unique right to borrow and own up to 100% of the company's common stock. ESOP assets are held in a tax-exempt trust and employees do not contribute anything personally.

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Topics: Plan Design, Government & ESOPs, ESOP Administration

Tips on Coordinating ESOP/401(k) Plan Design and Administration

Posted by ESOP Association

Apr 24, 2014 3:16:00 PM

Plan_Design_ESOP_401kMost companies with an ESOP also sponsor a 401(k) plan for their employees. However, the designs for these two plans are not always coordinated. The administration of the plans may lack coordination as well. It’s not uncommon to find ESOP and 401(k) plans sponsored by the same employer with differing definitions of compensation, differing eligibility exclusions, etc. Differences “by design” are fine, but unintentional differences can result in operational errors. The following real life examples (and commentary) illustrate the importance of coordinated design for paired ESOP and 401(k) plans.


Example 1: ABC Company adopts a new ESOP. Per the ESOP document, “Compensation” is gross compensation paid, less reimbursements, expense allowances, and fringe benefits. The corresponding definition in the 401(k) plan is gross compensation including fringe benefits. ABC Company provides the same census data to its 401(k) and ESOP administrators. After year end, the plan auditors discover that the ESOP third party administrator (TPA) has used the wrong compensation definition in allocating contributions.

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Topics: Plan Design, ESOP & 401(k) Plans

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Blue Ridge ESOP Associates can provide everything you need to administer your ESOP, 401(k) or combination ESOP/401(k) plan. Our full service outsourcing, which can include participant on-line services, provides worry-free  assistance for your HR or Benefits staff, leaving them free to concentrate on other responsibilities.

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