Blue Ridge ESOP Associates Industry News

There are many options to consider when determining the best way to handle an ESOP plan’s
repurchase obligation.

There is a very high probability an ESOP will be leveraged during its lifecycle.  When this leveraging occurs and the ESOP takes on debt to acquire company stock, a number of legal documents are drafted to record the terms of the transaction and the requirements of the involved parties.  As the Plan Sponsor or Trustee of an ESOP, it is important to understand the reason these documents exist and the differences between ESOP internal loans versus external loans.

The Employee Retirement Income Security Act of 1974 (ERISA) requires that every fiduciary of an employee benefit plan and every person who handles funds of the plan be bonded. The purpose of the bonding requirements is to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who ”handle” the plan assets. To monitor this requirement, plan sponsors are required to report annually on the IRS Form 5500 whether the retirement plan, including ESOPs, was covered by a fidelity bond and the amount of coverage for that respective plan.

While there are no specific penalties for failure to satisfy the appropriate bonding requirements, this is one step not to overlook. Plan fiduciaries can be held personally liable for any losses incurred by the plan that should have been covered by a fidelity bond. In addition, U.S. Department of Labor (DOL) investigators routinely review ERISA fidelity bonds during plan audits and investigations.