Blue Ridge ESOP Associates Industry News

When an employee terminates employment with the company due to a disability, his or her ESOP account may be subject to certain procedures and additional benefits. Before these procedures and benefits can be applied, it is important to understand how your ESOP Plan Document defines disability and whether or not the employee’s circumstance meets that definition.

Segregation, also referred to as “reshuffling” or “conversion,” is defined by the IRS as “the mandatory transfer of employer securities into or out of plan accounts, not designed to result in an equal proportion of employer securities in each account.” Segregation is often used in ESOPs to convert the accounts of terminated participants out of stock and into cash until such participants are paid a full distribution of their vested plan balances.

The U.S. Department of Labor (DOL) requires qualified retirement plans to have an annual audit by an independent qualified public accountant. The findings of the audit should be reported on the plan’s Form 5500. However, your plan may be eligible for the “small plan audit waiver” if it meets the below outlined requirements. 

In our annual year-end data collection process, we always ask our clients to confirm who their officers are. Sometimes our clients will ask us what it means to be an officer.  This article is intended to provide guidance on this important question.

Fidelity Bond Coverage for your ESOP

When preparing or reviewing your ESOP’s Form 5500 annual return, you may notice that Line 4e on Schedule H for large plans and Schedule I for small plans asks the following: “Was this plan covered by a fidelity bond?” It is important to not only make sure that your ESOP is covered by a fidelity bond, but that you have the required amount of coverage each year and that you relay this information to your third-party administrator or the party responsible for completing your Form 5500.

The hours of service is an important piece of information you will provide to your ESOP third party administrator (TPA) with your annual census data. An employee’s hours of service may be used to determine eligibility for participation in the ESOP and eligibility to receive allocations and to track years of service for vesting and breaks in service. Therefore, it is important to use the correct method (as defined by your Plan Document) to credit each employee with the correct number of hours.