More Mistakes can be Self-Corrected
Some plan operational issues can be self-corrected if errors are caught on a timely basis. Others require a voluntary compliance (VCP) filing with the IRS in order to get approval for corrections.
The Employee Plans Resolution System (EPCRS) was modified in April to expand the number of defects that can be corrected without an IRS filing. Here is what changed:
- Plan loans in default. A participant loan goes into default when payments are missed. A plan can provide a grace period that stipulates that default occurs if a payment due in one quarter is not made by the end of the following quarter. Once the grace period ends, the entire loan becomes a deemed, and taxable, distribution. Under the new EPCRS rules, this deemed distribution can be avoided by having the participant make a corrective catch-up payment or by re-amortizing the remaining loan balance within the original loan term.
- Participant loans exceed the number available. A plan’s loan policy will generally limit the number of loans that a participant can have outstanding. Let’s say the limit is one, and all participants or some non-highly compensated participants were permitted to have two loans. The plan could be retroactively amended to conform the plan to its operation.
- Participant loan without spousal consent. Very few loan programs require spousal consent on a new loan. But if plan had a spousal consent requirement that was not met, the error could be corrected by simply obtaining the missing spousal consent.
- Required plan amendment not adopted. From time to plan, a plan may need to adopt a required amendment. It may now be possible to retroactively adopt a required amendment no later than the close of the second plan year following the plan year in which the amendment should have been adopted. To use self-correction, a plan must have a favorable IRS determination letter or favorable opinion letter if the plan is a volume submitter or other pre-approved plan.
- Oops, participants received greater benefits than the plan permitted. While this type of error might be limited, it could be possible now to self-correct the error through a timely-adopted retroactive amendment.
Department of Labor Remarks about ESOPs
At a May 1 hearing of the House Committee on Education and Labor, Department of Labor Secretary Acosta was asked about his agency’s position on ESOPs. He said, “I strongly support ESOPs; I think ESOPs are of benefit to employees. The industry is conforming much more closely to the law. I think the enforcement actions peaked sometime around 2013 and have declined since as the industry comes into greater conformity with what pension laws require.” The Secretary also agreed that more DOL guidance on compliance would be helpful.
At a recent conference sponsored by ASPPA, Geoffrey Forney Sr, a trial attorney from the Office of the Solicitor, said that the DOL is still looking at leveraged ESOPs and the issue of adequate consideration. He said priorities are shifting and ESOP activity is becoming more centralized in the DOL’s national office and regional offices are coordinating enforcement more with the national office. He indicated that DOL is still very interested in ESOP second stage purchase transactions and any transactions in which there is a “floor price” arrangement. When an ESOP enters into a second stage leveraged transaction to purchase additional stock, it is not unusual to see the estimated fair value of the ESOP stock reduced post-transaction. A typical floor price arrangement might provide, for example, that for a defined short term period after such a transaction, retirees (and potentially others) might receive a “floor price” value when cashing out their shares based on what the stock value would be if there had not been a new leveraged stock purchase. Any difference between fair value per the last stock appraisal and the floor price is funded by the company sponsoring the plan.
Other Positive News for ESOPs
There is a fair amount of grass roots effort that is designed to encourage employee ownership and spread the news about its benefits. Here are some examples:
- The Employee Ownership Expansion Network has been established as a nonprofit organization focused on increasing the number of employee-owned companies across the US.
- There are new efforts in a number of states to establish or reinvigorate employee ownership centers at the state level. This includes Colorado, Massachusetts, Georgia, and others.
- A number of ESOP-friendly bills have been introduced in state legislatures including Texas, Indiana and Nebraska. Some of the bills seek to allow ESOPs to own all or part of professional corporations, promote state employee ownership assistance offices, develop capital gains exclusions for the sale of stock to an ESOP or create contracting preferences for ESOP companies at the state or local government level.
- A new report from Rutgers University, “Building the Assets of Low and Moderate Income Workers and Their Families”, stems from interviews with employee owners at 21 ESOP companies. Interview data provides concrete examples of the positive impact that ESOPs have had on workers at employee-owed companies.
