Next week is the Iowa-Nebraska ESOP Winter Conference in Omaha, NE, and there is still time to register here. Blue Ridge is pleased to be a sponsor for this conference. Stop by our table and let Chad Guzinski share with you the additional services we offer to help manage your ESOP & 401k the smart way. You will also have the opportunity to hear one of our professionals at the following session after lunch.

Guest Commentary

How Well Do ESOP Acquisitions of Non-ESOP Companies Work?

Suzanne Cromlish

February 5, 2016

According to the National Center for Employee Ownership, in recent years ESOP companies have been acquiring other companies at a rapid rate. There are probably as many or more companies acquired by ESOP companies as there are new ESOPs in any year. Until now, there has been no data on how well these acquisitions work. Wharton professor Robert Holthausen notes that 50% to 80% of all mergers fail to deliver positive results.

This research project looks at what happens in ESOP acquisitions. Most successful ESOP companies implement various types of progressive organizational strategies, including open-book management and high-involvement decision making, that may help overcome a principal challenge to mergers and acquisitions, namely difficulties with cultural integration. They also almost always make the target employees part of the ESOP. These practices of active employee engagement and participation enhance productivity and profitability because employees are personally empowered to improve company performance. This study focused on how other companies were acquired by an existing ESOP and how these target companies become employee-owned, with two key questions in mind:

January brings another batch of resolutions. Most, alas, will be long forgotten by the end of first quarter. Because you want to make more of your investment in ESOP ownership and engage your employees as owners, why not resolve to use the SMART process to achieve your ownership-development goals in 2016?

SMART, as you may know, stands for Specific, Measurable, Attainable, Relevant and Time-bound. Here’s how you can be SMARTer and make more of employee ownership this year.

S= Specific. What do you want to accomplish with your ESOP? What level of understanding and engagement do you want from employees? What attitudes, behaviors and actions would you like employee-owners to display in their daily jobs? Write down specifics that you want to see happen.

An unusual provision was slipped into the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. This legislation provided that the time for filing Form 5500 returns for 2016 and later could be extended an additional 3 ½ months instead of the current extension period of 2 ½ months.   That would have meant the possibility for extending the filing deadline for a calendar 2016 plan to November 15, 2017!   Complaints about the extension did NOT fall on deaf ears. Congress passed the Fixing America’s Surface Transportation Act of 2015, which REPEALS the new extended filing deadline.

It’s not unusual for an S Corporation to find that contributions to the company’s ESOP and 401(k) plans might exceed a deduction limit, particularly if the ESOP is leveraged. The combined deduction limit is limited to 25% of eligible compensation paid during the company’s fiscal year.

So your company makes deposits to its ESOP to provide the funds needed for debt service and distributions. You remember that your third party administrator (TPA) mentioned something last year about your company contributions being just within your deduction limit. It might be time to look at funding your ESOP with contributions and S Corporation distributions.

What does this mean to your ESOP?  

IRS Advisory Committee Asks Practitioners and Service-Providers to Participate by February 1 in Confidential Survey About Elimination of Most Determination Letters (Employee Plans Subcommittee, IRS Advisory Committee on Tax-Exempt and Government Entities (ACT))

This week we will have a booth at the Las Vegas ESOP Conference and Trade Show. Stop by booth 205 and visit with our professionals who will show you how Blue Ridge ESOP Associates is able to take your ESOP to the next level with the latest enhancements in ESOPConnection and the ability for us to handle Repurchase Obligation Studies. Don't miss Kevin Rusch's session on ESOP Distributions:

Tomorrow members of the Blue Ridge ESOP Associates team will be attending the Mid-Atlantic Chapter Fall Conference at Boar's Head Inn. We are pleased to be a platinum sponsor supporting this professional conference. The following round tables will be led by our professionals.

Form 5500 changes are coming. The IRS published the proposed Form 5500 for 2015, and new questions are embedded in the return:

• Trust information, including name of trust and its federal identification number, name of trustee and trustee phone number
• Plan document questions relating to whether the plan has been timely amended ,and a request for the date of the most recent determination letter (or opinion letter for plans using a volume submitter or prototype document)
• Question regarding any tax deductible dividends paid by a C corporation ESOP
• Question on whether the plan has incurred unrelated business taxable income
• 401(k) nondiscrimination testing questions
• Coverage testing questions