Blue Ridge ESOP Associates Industry News

In this day and age we are increasingly reliant on receiving information electronically. With the desires to “Go Green”, many companies rely on electronic delivery of information to their clients. With respect to required ESOP notices, however, it is important to understand the rules of what can be delivered electronically to participants, and how those notices must be delivered. As an example, just putting a copy of your Summary Plan Description (SPD) on your company website may not be a sufficient method of delivering that document to your employees.

The Department of Labor (DOL) issued a regulation in 2002 which is commonly referred to as a “Safe Harbor” method for delivery of plan disclosure documents. Documents such as the SPD, Summaries of Material Modification to the SPD (SMM) and Summary Annual Reports (SAR) can be electronically posted to a website for participants to access. These electronic accesses to those plan documents though are limited to two categories of participants:

This past June, the IRS released Technical Advice Memorandum (TAM) 201425019, which addressed the tax consequences of an ESOP failing to use the proper method of calculating the annual release of company stock from the loan suspense account.

Background. When a company’s retirement plan includes employer stock as an investment option and stock value declines significantly, plan participants may seek to recover losses. In the past decade, there have been many “stock drop” lawsuits and most have involved public companies that sponsor KSOPs or other plans holding employer stock. Claimants have alleged that plan fiduciaries failed to liquidate employer stock or failed to restrict further purchases when such investments became imprudent. Defendants have responded by citing The Moench Presumption as part of their defense.

In the 1995 ESOP case Moench v. Robertson, public company stock declined sharply before the company went bankrupt. ESOP fiduciaries continued to invest in company stock while the share price dropped from $18.25 to $.25 over a two-year period. The Third Circuit court ruled that ESOPs are designed to be invested in employer stock and there is a “presumption of prudence” for holding employer stock in an ESOP. A plaintiff can overcome the presumption by establishing that a fiduciary abused its discretion by investing in employer stock.

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.