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About the Q&A Basic ESOP Rules and Issues ESOP Basics ESOP Participation: Rules and Practices Contributions and Stock Allocation Vesting Rules Forfeitures / Reallocating Shares Distribution (Other than Diversification): General Issues Are the cash and stock portions of an employee's account treated differently for ESOP distributions? Can a company loan money to an employee after termination for the value of their ESOP account before it makes the distribution of the account? Can the ESOP distribution rules be changed later on in the plan to make them more restrictive or would this violate "anti-cutback" rules? In an ESOP, if the company cannot require employees to take cash for the shares, does it have a right of first refusal on shares distributed to former employees? Is there a required rollover into an IRA for any ESOP distributions? How do employees handle assignment of their ESOP benefits to someone else? If an employee has a put option with two 60-day windows one year apart, what price is used for the shares if the employee waits until the second 60-day period to exercise? Can we use the price when the distribution was made apply or the most recent valuation? Under my state's laws, a company cannot redeem its stock unless it has a surplus. If a leveraged ESOP creates a debt situation such that the company cannot redeem stock, what happens to the employee's put option on the shares? If on the date of termination, a participant's vested account balance exceeds $5,000, but later falls to under $5,000 before distribution occurs, should a required minimum distribution be made anyway? What if the plan states that the date on which the $5,000 value will be tested is at termination, not distribution? When a company with an ESOP is bought by another company, what happens to the employees' accounts? When do they get paid out? What is a Qualified Domestic Relations Order (QDRO)? What does a plan administrator do with a Qualified Domestic Relations Order (QDRO)? Timing of Distributions What is the typical waiting period for distributions from an ESOP? When does a company have to start distributing an employee's account? Under what circumstances is the company permitted to distribute account balances under $5,001 to terminated employees earlier than five years following termination? A company can defer the start of its ESOP distributions until after its loan is repaid. Does this even apply in death, retirement, or disability? If an ESOP loan is refinanced, can the extension of the loan period further extend the time the employer is allowed before paying distributions to participants? When an ESOP delays distribution until after the loan is repaid, and pays in installments at that point, can participants still receive a five-year installment payout? When an employee puts shares to the company, does the company have to pay for them all at once? If a valuation is not completed until months after the distribution date, should the company pay interest on the distribution amount? If a partially vested employee leaves with an account partly in leveraged ESOP shares and partly in other investments, is there an order to paying out the account? Can early distributions be made in the case of hardships? If a valuation is not completed for some months after the end of the plan year, how should the company handle distributions in terms of the price it pays for shares to make sure the price reflects fair market value? The law says the distribution must be at fair market value, but given the lag between the end of the plan year triggering a distribution option and the valuation, things can change. Form of Distribution (Stock, Notes, Cash) Tax and Penalties on Distributions What is the employee's tax liability for ESOP distributions? If an employee leaving for reasons other than death, disability, or retirement receives a lump-sum distribution that is paid in installments, with interest, what is the tax treatment if it is not rolled into an IRA? Is there a company withholding issue on the stock? If an employee leaving before death, retirement, or disability receives a distribution of shares and chooses not to roll it into an IRA, is the entire distribution subject to the 10% early withdrawal penalty? Are corporate contributions to an ESOP subject to FICA? Can an employee get net unrealized appreciation tax treatment on S ESOP share distributions? How does the company determine the net unrealized appreciation on participant accounts? If an employee's lump-sum distribution from an ESOP is paid with a note, how is it taxed? If an employee takes a distribution in stock intending to hold onto it and sell later to benefit from net unrealized appreciation tax treatment, but then decides to roll the money into an IRA, what happens? ESOP Diversification Rules Voting Rights Common and Preferred Stock Requirements for ESOP Investments Paying Dividends on ESOP Shares How does a company determine how to allocate dividends? Whose accounts receive dividends and which shares receive what dividends? Are dividends just paid on allocated stock? Can dividends paid on unallocated shares be passed through? Can dividends be paid just on vested shares? Are dividends paid on ESOP shares always deductible? When can a company take a deduction for dividends paid on ESOP shares? Do employees pay tax on the dividends? Are ESOP dividends that are paid directly to employees taxed as wages? Are distributions to former employees considered dividends? Can cash dividends be paid to former employees still in the plan? If an employee terminates, and a dividend is paid while the employee is still a plan participant, does the employee have to get the dividend? Can distributed dividends be rolled over into an IRA or other retirement plan? When dividends are used to repay a loan, what happens to shares in the ESOP? Can a company take a deduction if it institutes a dividend switchback program whereby participants could elect to receive the cash dividend and simultaneously defer it back into the plan and into the other available 401(k) funds? When a company uses dividends to repay a loan, must the shares always be allocated based on account balances or can they be based on relative pay or whatever formula the company uses to allocate contributions? If a company has a dividend switchback program, how would the amount paid as dividends be reported? When is the "fair market value" determined for the purpose of allocating shares repaid by the use of dividends? To use dividends to repay an ESOP loan, the dividends must be paid on the shares acquired with the proceeds of an ESOP loan (at least for loans after August 9, 1989). This required linkage can be broken if a loan is refinanced as a result of a corporate reorganization or sale. Are dividends used to repay the ESOP loan still deductible given that the linkage between the original loan and the shares acquired by that loan has now been broken (that is, the new loan or sale of shares may now be used to repay the loan)? Can former employees still in the plan get allocations of shares from dividends used to repay an ESOP loan? Can dividends on shares acquired prior to August 9, 1989, be used to repay an ESOP loan entered into after this date? Does creating a new class of non-voting, dividend-paying stock that is a significant percentage of the total company's stock constitute a recapitalization subject to "pass-through" voting? If an employer's stock declines in value, but the dividend payments on shares has required an allocation of shares greater than what would be released under the normal formula the company is using, can the employer use shares from the suspense account to make up the deficit? What is a "reasonable" dividend? Reinvestment of Dividends Providing for Employee Access to Plan Funds During Employment Highly Compensated Employees / Top Heavy Plans Can Employees Directly Purchase Shares Other Than in Specific Stock Purchase Plans? Setting Up an ESOP Financing Employee Ownership Leveraged ESOP Rules Using an ESOP for Business Continuity Valuation Plan Administration ESOP Accounting Rules S Corporation Issues Trustee and Fiduciary Issues Securities Law Handling ESOP Repurchase Obligations Non-ESOP Arrangements and 401(k) Plans Plan Termination, Freezing a Plan, and Merging an ESOP into Another Plan Miscellaneous Employee Ownership Issues Back to Top
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