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Model ESOP

(Digital Version)

3rd Edition

by Karen Ng (with explanatory notes by Corey Rosen)

This is provided as a zip file containing both the book PDF and the contents of the CD accompanying the print version of the book, with no shipping charges. It also is available in a print version (for which shipping charges apply).
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This publication includes a model employee stock ownership plan (ESOP) document with alternate provisions and a detailed, step-by-step explanation and commentary. It is not a "fill-in-the-blanks" kit; ESOPs are too complicated for such things. The model plan will, however, help you develop the ESOP you want. It was updated for the third edition in 2006 to reflect tax law changes, including the Pension Protection Act of 2006. The revised third edition of 2007 incorporates some minor edits. The book includes the plan documents in word-processing format (the print version comes with these on a CD; the digital version includes these in a zip file along with a PDF of the book's text). The model plan is by Karen Ng, a noted attorney and highly experienced ESOP expert, and the explanation is by NCEO Senior Staff Member Corey Rosen.

Publication Details

Format: Zip file containing book PDF and CD contents, 100 pages
Dimensions: 6 x 9 inches
Edition: 3rd (January 2007)
Status: Available for electronic delivery

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Contents

Preface

Part 1: Model Plan Document
Employee-Owned Company, Inc., Employee Stock Ownership Plan
Section 1. Nature of the Plan
Section 2. Definitions
Section 3. Eligibility and Participation
Section 4. Employer Contributions
Section 5. Investment of Trust Assets
Section 6. Allocations to Participants' Accounts
Section 7. Allocation Limitations
Section 8. Voting Company Stock
Section 9. Disclosure to Participants
Section 10. Vesting and Forfeitures
Section 11. Credited Service and Break in Service
Section 12. When Capital Accumulation Will Be Distributed
Section 13. In-Service Distributions
Section 14. How Capital Accumulation Will Be Distributed
Section 15. Rights, Options, and Restrictions on Company Stock
Section 16. Leveraging Provisions
Section 17. No Assignment of Benefits
Section 18. Administration
Section 19. Claims Procedure
Section 20. Limitation on Participants' Rights
Section 21. Future of the Plan
Section 22. "Top-Heavy" Contingency Provisions
Section 23. Governing Law
Section 24. Execution
Option Paper 1: Definition of "Disability" and Impact on Plan's Claims Procedures
Option Paper 2: Allocations
Option Paper 3: Additional Allocation Limitation
Option Paper 4: Voting
Option Paper 5: Providing Additional Information to Participants
Option Paper 6: Vesting Schedules
Option Paper 7: Timing of Forfeitures
Option Paper 8: Automatic Rollover
Option Paper 9: Selection of the ESOP Committee
Option Paper 10: Top-Heavy Vesting Schedule
Appendix 1: Special Considerations for S Corporations
Appendix 2: Duties of the Independent Trustee

Part 2: Explanatory Notes
Section 2. Definitions
Section 3. Eligibility and Participation
Section 4. Employer Contributions
Section 5. Investment of Trust Assets
Section 6. Allocation to Participants' Accounts
Section 7. Allocation Limits
Section 8. Voting Company Stock
Section 9. Disclosure to Participants
Section 10. Vesting and Forfeitures
Section 11. Credited Service and Break in Service
Section 12. When Capital Accumulation Will Be Distributed
Section 13. In-Service Distributions
Section 14. How Capital Accumulation Will Be Distributed
Section 15. Rights, Options, and Restrictions on Company Stock
Section 16. Leveraging Provisions
Section 18. Administration
Section 19. Claims Procedure
Section 22. "Top-Heavy" Contingency Provisions

Excerpts

From the Preface

This is a model, not a prototype plan. The government allows some kinds of retirement plans, such as Simple IRAs, to use certain preapproved plan documents ("prototype plans") that allow users to fill in the blanks. Prototype plans are not allowed for ESOPs, however.

The purpose of this book is not to provide users with a document they can simply adapt to their own situation and submit to the Internal Revenue Service (IRS) for approval. It is absolutely necessary for users of this (or any model ESOP plan) to seek qualified, experienced counsel to review the document.

From the Model Plan

Distribution of a Participant's Capital Accumulation shall commence not later than 60 days after the Allocation Date coin­ciding with or next following the latest of (1) his 65th birth­day, (2) the tenth anniversary of the date he became a Par­ti­cipant, or (3) his termination of Service. A Participant who termi­nates Service after becoming 100% vested in his Account bal­ances under Section 10(a)(2) shall be entitled (upon his request) to have the distribu­tion of his Capital Accumulation commence upon his at­taining age 55. The distr­ibution of the Capital Accumulation of any Participant who attains age ­70½ in a calendar year and who either (1) has terminated Service or (2) is a "5% owner" (as defined in Section 416(i)(1)(B)(i) of the Code) must commence not later than April 1 of the next calendar year and must be made in accordance with the regulations under Sec­tion 401(a)(9) of the Code, including Sec­tion 1.401(a)(9)-2 through 1.401(a)(9)-9 (as modified by the Section 401(a)(9) Final and Temporary Regulations published in the Federal Register on April 17, 2002). If the amount of a Par­ticipant's Capital Accumu­la­tion cannot be determined (by the Committee) by the date on which a distribution is to commence, or if the Participant cannot be located, dis­tribution of his Capital Accumulation shall commence within 60 days after the date on which his Capital Accumulation can be determined or after the date on which the Committee locates the Participant.

From "Section-by-Section Analysis"

Like most plans, this one is written to provide the ESOP committee with the maximum allowable flexibility as to when to make payouts for participants who die, retire, become disabled or terminate. However, this provision allows the committee to provide for faster distributions. The committee can do this, provided there is a written policy it follows and the changes do not have the effect of discriminating in favor of more highly compensated employees or to favor one class of employees over another. For instance, a company might want normally to pay out in two years but allow the committee to extend that in the case of financial constraints.

A plan could be written with shorter payout provisions as well. An ESOP sponsor can change the rules for stock distribution, again as long as the change is not designed to favor one class of employee over another or to favor highly compensated employees. For instance, a company that initially had a one-year waiting period could extend it to five years. It could not decide to pay out higher-paid people in one year and lower-paid people over five years, for instance.

There are many other variations a committee might adopt. For instance, it might pay out accounts under a certain amount faster then those over that amount. There are also special provisions for leveraged ESOPs, as described in Section 16.