The Rights of ESOP Participants
To get the tax benefits employee stock ownership plans (ESOPs) provide, companies must abide by the rules designed to make sure taxpayers are getting their money's worth. Most of these rules concern responsibilities of ESOP fiduciaries to operate the ESOP for the exclusive benefit of ESOP participants and requirements for who is covered by the ESOP and how and when they get their benefits. ESOP participants also have a variety of rights to help ensure that the fiduciaries live up to their obligations and that they receive basic information about the plan. This article describes the most important of those rights. It is not meant to be comprehensive.
Summary Plan Description (SPD)
All ESOP sponsors must provide a document to all employees explaining the rules of the ESOP, including how and when they become participants, how and when they get their ESOP benefits distributed to them, how they can take actions to question or complain about ESOP operations, and names and addresses of the sponsor and fiduciaries. All ESOP participants must receive the document within 90 days of becoming a participant, and the SPDs must be updated when material amendments are made, or, if there are none, every five years. The document is supposed to be written so that employees can understand it, but, at the same time, must be comprehensive. In practice, few employees ever read the SPDs and fewer still understand them. Companies should also provide an ESOP handbook that is more basic and that refers to the SPD as the governing source of information.
Summary Annual Report
Within seven months after the close of each fiscal year of the plan, the sponsor must issue a summary annual report on one of the Department of Labor 5500 forms. These forms provide information about plan activity and assets. ESOP participants must be able to inspect and copy the report. ESOP participants also receive a shorter version of the form.
Individual Benefit Statements
Each year, or upon termination, request, or a one-year break-in-service, employees must receive an annual statement indicating the fair market value of their shares and any other assets in their ESOP. Participant vesting should be noted. ESOP participants have a right to challenge the accuracy of the information. When participants have the right to receive benefits, they must receive information about how they can receive them and the tax consequences of each option.
Access to Plan Documents
Participants must be able to view the ESOP summary plan description, the plan itself, trust documents, and the latest annual plan report.
If participants are unable to get the summary plan description, the summary annual report or the annual report from the plan administrator, they may be able to obtain a copy by writing to the U.S. Department of Labor, EBSA, Public Disclosure Room, Room N-1513, 200 Constitution Avenue, N.W., Washington, D.C. 20210, for a nominal copying charge. Participants should provide their name, address and phone number to enable EBSA to contact them to follow up on the request.
Shareholder Voting, Proxies and Other Voting Disclosure Material
All ESOP participants have at least some voting rights. In private companies, ESOP participants must be able to direct the trustee on the voting of allocated shares for sale of all or substantially all of the company's assets, merger, liquidation, recapitalization, reclassification, dissolution, or consolidation. Note that ESOP participants do not necessarily have the right to direct the trustee on votes regarding the sale of the company's stock. In public companies, ESOP participants must receive the same rights as other shareholders. When vote pass-through is required, appropriate information on the issues must be provided, just as it would to other shareholders.
Information Companies Don't Have to Provide
It is common to read articles that say ESOP companies must disclose their financial statements, officer salaries, share ownership structure, and other information to ESOP participants. There are no requirements to do any of these things. Most ESOP companies do, however, provide some form of financial disclosure. Most also let ESOP participants know who else owns how many shares, but few provide information on salaries.
If a claim for benefits to an ESOP participant is denied, participants must receive a written notice explaining why. They must also have a chance to have a full and fair review of the denial and a written explanation of the results. The law sets forth very specific time lines and procedures for how claims must be processed. ESOP plan documents must spell this out, and ESOP participants must receive a description of these rules. If participants are still dissatisfied, they can file a civil action.
Employees have brought dozens of lawsuits against ESOP sponsors, advisors, and trustees. Most of these concern improper valuations, misuse of assets (such as moving profit sharing funds into an ESOP), broken promises (such as changing the schedule for distributing benefits), or excessive management enrichment to the detriment of plan participants. ESOP participants can sue on their own behalf or as part of a class. The Department of Labor can also sue, and sometimes will enter a case on behalf of ESOP participants.
ESOP fiduciaries are the clearest target of employee suits because they have a defined legal obligation to protect plan assets. ESOP sponsors, including the company's board of directors, are also usually named parties because they make decisions with respect to the operation of the plan. ESOP administrators can also be sued for errors in administration. Professional advisers are usually not considered fiduciaries as long as they just provide advice; if they actually make decisions, however, they too become ESOP fiduciaries.
ESOP participants can receive compensation for benefits they would have received, penalties, and attorney's fees. Sometimes these payments are made directly to participants; sometimes they are made to the ESOP. Most lawsuits are brought in cases where the company has pushed the ESOP rules to their limits. Frequent examples are investing profit sharing plan assets in ESOPs where the company's future is uncertain, accepting valuations that attempt to maximize the price the ESOP pays sellers by making only the most favorable assumptions, failure by a trustee to bargain aggressively with sellers to protect employee interests, and the use of plan assets to entrench management. Creating a strong paper trail of how ESOP trustees worked to protect participant interests, hiring independent trustees for potentially difficult situations, obtaining experienced ESOP advice, and knowing the law all help avoid lawsuits. Nothing helps more, however, than being willing to look to the interests of ESOP participants first, rather than trying to see how far the law can be pushed without getting sued.
Contacting the Department of Labor
The Employee Benefits Security Administration (EBSA) is a division of the U.S. Department of Labor. It enforces the law by informally resolving benefit disputes, conducting investigations, and seeking correction of violations of the law, including bringing lawsuits when necessary. The Department has benefit advisors committed to providing individual assistance to participants and beneficiaries. Participants will receive information on their rights and responsibilities under the law and help in obtaining benefits to which they are entitled. Contact a benefits advisor by calling toll free at 1-866-444-3272 or electronically at www.askebsa.dol.gov. Also see the Department of Labor's free online publication What You Should Know About Your Retirement Plan (PDF).