The Employee Ownership Update
December 1, 2005
Senate Bill Calls for Faster Vesting, More DiversificationThe Senate has passed the Pension Security and Transparency Act (S. 1783), a bill providing comprehensive reform of defined benefit plans and significant changes for defined contribution plans.
The bill requires that employees be able to diversify employer stock held in their profit sharing, stock bonus, or 401(k) plan after they have completed three years of service or are 55 years old. Stand-alone ESOPs, or KSOPs with a separate company-funded ESOP component, however, are specifically excluded.
The bill speeds vesting requirements from five-year cliff vesting to three years, while graduated vesting now must be completed in six years instead of seven. Faster vesting generally would have little impact on ESOP repurchase obligations because turnover tends to be very low anyway for people who have stayed at least three years.
The House is working on its own bill, but there are significantly different provisions for defined benefit plan reform that make passage of a final bill very uncertain.
FASB to Consider Changes in Accounting for Retirement PlansThe Financial Accounting Standards Board (FASB) has voted to conduct a comprehensive review of how companies account for retirement plans. In the brief announcement describing the new project, FASB stated that the first phase "seeks to improve financial reporting by requiring that the funded or unfunded status of postretirement benefit plans, measured as the difference between the fair value of plan assets and the benefit obligation-i.e., the projected benefit obligation (PBO) for pensions and the accumulated postretirement benefit obligation (APBO) for other postretirement benefits-be recognized on the balance sheet." In the second phase, FASB will look at how these obligations should be recorded on the income statement, including how plans with lump-sum options should be recorded. The project could take several years to be completed.
It is not at all clear just how or even if this will affect ESOPs. The announcement focuses primarily on defined benefit pension plans, as do the prior statements FASB has issued on retirement plans referenced in the announcement. One possibility, however, is that companies would have to book the repurchase obligation on their balance sheet. It seems less likely that there would be dramatic changes in the income statement treatment of ESOPs, given that changes made in the early 1990s are generally consistent with the philosophy FASB recently used in setting out standards for other stock.