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The Employee Ownership Update

Loren Rodgers

October 1, 2013

(Loren Rodgers)

DOL Considering Rules to Require Defined Contribution Plans to Show Projected Lifetime Benefits

The U.S. Department of Labor (DOL) is developing proposed regulations that would require "a participant's accrued benefits to be expressed on his pension benefit statement as an estimated lifetime stream of payments, in addition to being presented as an account balance." Additionally, the rules "would require a participant's accrued benefits to be projected to his retirement date and then converted to and expressed as an estimated lifetime stream of payments." The proposal, Employee Benefits Security Administration, 29 CFR Part 2520, RIN 1210-AB20, has raised some controversy, and the DOL has extended the comment period on the rule. Several large pension and employer organizations have expressed concerns about what standards would be used to do this, costs, and potential legal exposure.

Be Careful About Deferring Pay in a Startup Company

In an article in CFO Magazine on potential compensation perils for startup companies, Christine Osvald-Mruz warns that many startup companies defer some or even all cash compensation for employees until they have the money to pay. If that payout date is uncertain—as in whenever the company has the funds—Osvald-Mruz notes that it would be subject to additional deferred compensation taxation under Section 409A of the tax code. That can be avoided by specifying a specific date or event in the future, such as after some vesting period or at a date far enough into the future that it seems certain the company will have the cash.

IRS Modifies Determination Letter Process to Clear Backlog

On September 18, the IRS announced modifications to its determination letter process. Under the modified procedures, the determination letters ("DL") issued will no longer include the dates of adoption for plan documents or amendments.

Since the announcement of the modified DL process, the IRS has been issuing determination letters for ESOPs at a vastly accelerated pace, with service providers reporting dozens or hundreds of such letters received. The letters appear to be issued on a vastly expedited basis. Based on informal conversations with IRS agents and officials, ESOP practitioners are concerned that the ESOP plan documents were not (and will not be) completely reviewed before a letter is issued.

The IRS statement says that "determination letters are based on the facts and demonstrations presented to the IRS in connection with the determination letter application. Therefore, our processing change does not affect the scope of or reliance on a determination letter." However, if the failure to completely review the ESOP documents produces flawed determination letters, the determination letters may eventually prove of limited value in providing assurances to employers about the plan's status as a qualified ESOP.

If the new process for determination letters does make such letters less reliable, ESOP companies may have fewer tools for IRS audits and DOL investigations. ESOP companies have also used determination letters to satisfy the due diligence requirements of lenders and outside auditors.

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