EXECUTIVE EDUCATION SERIES: Accounting and Management Issues of

Employee Stock Ownership Plans

Presented by: Hal Hunt, Cindy Dwyer, Mike Loritz and Robert Grossman

May 23, 2013

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Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

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Today’s Presenters

Hal Hunt, CPA Shareholder 913.234.1012 | hhunt@cbiz.com

Hal leads MHM’s Employee Benefit Plan (EBP) Audit Practice. With over 25 years of diverse experience with EBP accounting, auditing and compliance issues, he is also a member of the firm’s Professional Standards Group as EBP subject matter expert. As the EBP National Practice Leader, Hal is responsible for providing internal training, along with providing technical support to engagement teams, serving as engagement quality reviewer and developing resource tools for our EBP audit professionals. He served on the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC) Executive Committee and is currently a member of the EBPAQC ESOP Task Force.

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Cindy Dwyer Shareholder 913.234.1022 | cdwyer@cbiz.com Cindy is the President of MHM Retirement Plan Solutions and a Shareholder of Mayer Hoffman McCann P.C. She supervises staff, oversees technical research, and provides quality control services. She has previously served as the national Chairperson of the American Institute of Certified Public Accountants Employee Benefits Technical Resource Panel (TRP) and has recently been reappointed as a member of the TRP. Additionally, Cindy has been a recurring speaker at the American Institute of Certified Public Accountants National Conference on Employee Benefit Plans. Cindy is also a committee member and current chair of the Employee Benefits Institute sponsored by UMKC School of Law.

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Today’s Presenters

Robert D. Grossman Partner, Lathrop & Gage LLP 816.460.5831 | rgrossman@lathropgage.com Mr. Grossman is a nationally-recognized ESOP authority with extensive experience representing owners, management and fiduciaries of employee-owned companies. ESOP transactions have involved private as well as public companies in a variety of industries including advertising, architecture, automotive, banking, chemicals, commodities trading, construction, energy, engineering, financial services, health care, insurance, manufacturing, pharmaceuticals, printing, professional and other services, retail, security and telecommunications.

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Today’s Agenda

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ESOP Overview ESOP Plan Accounting and Auditing Update

Complex ESOP Issues

ESOP Legal and Regulatory Update 4

ESOP OVERVIEW

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1950s—ESOP concept developed 1970s—Employee Retirement Income Security Act of 1974

(ERISA) 1990s—ESOPs became eligible to hold shares of

S-Corporations in 1998 2000s—Clarification and definition of abusive

S-Corporation ESOP structures, IRC 409(p) in 2001

Source: The ESOP Association

ESOP Timeline

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Approximately 11,000 ESOPs in the U.S., covering 10.3 million employees (10% of the private sector workforce) across a wide spectrum of industries 5,000 ESOP companies are majority-owned by the ESOP 4,000 ESOP companies are 100% owned by the ESOP 2,000 ESOP companies are minority-owned by the ESOP Approximately 3,700 (1/3) are S-Corporation ESOPs

At least 70% of ESOP companies are or were leveraged, meaning they used borrowed funds to acquire the employer securities held by the ESOP

Total assets owned by U.S. ESOPs is estimated to be $870 billion

Source: The ESOP Association

ESOP Population

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Defined contribution retirement plan Invested “primarily” in “qualifying employer securities” Tax benefits and related compliance matters Key issues arise when debt is used to acquire company stock: Direct loan — between lender and ESOP

Commercial lenders Seller financing Participant puts of shares back to ESOP for note from ESOP

Indirect or 2–step loan Lender to plan sponsor, sponsor to ESOP Mirror terms are not required

Internal loan Sponsor to ESOP with no associated borrowing by sponsor

ESOP Basics

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Plan qualification requirements of the IRC require that an independent valuation of privately held employer securities, (acquired after December 31, 1986), must be performed annually.

However, the DOL strongly encourages all ESOPs holding private securities to obtain such an independent valuation and requires a valuation for any employer security purchase or sale transactions between the plan and a party in interest.

This annual valuation is used to allocate shares to participant accounts, and to redeem shares from retiring plan participants to put back to the employer.

Valuations are also used for annual ESOP administration and reporting purposes.

ESOP Basics

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ESOP PLAN ACCOUNTING AND AUDITING UPDATE

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Plan Financial Statements Evolution of Fair Value Measurements

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FAS 35 (adopt 1981) Plan investments valued

at fair value

ASU 2009–12 “NAV” (adopt 2009) - Use of NAV as a practical

expedient for valuation - Additional disclosures and hierarchy

ASU 2011–04 (adopt 2012) - Description of valuation processes for L3

- Unobservable inputs table (quantitative) for L3 - Public entities to disclose all

L1 and L2 transfers - Public entities to provide narrative description of sensitivity of FV to changes in unobservable

inputs (qualitative)

ASU 2010–06 (adopt 2010) - Disaggregate hierarchy disclosures by “nature

and risk” class for all FV assets and liabilities - Disclose transfers between L1 and L2

- Other new disclosures FAS 157 (adopt 2008) - Apply new FV definition - Hierarchy disclosures

FSP FAS 157–4 (adopt 2009) Disaggregate hierarchy disclosures by

“nature and risk” category for equity and debt securities

ASU 2010–06 (adopt 2011) Expanded disclosure of

L3 activity

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ASU 2011-04 and Topic 820

ASU 2011-04: Provides for more information and transparency about

how fair value is determined for investments that are not traded in an active public market.

It is that new information that has drawn the attention of the ESOP community.

FASB Accounting Standard Update (ASU) 2011-04: Measurement (Topic 820): Amendments to Fair Value Measurement and Disclosure Requirements

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Private Company ESOP Example

Description Fair Value Valuation Technique(s)

Unobservable Inputs

Rate Applied

Sponsor Company Common Stock

$92,320,000 Discounted Cash Flow

Weighted average cost of

capital

11.1%

Long-term revenue growth

rate

4.2%

Long-term pretax operating margin

10.3%

Discount for lack of marketability

17%

Market Comparable Companies

EBITDA multiple 11.3

Revenue multiple 2.0

Discount for lack of marketability

17%

Example Disclosure Level 3 Investment Valuation Techniques and Inputs — Private Company ESOP

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Private Company ESOP Example

The fair value of the sponsor company common stock held by the plan is valued at fair value based upon an independent appraisal. This appraisal was based upon a combination of the market and income valuation techniques consistent with prior years. Plan management has concluded that market participants would also recognize a discount for lack of marketability. The valuation process involves plan management’s selection of an independent appraiser under contract for a term of 3 years with the right to cancel such contract at any time. Plan management accumulates the data for the appraiser from the audited financial statements of the Company. The appraiser prepares a preliminary report which plan management, along with the ESOP trustee, reviews in detail, discusses and approves. The results of this process are documented in minutes of the plan fiduciary.

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Level 3 Investments Disclosures in 2012: Consideration must be given to the fact that this is public

information: all 5500s including the audited financial statements are

PUBLICLY accessible on the DOL’s EFAST2 website GAAP departure is possible, but Form 5500 requires

disclosure of the existence of a GAAP departure

ASU 2011-04 Fair Value

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Level 3 Investments Disclosures in 2012: As a result, potentially confidential information of a private

company ESOP sponsor could be accessed by: competitors potential acquirers of the company attorneys looking for potential litigation on the share price or other potentially adverse parties

ASU 2011-04 Fair Value

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Level 3 Investments Disclosures in 2012: The example disclosure reflects a straightforward valuation

example. Disclosures become more complicated when based upon

the fair value of the underlying assets of the company. The potential risk of disclosing confidential information

may be reduced by the complexity of the disclosure. In contrast, a company with a very simple valuation model,

such as a multiple of EBITDA times a discount, is more likely to be concerned about the transparency of the financial information it is disclosing.

ASU 2011-04 Fair Value

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Level 3 Investments Disclosure Controversy: ESOP community submitted a request to the FASB for relief

from these requirements. On April 30, 2013, FASB issued an Exposure Draft for a

proposal to indefinitely defer the reporting of the quantifiable aspects of the inputs.

If approved, the last column of the table from the previous illustration would be omitted.

ASU 2011-04 Fair Value

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Private Company ESOP Example

Description Fair Value Valuation Technique(s)

Unobservable Inputs

Rate Applied

Sponsor Company Common Stock

$92,320,000 Discounted Cash Flow

Weighted average cost of

capital

11.1%

Long-term revenue growth

rate

4.2%

Long-term pretax operating margin

10.3%

Discount for lack of marketability

17%

Market Comparable Companies

EBITDA multiple 11.3

Revenue multiple 2.0

Discount for lack of marketability

17%

Example Disclosure Level 3 Investments Valuation Techniques and Inputs — Private Company ESOP

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Level 3 Investments Disclosure Controversy: An indefinite delay will allow the accounting community to

work with the DOL to see if some method could be achieved to mask this potentially confidential information from the general public.

FASB is trying to balance the objective of: providing sufficient information to the intended users of the

financial statements, with the conflict created by publicly exposing such information to

unintended and possibly adverse parties.

ASU 2011-04 Fair Value

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Level 3 Investments Disclosure Controversy: The proposal to indefinitely defer these ASU 2011-4

requirements follows an exposure draft process: a 30-day comment period began May 1 and ends May 31,

2013 If approved, deferral would be immediate and in effect until

the employee benefits community, the DOL and others resolve the issue.

Indefinite deferrals may last multiple years.

ASU 2011-04 Fair Value

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Level 3 Investments Disclosure Controversy: Comments opposing deferral would likely emphasize how

important such disclosures are for: the DOL in selecting plans for audit lawyers representing participant rights public interest groups like the Pension Rights Counsel interested plan participants etc.

ASU 2011-04 Fair Value

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Accumulating this information may take time Accumulating this information may be controversial Start now Discuss with your auditor Encourage discussions with trustee, legal counsel and

valuation advisor See if valuation advisor can include an “Auditor” section in

report with the table information Review the footnote before it is finalized

Action Items: ASU 2011-04 Level 3 Investments Disclosures

COMPLEX ESOP ISSUES

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ESOP as S Corp Shareholder

ESOP Trust is an eligible S Corporation shareholder ESOP Trust is a tax-exempt entity

Income passed through to the ESOP is not taxed

ESOP is not subject to unrelated business income tax

100% ESOP owned S Corporation becomes a tax-exempt entity

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Advantages of an ESOP-owned S Corporation

Tax savings create additional cash flow which can be used to fund -- ESOP loan repayments Repurchase obligations Capital expenditures Acquisitions

Terminated participants cannot demand a distribution of stock

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S Corporation Disadvantages

Selling shareholder cannot elect section 1042 rollover and capital gains tax deferral

Limitation on contribution deductions 25% limit without increased allowance for ESOP loan

interest Concern with section 409(p) anti-abuse rules Inability to defer distributions to terminated employees Distributions on financed shares with an outstanding loan

cannot be delayed until loan is repaid

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S Corporation Anti-abuse - Rules 409(p)

Why? To ensure that ESOPs that are established for S Corporations provide broad based employee coverage,

and to benefit rank and file employees as well as highly compensated employees and historical owners

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S Corporation Anti-abuse — Rules 409(p)

What’s the beef? S Corporation income allocated to stock held by the ESOP

is not subject to income or unrelated business income tax (UBIT), whereas S Corporation income allocated to stock held by any other qualified plans IS subject to unrelated business income tax

Prohibited allocation rules — no portion of the plan attributable to employer securities may accrue during a “nonallocation” year to “disqualified persons”

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S Corporation Anti-abuse — Rules 409(p)

“Disqualified Person” — An individual is a disqualified person if:

1. The aggregate number of “deemed-owned shares” of such individual and the individual’s family unit is at least 20% of the number of all deemed-owned shares or

2. The number of “deemed-owned shares” held only by the individual is at least 10% of the number of all “deemed-owned shares”

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S Corporation Anti-abuse — Rules 409(p)

“Deemed-Owned shares” Shares of stock in the S corporation that are allocated to the

individual’s account under the ESOP, and such person’s share of the stock held by the ESOP which has not been allocated under the plan (i.e., shares held in a suspense account)

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S Corporation Anti-abuse — Rules 409(p)

“Family Unit” 1. Individual’s spouse 2. Ancestor or lineal descendant of the individual or of the

individuals spouse 3. Siblings of the individual or the individual’s spouse, and

any lineal descendant of a sibling 4. The spouse of any individual described in (2) or (3)

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S Corporation Anti-abuse — Rules 409(p)

John & Sue

Ann Dave & Carol’s daughter

Dave & Carol

Rob John & Sue’s son

Rob’s family unit: Rob, John, Sue, Ann, Dave & Carol

John’s family unit: John, Sue, Rob & Ann

married

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S Corporation Anti-abuse — Rules 409(p)

Nonallocation year A plan year under the ESOP is treated as a

nonallocation year if, at any time during the plan year Disqualified persons own at least 50% of the outstanding S

corporation shares (both shares outside the ESOP and “deemed-owned shares” in the ESOP)

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S Corporation Anti-abuse — Rules 409(p)

ESOP Plan Outside Plan Total Thomas 500 5,000 5,500 Other Participants 3,500 0 3,500 Total 4,000 5,000 9,000 % held by Thomas 12.5% 61%

Thomas is a Disqualified Person because he owns at least 10% of the deemed owned shares. Must now look at is total ownership in the company Since his total ownership is at least 50%, this is a

problem

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S Corporation Anti-abuse — Rules 409(p)

Synthetic equity — can also be included in the computations Stock options Warrants Restricted stock Deferred issuance stock right Non qualified deferred compensation plans

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S Corporation Anti-abuse — Rules 409(p) Nonallocation year An excise tax (50%) is imposed on the S Corporation the disqualified person is treated as having received a

distribution in the amount of the prohibited allocation ESOP no longer eligible for the prohibited transaction

exemption with respect to any outstanding loan to the ESOP

S Corporation income is subject to UBIT Results in plan disqualification

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S Corporation Anti-abuse — Rules 409(p)

Plan Ahead – Arks are way easier to build before it floods than during.

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S Corporation Anti-abuse — Rules 409(p) Summary

Before implementing an S Corporation ESOP examine the test and all family relationships.

Address synthetic equity.

ESOPs with numerous, broad-based employee participation generally should not have a problem passing the section 409(p) test but watch family relationships.

Testing should be done at the beginning of the plan year; corrective action must be taken AFTER preliminary testing but BEFORE any formal allocation is made.

Annually, make sure your third party administrator is performing this test and review the results.

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Dividends Used for Debt Service

Dividends on allocated shares MAY be used for debt service if “return for value” rule is satisfied. IRC §404(k) (aka “Dividend Short Fall”) Shares allocated to participant due to use of dividends must

at least equal in value the dividend dollars applied. Other allocations to account due to contributions cannot be

used to satisfy this test. Typically any shortfall is made up through allocation of

shares attributable to dividends paid on collateral IMPACT: This is a condition of the right to use dividends for

debt service. Violation may result in an additional employer contribution or a prohibited transaction, subject to correction.

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Dividends Paid to an ESOP

Example: Suppose a participant receives a dividend of $1,000 on shares allocated to his account in the ESOP. The $1,000 is used to repay the exempt loan. 20 shares are released and returned to the participant. The share value at the end of the plan year is $40 per share, or $800 for the 20 shares returned. This is $200 less than the value removed from the account.

“Dividend short fall” or “return of value” issue

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Dividends Paid to an ESOP

Violation may result in an additional employer contribution or a prohibited transaction, subject to correction

Particular issue for an S Corporations as correction methods may be limited

Dividend short fall rules do not apply to shares held in the suspense account

A rising stock price does not guarantee that the plan will not have a dividend short fall issue

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Handling Liquidity or Repurchase Obligation

Know the plan document Distribution provisions –

Immediate pay-out, delay for 5 years, installments?

Annually prepare a Repurchase Obligation Study Properly plan for cash flow requirements

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Handling Liquidity or Repurchase Obligation

Source of the money to fund distributions Cash contributed and distributed

Shares remain in plan and are reallocated in same ratio as cash was withdrawn from active participant accounts

Shares distributed and repurchased by ESOP with cash Where did the cash come from?

Shares distributed and repurchased by ESOP with note Securities acquisition note subject to all of the leveraged ESOP

rules

Shares distributed and repurchased by Plan Sponsor Repurchase transaction is outside the plan

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Handling Liquidity or Repurchase Obligation

Source of the money to fund distributions (Continued)

Shares repurchased from ESOP by Plan Sponsor and cash distributed to participants Party in interest transaction

Price paid is not less than adequate consideration on the transaction date (all other distribution methods can, generally, use value as of prior valuation date).

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ESOP LEGAL AND REGULATORY UPDATE

Department of Labor Issues

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On October 22, 2010, the Department of Labor (“DOL”) proposed a regulation that would make ESOP valuation advisors “fiduciaries” under ERISA.

In the proposal, the DOL makes reference to a national enforcement project maintained by its Employee Benefits Security Administration (“EBSA”) designed to identify and correct violations of ERISA in connection with ESOPs According to DOL, “one of the most common violations found is

the incorrect valuation of employer securities.” “A common violation found in the ESOP national enforcement

project arises in cases where plan fiduciaries have reasonably relied on faulty valuations of securities prepared by professional appraisers.”

National Enforcement Project/Fiduciary Regulation Proposal/Recent Aggressive Activity

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National Enforcement Project/Fiduciary Regulation Proposal/Recent Aggressive Activity

Responding to a number of public comments and testimony, the DOL announced in September, 2011 that it would re-propose its fiduciary regulation.

DOL has indicated that the re-issuance of the new fiduciary rule might be published in July, 2013, but it will likely be later than that.

In the meantime, over the past 3 years, DOL has taken an aggressive position with respect to ESOPs, has brought a series of lawsuits and has not shied away from the press.

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3/4/10 News Release – “[The DOL alleges] violations of the Employee Retirement Income Security Act (ERISA) that resulted in losses to the company-sponsored ESOP.”

3/11/10 News Release – “The U.S. Department of Labor has obtained consent judgments providing for restitution of more than $12 million. . . .”

6/8/11 News Release – “The plans’ fiduciaries, including trustees and members of the boards of directors of the companies that sponsored the plans, allegedly allowed the plans to pay excessive prices for the stock, used flawed valuations for the stock transactions, failed to select a qualified appraiser for the stock transactions, and provided inaccurate and incomplete information to the appraiser and his firm. Litigation against remaining defendants is ongoing.”

DOL News Releases

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2/23/12 News Release – “The U.S. Department of Labor… has announced…funding of a global settlement in the amount of $32 million to be allocated among the Tribune Employee Stock Ownership Plan’s participants, and to pay for legal and administrative expenses.”

4/25/12 News Release – “The Department alleges in the suit that a reasonable value for the company as of November 2002 was far less than the amounts paid for the company stock and the total deferred compensation agreements entered into with [defendant].”

DOL News Releases

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DOL News Releases 7/24/12 News Release – “Because participants’ benefits depend

on the ESOP buying and selling stock for fair market value, the department intends to make certain that the price an ESOP pays for the plan sponsor’s stock reflects its true market value, those retained to advise an ESOP about the stock purchase fulfill their fiduciary duties under ERISA and those who sell their shares to an ESOP do not receive a windfall.”

10/2/12 News Release – “The suit alleges that…[the] appraiser’s report presented unrealistic and aggressively optimistic projections of [the company’s] future earnings and profitability.”

11/29/12 News Release – “ESOP participants depend on the plan to buy and sell sponsor-company stock at fair market value. The department is committed to making sure that the ones responsible for making these decisions are fulfilling their fiduciary duties to protect the interests of the ESOP participants.”

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12/7/12 News Release – “An investigation by EBSA determined that . . . [the trustee] failed to comply with its duty to understand the valuation report that set the purchase price, identify and question assumptions in the report, and verify that the conclusions in the report were consistent with the company’s financial data.”

2/21/13 News Release – “the Department concluded that, as a result of . . . violations of . . . fiduciary duties and the design of the transactions, the stock purchases did not provide benefits to the plan and its participants commensurate with the amount the plan paid for the stock, the transactions were not primarily for the purpose of providing benefits to plan participants, the transactions did not promote employee ownership of [the company].”

DOL News Releases

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May 10, 2013 ESOP Association presentation by Tim Hauser, DOL solicitor in charge of this type of litigation: “ESOPs serve profoundly important social purposes like

retirement savings and employee empowerment.” “The point of DOL enforcement is to make sure those goals are

advanced.” “The goal is making sure abuses do not occur, recognizing that

they are a small minority.” DOL views ESOPs solely as retirement plans under ERISA. As a result, they are subject to the fiduciary responsibilities rules

of ERISA. Exclusive Benefit Rule Prudency Rule Plan Document Rule

The importance of “adequate consideration.”

Recent Comments By DOL Representative

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Lessons Learned/DOL Suggestions

What is the Trustee’s role in selecting a valuation advisor and approving a valuation report? Who hires the valuation advisor? Investigate the qualification of the valuation advisor Does the expert have all the relevant and current financial

data?

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Lessons Learned/DOL Suggestions

Read the appraisal, ask questions, and understand it. Underlying assumptions Valuation methodologies Does the narrative discussed match the financial data? Heavy concentration in one or a handful of customers Be wary of rosy, hockey-stick type projections Sensitivity testing ”Assume a reversion to the mean” Analysis of so-called “comparable” companies Discounts for minority interests and/or marketability Have there been other offers? Procedural prudence and documentation

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ESOP LEGAL AND REGULATORY UPDATE

Indemnification Issues

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Harris v. GreatBanc Trust Company, Sierra Aluminum Company and the Sierra Aluminum Company ESOP*

Arises out of lawsuit filed by DOL in September, 2012 alleging various violations under ERISA.

The Trustee's engagement letter contained an indemnification provision pursuant to which the plan sponsor agreed, subject to the applicable provisions of ERISA, to indemnify the Trustee, its officers, directors, employees and agents (the "Indemnitees") for any loss, cost, expense or other damage, including attorneys' fees, suffered by the lndemnitees resulting from or incurred with respect to any legal proceedings related in any way to the performance of services under the engagement letter, the Plan or the trust.

*(USDC, Central District of California, March 15, 2013)

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Harris v. GreatBanc Trust Company, Sierra Aluminum Company and the Sierra Aluminum Company ESOP* The indemnification obligation would not apply, however, if the

loss, cost, expense or damage was determined in a final judgment by a court of competent jurisdiction to have resulted from: The gross negligence of willful misconduct of the Indemnitee; or The violation or breach of any fiduciary duty imposed under ERISA

on the Indemnitee Furthermore, in the event it was ultimately determined that the

Indemnitees were not entitled to indemnification, the agreement required them to reimburse the plan sponsor for any fees or expenses previously advanced.

DOL argued that since the ESOP owned 100% of the stock of the plan sponsor, enforcement of the indemnification provision would harm the ESOP since the assets of the plan sponsor would be depleted.

*(USDC, Central District of California, March 15, 2013)

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Harris v. GreatBanc Trust Company, Sierra Aluminum Company and the Sierra Aluminum Company ESOP*

Section 410(a) of ERISA states that "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation or duty... shall be void as against public policy."

In dismissing the DOL's claim, the court determined that the indemnification provision in this particular case did not run afoul of ERISA § 410(a) noting that the terms of the agreement expressly prohibited indemnification if a court entered a final judgment finding the Trustee liable for breach of its fiduciary duties under ERISA.

*(USDC, Central District of California, March 15, 2013)

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Harris v. GreatBanc Trust Company, Sierra Aluminum Company and the Sierra Aluminum Company ESOP*

The court further distinguished the indemnification agreement in this case from the agreement at issue in Johnson v. Couturier (9th Cir. 2009):

The Couturier indemnification agreement did not exclude indemnification for fiduciary breaches.

The plan sponsor in Couturier was no longer an operating company. As a result, liquidation proceeds of the company payable to the ESOP would be reduced, dollar for dollar, by the amount of the indemnification payments.

Generally speaking, assets of the plan sponsor should not be treated as plan assets.

*(USDC, Central District of California, March 15, 2013)

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ESOP LEGAL AND REGULATORY UPDATE

IRS Issues

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Correcting Plan Errors

The Employee Plans Compliance Resolution System ("EPCRS") allows plan sponsors to correct various types of failures to comply with the requirements of the Internal Revenue Code.

Revenue Procedure 2013-12 updates the comprehensive system of correction programs available under EPCRS.

There are three components to EPCRS:

Self-Correction Program ("SCP")

Voluntary Correction Program ("VCP")

Audit Closing Agreement Program ("Audit CAP")

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General Correction Principles

Full correction must be made for all participants and beneficiaries and for all taxable years (whether or not the taxable year is closed).

The plan should be restored to the position it would have been in had the failure not occurred.

The correction method should be "reasonable and appropriate."

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News on 415 Excess Allocations In situations where a plan sponsor maintains a plan or

plans which provide for elective deferrals and nonelective employer contributions (other than matching contributions), it is not uncommon to have allocations that would exceed the 415 limits.

A question had arisen as to whether or not it was possible to argue that a plan had the requisite practices and procedures in place to prevent the occurrence of a 415(c) violation if these excesses were occurring every year.

Under Revenue Procedure 2013-12, it is clear that a plan sponsor will not be treated as failing to have established practices and procedures in place if excess annual additions are regularly corrected by a return of elective deferrals to affected employees within 21/2 months after the end of the plan's limitation year.

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IRS Determination Letter Applications

Plan sponsors are now generally required to submit plans for favorable determination letters every five years on a cycle determined by the last digit of their employer identification number.

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Last Digit of EIN Required Cycle Submission Date 1 or 6 A 1/31/12 2 or 7 B 1/31/13 3 or 8 C 1/31/14 4 or 9 D 1/31/15 5 or 0 E 1/31/16

The IRS has made a concerted effort to understand ESOPs and, about 5 years or so ago, appointed a small group of specially-trained agents (called the "ESOP cadre") to review all ESOP submissions.

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IRS Determination Letter Applications

In connection with that effort, the IRS has gotten years behind in reviewing ESOP submissions and in responding to determination letter requests.

During 2010, the IRS published their response to several "Requests for Technical Assistance" dealing with topics such as (i) permissible definitions of "10 years of participation" for purposes of statutory diversification, (ii) plan rebalancing and reshuffling and (iii) converting the accounts of terminated participants from company stock into cash or other investments.

In recent weeks, we have finally seen a flurry of responses with respect to ESOP documents filed in 2010.

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IRS Determination Letter Applications Common Issues Being Raised in the Determination Letter Process:

Required elimination of language describing the use of proceeds arising from the sale of ESOP suspense account shares to pay debt and the advance characterization of such proceeds as earnings (not subject to IRC § 415).

Acceptable language regarding the avoidance of a non-allocation year in connection with IRC § 409(p).

Specifying whether the plan sponsor is a C corporation or an S corporation. Elimination of employer or plan administrator discretion in connection with

the conversion of Company Stock accounts into cash following a severance from employment.

Conversion of Company Stock accounts into cash in the case of a former employee that goes to work for an entity that precludes its employees from having an interest in certain entities pursuant to a conflict of interest policy.

Supplemental Diversification.

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Other IRS Activities Pertaining to ESOPs Possible consideration of an ESOP prototype Comprehensive update/overhaul of ESOP regulatory

scheme Requested information from the ESOP Association L&R

Committee regarding update of exempt loan regulations Refinancings which extend the term of an exempt loan Multiple outstanding loans Periodic vs. annual releases Loan forgiveness and release fraction Reasonable interest rate safe harbor Repayment of loan from third party sales Loan subordination provisions What happens when the value of shares released by the use of

dividends on allocated shares is insufficient Permissible length of exempt loans

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Questions?

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If You Enjoyed This Webinar…

Join us for these related EES courses: June 13 and 18: ESOPs for the

Architecture/Engineering/Construction Industry Oct. 24: The Role of ESOPs in Private Equity Firms Nov. 14 and 19: Employee Benefit Plan Accounting Issues

Update

Read these related publications: MHM Messenger 11-13: FASB Proposal Affects Employee

Benefit Plans Employee Stock Ownership Plan Primer

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Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

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Today’s Presenters

Hal Hunt, CPA Shareholder 913.234.1012 | hhunt@cbiz.com

Hal leads MHM’s Employee Benefit Plan (EBP) Audit Practice. With over 25 years of diverse experience with EBP accounting, auditing and compliance issues, he is also a member of the firm’s Professional Standards Group as EBP subject matter expert. As the EBP National Practice Leader, Hal is responsible for providing internal training, along with providing technical support to engagement teams, serving as engagement quality reviewer and developing resource tools for our EBP audit professionals. He served on the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC) Executive Committee and is currently a member of the EBPAQC ESOP Task Force.

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Cindy Dwyer Shareholder 913.234.1022 | cdwyer@cbiz.com Cindy is the President of MHM Retirement Plan Solutions and a Shareholder of Mayer Hoffman McCann P.C. She supervises staff, oversees technical research, and provides quality control services. She has previously served as the national Chairperson of the American Institute of Certified Public Accountants Employee Benefits Technical Resource Panel (TRP) and has recently been reappointed as a member of the TRP. Additionally, Cindy has been a recurring speaker at the American Institute of Certified Public Accountants National Conference on Employee Benefit Plans. Cindy is also a committee member and current chair of the Employee Benefits Institute sponsored by UMKC School of Law.

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Today’s Presenters

Robert D. Grossman Partner, Lathrop & Gage LLP 816.460.5831 | rgrossman@lathropgage.com Mr. Grossman is a nationally-recognized ESOP authority with extensive experience representing owners, management and fiduciaries of employee-owned companies. ESOP transactions have involved private as well as public companies in a variety of industries including advertising, architecture, automotive, banking, chemicals, commodities trading, construction, energy, engineering, financial services, health care, insurance, manufacturing, pharmaceuticals, printing, professional and other services, retail, security and telecommunications.

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