Transcript Age 55 Diversification - Kent State University

Age 55 Diversification
18th Annual Ohio Employee
Ownership Conference
Presented by Dorn Swerdlin
Swerdlin & Company
Friday, April 16, 2004
What We Will Discuss
 Basic Rules
 Examples
• Timeline
• Election Forms
• Acting on Election
 Diversification Calculations
 Sticky Issues
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Basic
Rules
Age 55 Diversification
 Code Section 401(a)(28)(B)
 Allows participant to diversify out of
company stock.
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Eligibility
Age 55
10 years of
participation
in plan
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Stock Eligibility
 Shares of company stock acquired by
trust after December 31, 1986
 May be allowed with respect to all
shares
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Election Period
 6 year period
 Begins when participant meets eligibility
requirements
18th Annual Ohio Employee Ownership Conference
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Elections
First 5
Years
6th Year
Able to diversify 25% of
qualifying shares
Final option to diversify up to
50% of qualifying shares
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Computing Shares
Total of allocation
shares that have
ever been eligible
for
diversification
minus
Any shares that
have been
previously
diversified
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Exceptions
 Not required if shares in participant’s
company stock account have a market
value of $500 or less
Market Value
<
$500
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Timing of Elections
 Must be granted to participant within
90 days of close of plan year during
which he meets requirements
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Implementation
 Within 90 days after the last day of the
90-day election period
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Alternatives
 Company may implement
diversification elections by:
 Making a distribution of the diversified
shares or
 Providing at least 3 investment options
within the ESOP (or another plan)
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Corporation
Effective Date of ESOP:
January 1, 1980
Diversification Occurs:
Age 55 and 10 years of
participation
KL Corporation also sponsors a
401(k) Plan
Leon Kelso
Date of Birth:
January 1, 1935
Date of Participation:
January 1, 1995
Diversification Procedures Timetable
Description
Due
Begin discussions regarding alternatives Two years before plan is subject to
to comply and requirements.
diversification.
Review plan document as it relates to
diversification.
One year before plan is subject to
diversification.
Send preliminary diversification election
forms to participants eligible to
diversify. If final allocation report and
stock valuation are completed, send
final forms instead.
Within 90 days after the end of the
plan year.
Send final diversification election forms
to participants eligible to diversify.
As soon as possible after allocation and
stock appraisal are completed.
Complete diversification for those
choosing to diversify.
Within 180 days after the plan year end
(provided final allocation and stock
appraisal are completed by that date).
Execute Transfer
Final Election Form
Appraisal and Allocation
Complete
Returns Preliminary Form
Preliminary Election Form
10 years plan participation
(eligible for diversification)
Preliminary Explanation
Joins Plan
LK Attains Age 55
Diversification Timeline
Election Forms
Preliminary 2004
Diversification
Election Notice
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Election Forms
Final 2004
Diversification
Election Notice
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Election Forms
Final 2009
Diversification
Election Notice
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Acting On The Election
 Transfer to KL Corporation 401(k)
 Take Cash
 Taxed as ordinary income and subject to any
applicable penalties
 Roll over to IRA
 Take Stock
 Put Option is available (closely held)
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Diversification Calculation
L. Kelso
Plan allows participants to "diversify" 25% of their shares after 5 years of plan participation.
A
B
C
D
E
Diversification
Year
# Post 1986
Shares as of
Beginning of
Year
# Shares
Allocated
During the
Year
Post 1986
Shares
Previously
Dist in 2000
Post 1986
Shares
Previously
Diversified
F
G
Total Post % Available for
1986 Shares Diversificaiton
H
I
Maximum #
Available for
Diversification
Less # Shares
Previously
Diversified
K
J
Net Available for Number
Diversification Diversified
L
Cumulative
Shares
Diversified
567.500
(567.500)
(567.500)
(567.500)
7.500
(7.500)
(575.000)
581.250
(575.000)
6.250
(6.250)
(581.250)
25%
585.000
(581.250)
3.750
(3.750)
(585.000)
2,340.000
25%
585.000
(585.000)
0.000
0.000
(585.000)
2,360.000
50%
1,180.000
(585.000)
595.000
1
2,000.000
20.000
250.000
0.000
2,270.000
25%
567.500
2
1,452.500
30.000
250.000
567.500
2,300.000
25%
575.000
3
1,475.000
25.000
250.000
575.000
2,325.000
25%
4
1,493.750
15.000
250.000
581.250
2,340.000
5
1,505.000
0.000
250.000
585.000
6
1,505.000
20.000
250.000
585.000
0.000
(595.000)
(1,180.000)
If the plan allows the participant to diversify more than the number of shares required under the Code,
there are no provisions under the Code or regulations allowing those shares to be deducted from the
amount available for diversification during the qualified election period. However, they must be included
in determining the total number of post 1986 shares allocated to the participant's account.
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Sticky
Issues
Determining Years of Participation
Active
Employees
General year
of service
definition
1,000 hours of
service within
a 12-month
period
Vesting:
1,000 hours of service in a plan year
Eligibility:
1,000 hours during initial year of employment
and anniversaries thereof – or – if fewer than
1,000 hours during initial year of employment,
measurement period reverts to plan year
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Determining Years of Participation
What About Terminated With a
Vested Account Balance?
 Code is unclear
 Conservative approach:
As long as a terminated participant has a vested benefit
remaining in the plan, he/she is considered to be a “Participant”
under the Internal Revenue Code; therefore, for each plan year
that they have a vested balance, they have a year of
participation for diversification purposes
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Determining Years of Participation
What Happens When Plans Merge?
Employer
sets up
new ESOP
Merges
existing
401(k) into
ESOP
 There is no clear guidance; however,
the conservative approach is to count
years of participation from entry in the
older plan.
Right Away:
Participants may
have 10 years of
participation
if you include
their years in the
401(k) plan
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Determining Years of Participation
 Recommendation
 In both instances, draft documents to
specifically define years of participation for
diversification purposes.
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
What About Reshuffling?
 Each participant has same
proportion of shares and cash
 How do you keep track of shares?
 Administratively maintain separate “buckets”
for post 1986 shares
 For qualifying participants, diversify within
the plan and transfer diversified shares to
cash investment
 Any other suggestions?
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Deadline Dilemmas
 How do you meet the 90 Day and
180 Day deadlines?
 Offer a preliminary diversification election
form based on prior year information
 Upon completion of appraisal and allocation,
provide a final election form based on final
information
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company
Deadline Dilemmas
 What if you miss the deadline?
 Creates an operational error for the plan.
 Correct the problem so that the plan is in
the same position it would have been had
the error never occurred; offer the
participant the diversification right at the
price that would have been paid when the
election should have been made
18th Annual Ohio Employee Ownership Conference
Presented by Dorn Swerdlin, Swerdlin & Company