In the In re Citigroup ERISA Litigation, No. 07 Civ. 9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009) ruling, the district court found that Citigroup did not breach its ERISA fiduciary duties by offering stock as a retirement plan option while the stock was incurring major losses. The case is on appeal.

We have previously discussed how the sales prices of a closely held company was down 25%+ percent in 2008 and 2009. ESOPs on the Rise Among Small Businesses provides a very positive yet balanced look at ESOPs and discusses how lower valuations in the traditional marketplace are making ESOP transactions more attractive:

A press release announced a new study, RESILIENCE AND RETIREMENT SECURITY: Performance of S-ESOP Firms in the Recession, that found that S Corporation ESOPs outperformed their non-ESOP counterparts during the recent recession in job creation, revenue growth, and providing higher wages and retirement security:

We have discussed how the Tribune Company Filed for Bankruptcy and how the Tribune ESOP is Being Terminated. A group of current and former employees filed a lawsuit on September 16, 2009. In a December 17, 2009 Memorandum Opinion and Order (Neil v. Zell, N.D. Ill. 2009, No. 08 C 6833), a federal judge dismissed some claims and ruled that other parts of the lawsuit can proceed. Employee Benefits Developments February 2010 discusses the case:

The Employee Plans News – Spring 2010 Edition discusses the new IRS Form 5500 electronic filing requirements:

In Shared Ownership Firms Report Substantially Larger Return on Assets we discussed selling to an ESOP in phases. In addition to providing a ready market for an otherwise illiquid asset and providing the owner with diversification and liquidity while retaining control of the company, it helps set the stage for a gradual business transition. The lead director's role in succession planning discusses the board's role in succession planning for both the CEO and the management team:

The March 16, 2010 Employee Ownership Update is online and discusses the following:

Employee communications: Trends, fads and what's next discusses the how employee communications play a critical role in engaging employees:

• The right to be invested in employer stock is not a § 1.411(d)-4 Section 411(d)(6) protected benefit.
  
  
• Any provision must meet the requirements of a § 1.401-1(a)(2) definite written program and require a § 1.401-1(b)(1) definite predetermined allocation formula. Specifically, any provision providing for the mandatory transfer of stock must have language that "directs the plan administrator as to the number of shares or amount of cash to transfer in or out of plan accounts". The plan must also "state the manner in which the transfers will be effectuated, such as the date of valuation." A reshuffling provision "that affords an administrator discretion to choose which participants will receive or transfer shares violates § 1.401-1(b)(1) of the Regulations"
  
  
• Diversification rights under IRC Section 401(a)(28)(B) - Additional requirements relating to employee stock ownership plans - Diversification of investments and IRC Section 401(a)(35) - Diversification requirements for certain defined contribution plans include "a participant's right not to have shares diversified pursuant to such sections mandatorily transferred back into his or her account." Rebalancing or reshuffling does not violate the diversification regulations as long as the provisions "preclude shares diversified" from being "mandatorily returned to participants' accounts". In other words, the plan may not mandatorily reinvest a participant's account in stock after the participant has diversified those shares.
  
  
• The right of each participant to have or not have a particular form of investment is a plan right or feature subject to the current and effective availability requirements under § 1.401(a)(4)-4 Nondiscriminatory availability of benefits, rights, and features.
  
  
• Rebalancing – "Rebalancing, which treats all participants the same, will not raise issues of current and effective availability."
  
  
• Reshuffling – A plan provision "providing for the transfer of all employer securities from plan accounts of terminated employees" does not raise issues of current or effective availability because terminated employees comprise a coverage group under § 1.401(a)(4)-10 Testing of former employees. A reshuffling provision "will not fail to satisfy § 1.401(a)(4)-4 in form merely because it imposes age or service conditions on the availability of an investment option."
  
  
• Reshuffling provisions must comply with § 1.411(a)-11(c)(2)(i) Restriction and valuation of distributions - Consent and "not impose a significant detriment on a participant who does not consent to a distribution" and provide for sufficient investment options:
  
  § 1.411(a)-11 Restriction and valuation of distributions.
  
  (2) Consent. (i) No consent is valid unless the participant has received a general description of the material features of the optional forms of benefit available under the plan. In addition, so long as a benefit is immediately distributable, a participant must be informed of the right, if any, to defer receipt of the distribution. Furthermore, consent is not valid if a significant detriment is imposed under the plan on any participant who does not consent to a distribution. Whether or not a significant detriment is imposed shall be determined by the Commissioner by examining the particular facts and circumstances.
  
  The memo cited Revenue Ruling 96-47 and provide more details:
  
  Accordingly, A plan providing participants with the option of an immediate distribution would need to have language that preserves sufficient investment options in order to ensure that the loss of the employer stock investment is not a "substantial detriment". For example, the plan might offer three alternative investment options such as described in Code Section 401(a)(28)(B) or might offer other choices that include a life-cycle fund or targeted-retirement-date fund. Since ESOPs and stock bonus plans may provide for the option of an immediate distribution upon termination of employment, we believe that it is appropriate to request language porviding for sufficient investment options.

A recent study, Governance Problems in Closely-Held Corporations, found that firms with shared ownership report a substantially larger return on assets and lower expense-to-sales ratios.

In November 2008 we discussed how the DOL Sued the Board of Directors for Alleged ERISA Violations and misusing ESOP assets. The DOL has announced that they have obtained consent judgments recovering more than $12 million for employee stock plan participants in California and Washington:

The IRS issued a February 23, 2010 Response to Technical Assistance Request #4 with regard to ESOP rebalancing and ESOP reshuffling provisions. The memo was issued three days prior to the Hoffman v. Tharaldson Motels Inc. Employee Stock Ownership Plan, D.N.D., No. 3:08-cv-109, 2/26/10 ruling and defines rebalancing and reshuffling:

In ESOP Planning 2009: Plan Documents and Disclosures we discussed how the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) was one of the major pieces of Employee Benefits Legislation enacted in 2008. Some of the changes were retroactive to 2007 and others became effective January 1, 2009. An amendment must generally must be adopted by the end of the 2010 plan year.

The Journal of Accountancy (March 2010) has a great article on ESOPs. The ESOP Exit Strategy explores the advantages of using an ESOP as a succession planning tool:

Employee Ownership and Job Growth discusses the relationship between employee ownership and job growth and how Key Studies on Employee Ownership and Corporate Performance have found that employee owned companies outperform their counterparts. [ESOPs also Increase Employee Wealth and Wages and Provide Greater Employment Stability and Increase Job Satisfaction.]

In Hoffman v. Tharaldson Motels Inc. Employee Stock Ownership Plan, D.N.D., No. 3:08-cv-109, 2/26/10, a U.S. District Court for the District of North Dakota found that a plan amendment providing for the conversion of stock to cash for the ESOP accounts of terminated participants (a.k.a. Segregation of Accounts) was not a violation of the anti-cutback provisions of IRC Section 411(d)(6)(C) - Minimum vesting standards - Special rules - Accrued benefit not to be decreased by amendment.

Today I will be participating in an ESOP advocacy panel discussion on getting involved in government. We will be discussing the recent Positive ESOP Legislation and the need to Remain Vigilant. We will also be planning some trips to visit Capital Hill.

The March 1, 2010 Employee Ownership Update is online and discusses the following: