Your ESOP contribution will generally consist of the following items:

• Cash contribution used to make ESOP loan payments (if your loan is leveraged)
• Cash contribution used to fund distributions or to build-up the cash balance in the plan
• Share contribution
  

ESOP contributions will generally come from the following sources:

• Profit sharing contribution (including discretionary and Safe Harbor contributions)
• Required money purchase contribution (as required by the plan document)
• Matching contribution (including Safe Harbor contributions)

The contribution is one of the most important pieces to the annual administrative process, and the sooner you notify your ESOP recordkeeper or consultant of your intentions, the sooner they will be able to start processing the trust accounting. If you plan on contributing the maximum deductible contribution, it is important that you inform your recordkeeper of your intent as soon as possible. When determining the amount and timing of your ESOP contribution, you will want to consider the following questions:

• What is the maximum deductible amount that you can contribute to the plan? You will need to have compiled and analyzed your census and eligibility information in order to make this determination. The Deduction Rules generally limit contributions to all retirement plans (excluding 401(k) deferrals) to 25% of the combined compensation of all eligible plan participants (limited to $230,000 per participant in 2008). C Corporations can generally exclude interest payments in the maximum deductible contribution determination. Some experts advocate and private letter rulings support that, if structured correctly, C Corporations can deduct 50% instead of 25%. Of course, the most conservative approach is to stay within the 25% deduction limits.
  
  
• What does the plan document provide for contribution provisions? In many cases the document will provide for discretionary contributions and for contributions as needed to ensure that all required loan payments are made. If there are any other provisions, they will most likely provide that a fixed percentage of compensation per participant needs to be contributed each year (also known as a money purchase contribution).
  
  
• What are the scheduled loan payments? Will you be prepaying on your ESOP loan (the loan between the ESOP and the company) or only making the scheduled payments? If so, how do repayments affect the repayment schedule? Be sure that you are following a current version of the loan's amortization schedule.
  
  
• Did you pay or do you plan to pay any distributions in the near future? If so, how are you funding the distributions? One of the most common methods of funding distributions is contributing ESOP cash to the plan and recycling the shares within the plan. Cash contributions made to the plan for this purpose must also be included in the deduction limits
  
  
• How much was contributed last year? Are the employees accustomed to receiving a certain contribution amount? You may need to adjust your communication strategy accordingly.
  
  
• Will you be making your contribution by the end of the plan year or accruing the contribution? A benefit of accruing the contributions is that you will have the flexibility of using them as either 2008 accrued contributions or 2009 contributions, which is helpful if you encounter any compliance testing issues. You will not have this flexibility if the contribution was made in 2008.
  

Here are some other important items to consider about contributions:

• The contribution amount should be documented in the minutes.
• All contributions must be deposited by the time the corporate tax return (with extensions) is filed.
• You should be able to reconcile the contribution allocated to participants to the contribution reported on the IRS Form 5500 and the contribution on the corporate tax return.
• Contribution deductibility is based on the fiscal year of the corporation, not the plan year of the ESOP. If you the two years are not the same, then you may need two sets of compensation information.
• Dividends and S Corporations of Earnings are not considered contributions. They will be discussed in the next ESOP planning installment.
  

The ESOP Planning process includes planning for both the current year ESOP administration process as well as the various events that take place over the life of an ESOP. This article is one in a series of ESOP Planning 2008 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC, an ESOP administration and consulting firm dedicated to providing ESOP companies with a first-class ESOP experience. If you need assistance with the ESOP Planning process, please call Aaron at 800-837-3112 or email him at mailto:ajuckett@esopinsourcing.com