Distribution planning is one of the most important components of the planning process. Even if you had a detailed plan in place when you established your plan, chances are that things have changed. You should perform a distribution analysis annually. Here are some things to consider:

• Will you be required to make payments to participants in the next year? – Here are the rules for determining when you must begin offering participants an opportunity to request a distribution:
  
  
  • Death, Disability, Retirement – IRC Section 409(o)(1)(A)(i) - Qualifications for tax credit employee stock ownership plans - Distribution and payment requirements – Distribution requirement – In general requires that payments to participants that terminate as a result of death, disability, and retirement (as defined by the plan) begin within one year after the end of the plan year of the termination. For example (assuming a 12/31 plan year end), if a participant terminates after meeting the retirement provisions of the plan on June 29, 2007, the participant must be paid out after the December 31, 2007 allocation is completed (which should be sometime in 2008), and the payment must be made by December 31, 2008.
    
    
  • Other Termination of Service – For other separations of service, IRC Section 409(o)(1)(A)(ii) - Qualifications for tax credit employee stock ownership plans - Distribution and payment requirements – Distribution requirement – In general requires payment one year after the end of the fifth plan year after the year of termination. For example (assuming a 12/31 plan year end), if a participant terminates on June 29, 2007, the participant must be paid out after the December 31, 2012 allocation is completed, and the payment must be made by December 31, 2013.
    
    
  • Loan Exception – If there is an outstanding ESOP loan, IRC Section 409(o)(1)(B) - Qualifications for tax credit employee stock ownership plans - Distribution and payment requirements – Distribution requirement – Exception for certain financed securities allows payments to participants terminating for reasons other than death, disability, or retirement to be deferred until the close of the plan year in which the loan is paid in full. [If you are an S Corporation, there is some controversy about the loan exceptions because the language specifically references a C Corporation loan. Despite this technicality, many S Corporation ESOPs utilize the loan exception. To gain more comfort, the loan exception could be drafted in the plan document to receive a determination letter on the provision.]
    
    
• What distribution provisions are in your plan document? Are they more liberal than the above-mentioned statutory requirements? – In many cases the distribution provisions provided in the plan document will mirror the Code's requirements, but you should review your plan document to see if there are any additional distribution provisions in your document and treat those provisions as the minimum. You should also identify if there are any other distribution requirements. Examples include in-service withdrawals, early retirement distributions, and non-statutory diversification distributions (which are generally treated as in-service withdrawals and not diversification distributions).
  
  
• Do you have a written distribution policy? – If not, do you have an informal distribution policy that is not in writing? It is strongly recommended to have a written distribution policy and review it regularly. Some plans prepare a distribution policy every year. This is one of the most important items of the planning process. I strongly recommend that you do not delay your Repurchase Obligation and Distribution Planning.

The second installment of ESOP Planning 2008: Distributions will discuss the following questions:

• What is your distribution policy?
• Are you aware of your future repurchase obligation?
• How will the company provide funding for the future repurchase obligation?

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 ajuckett@esopinsourcing.com.