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:

• What is your distribution policy? The details of preparing a distribution policy are beyond the scope of this article. The purpose of this section is to provide a sample of some of the questions you will encounter when preparing your distribution policy. Creating your distribution policy is a complex process, and you should work with your ESOP counsel and advisors.
  
  
• Will distributions be paid in lump sum or in annual installments? In addition to satisfying the statutory timing requirements for offering payments to participants, if the plan opts to pay with installments, the plan must pay substantially equal periodic payments (not less frequently than annual) over a period of time not exceeding five years. If the balance exceeds a certain amount ($935,000 in 2008), then the installment period could be extended.
  
• When will participants commence receiving distributions? Will the plan mirror the statutory timing requirements or will participants be paid on a more aggressive schedule?
  
• Will the distributions be paid in stock or cash? If you are a C corporation and your charter or bylaws do not restrict the ownership of employer securities, then you are generally required to offer distributions in the form of stock. S corporations are exempted from this requirement. However, you may still elect to offer share distributions, even if they are not required. One significant benefit of offering share distributions is providing the participants with the potential of more favorable tax treatment when taking distributions (often referred to as net unrealized appreciation (NUA) treatment).
  
• If you are paying distribution in cash, where will the cash come from? You will need to use existing cash, contribute new cash to the plan, or redeem the shares (which will require a new stock appraisal as of the date of the redemption). If you contribute cash, will you have enough deduction room to include both the cash for distributions and for loan payments (if applicable)?
  
• If you are paying distributions in shares, who will purchase the shares and what will happen to them? If the company purchases the shares, will the shares become treasury or retired shares or will they be contributed to the ESOP (again)?
  
• Will the plan segregate the balances of terminated participants into cash? This strategy provides that cash from active participant accounts is used to purchase the shares from the accounts of terminated participants. The main purpose of segregation is to prevent terminated participants from sharing in the growth of the company stock.
  
• How will the company provide funding for the distributions? Once the company has selected its distribution strategy, it will have to determine how it will provide the funding.

There are many complexities to creating a distribution policy. The above-mentioned items are only some of the issues and complexities that need to be explored. The importance of a well-planned distribution policy should not be taken lightly.

• Are you aware of your future repurchase obligation? How will the company provide funding for the future repurchase obligation? You need to have an understanding of the short term and long term financial commitment needed to satisfy the future liability obligation. The most common method to obtain this understanding is by performing a "repurchase liability study." After you know your future repurchase obligation, you need to address how you are going to fund it. The details of determining and funding the future repurchase obligation are beyond the scope of this article, but it is crucial to the success of your ESOP and your company that you know your future repurchase obligation and plan accordingly.

The first installment of ESOP Planning: Distributions can be found at ESOP Planning: Distributions (1 of 4). The third installment of ESOP Planning: Distributions will be posted tomorrow and will discuss the following questions:

• For plans that have not started to pay distributions, do you have distribution forms and the required disclosures ready to distribute to participants?
• Are you paying distributions using the most current fair market value?
• Is the fair market value that you are using an accurate reflection of the market value or has the value become "stale"?
• Are any participants due to receive required minimum distributions (RMDs)?
• Do you have enough cash in the ESOP to pay RMDs?

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 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC.