Tribune Proposal Update
March 31, 2007

This article provides a basic explanation of how the ESOP would work in the proposed Tribune transaction, and adds some additional insights:

• They will most likely use up to 10% of the company's defined benefit plan assets, the maximum allowable by law, to fund the transaction.
  
• The company has an inactive ESOP and the inactive plan's assets will most likely be used to fund the transaction.
  
• The ESOP will borrow money to fund the transaction, either from the investor(s) or outside investors.
  
• While the transaction could be structured so the employees could elect to contribute their 401(k) assets to the transaction, this will most likely not occur due to the extensive securities compliance requirements and the short time period to finalize the transaction.
  
• The restructuring or purchase of the company could will likely involve layoffs or a reduction in compensation or benefits.
  
• The considerable debt of the company may limit the initial value of the tax deductions.
  
• An important factor that will impact the long-term success of the transaction is the corporate culture that is created after the transaction.
  

This article also discusses how the transaction could be structured.

Here is a general timeline of the Tribune's auction process:

• March 31, 2007 – Tribune's self-imposed deadline – The full board will be conducting a weekend meeting following Friday's gathering of the special committee.
  
• March 29, 2007 – Burkle and Broad make another involving an ESOP at $34/share.
  
• March 2007 – Zell improves his offer to $33/share.
  
• February 2007 –Zell makes his initial offer, involving an ESOP.
  
• January 2007 - Original proposed transactions are rejected. The focus switches to management's self-help deal.
  
• September 2006 - A special committee is established to explore alternate ways to increase shareholder value, including restructuring or selling the company.
  

This article also recaps the various offers in the Tribune auction process.

Employee Ownership Update: Retirement Reform Excludes ESOP/IRS Correction Programs CD-ROM/State Taxation of S Corporation ESOPs
March 29, 2007

The NCEO Employee Ownership Update for March 15, 2007 discusses three items:

• Retirement Reform in Budget Excludes ESOPs
  
• IRS Issues Correction Programs CD
  
• Eight States Tax ESOP S Earnings as Income
  

Here are my comments on the Update:

1. Retirement Reform in Budget Excludes ESOPs

The clarification that the reform excludes ESOPs was previously discussed here. The Update adds that, "Prospects for the reform on this front remain dim, as Congress seems disinclined to make major changes in retirement law after the four-year struggle to craft the Pension Protection Act, as well as substantial industry opposition to the proposal"

2. IRS Issues Correction Programs CD

We have discussed EPCRS in numerous posts over the last few months. This post summarizes the prior content, including links to 2 articles and an information page, and this post contains a link to another blog. The Update discusses Publication 4050 - Retirement Plan Correction Programs. According to the IRS website, the highlights of this CD-ROM include:

• IRS Revenue Procedure 2003-44, which sets forth the procedures relating to the IRS's correction programs, and a linked in-depth topical index.
  
• A plain-language explanation of the IRS's retirement plan correction programs and procedures, with links to definitions and relevant sections of Revenue Procedure 2003-44.
  
• Video clips explaining the need for ongoing retirement plan self-audit programs and available correction programs.
  
• A "Guide to Common Qualification Requirements" to help employers understand their responsibilities under the law.
  
• Examination Guidelines.
  
• Links to the IRS, DOL and PBGC web sites.
  
• Frequently asked questions (FAQs) on IRS and DOL correction programs.
  

FAQs on IRA-Based Plans (SEP, SARSEP and SIMPLE).

3. Eight States Tax ESOP S Earnings as Income

Although S Corporation ESOPs are exempt from federal income taxation, the Update discusses how 8 states (California, the District of Columbia, Louisiana, Michigan, New Hampshire, New Jersey, New York, and Tennessee) do not provide the same income tax exemption at the state level. In addition, 23 additional states impose some form of an S Corporation tax. More details will be provided in a future issue of the NCEO's Journal of Employee Ownership Law and Finance.

Spring 2007 Edition of Employee Plan News: Staggered Remedial Amendment Cycles/EPCU Projects/FAQ: Loans, Hardship Distributions, Plan Investments, CP 403 Notices, and CP 406 Notices/Small Business Products/IRS and DOL Guidance/PBCG Insights/New Form 5330 and New Publications 560 and 590/Potential 402(i) Resolution/EP Taxpayer Delinquency Investigation (TDI) Notices/EP Benefits Conferences
March 28, 2007

The Spring 2007 edition of Employee Plans News is now available. The newsletter covers a lot of the same items discussed in the Winter Edition of Retirement News for Employers, discussed here, so I will try to limit my comments to the new items:

• The EP responded to some of the practitioners' comments on the staggered remedial amendment cycles. Here are the questions that were answered:
  
  • With the end of Cycle A, what is your assessment of the first year's experience with the new process of Staggered Remedial Amendment Cycles (per Revenue Procedure 2005-66)?
    
  • What feedback has the IRS received from the Retirement Plans Community on the new process?
    
  • How is the IRS being responsive to the feedback?
    
  • Should Cycle B applicants wait to submit until the Cycle A "mini-spike" is processed?
    
  • What priority is applicable to "off-cycle" applications? Are these applications worked ahead of "on-cycle" applications?
    
  • What are the incentives for submitting applications earlier in a cycle period rather than waiting until the end of the 12-month period?
    
  • Why is it important to the IRS that the new process under the Staggered Remedial Amendment Cycles works?
    
  • Will the IRS go back to the old process for determination applications?
    
  • How is the IRS educating the Retirement Plans Community about the new process?
    
  • A link to an information page was provided: Staggered Remedial Amendment Period Revenue Procedure
    
    
    
    
• The newsletter mentioned two of the seven projects currently open in the Employee Plans Compliance Unit (EPCU), one of the two groups established to select returns to review or audit. The projects were the Minimum Funding Deficiency Project and the 403(b) Universal Availability Project. It also mentioned two of several new projects for this fiscal year: SIMPLE IRA Plan Relief Project and 5498 Project.
  
  
• The IRS website has a series of Frequently Asked Question (FAQ) pages, and the newsletter specifically discussed the following pages:
  
  • Retirement Plans FAQs regarding Loans
    
    
  • Retirement Plans FAQs regarding Hardship Distributions
    
    
  • Retirement Plans FAQs regarding Plan Investments
    
    
  • Retirement Plans FAQs regarding CP 403 and CP 406 Notices - Delinquency
    
    
    
    
• Two small business products, the 2007 Tax Calendar for Small Businesses and Self-Employed and the 2007 Small Business Resource Guide (SBRG), were discussed. More information and ordering information is available here.
  
  
• The employee plans published guidance for January 2007 through March 2007 was discussed. You can find more information on the published guidance in the Rules and Regulations section of our website.
  
  
• The DOL corner discussed new regulations and guidance. The only regulation not discussed in the Winter Edition of Retirement News for Employers was the Pension Distributions under Qualified Domestic Relations Order. As with the IRS guidance, you can find DOL guidance in the Rules and Regulations section of our website.
  
  
• The PBGC Insights section discussed the following items:
  
  • Effect of Treasury Mortaility Tables on PBGC Requirements
    
  • Mandatory Premium E-Filing Reminder
    
  • Premium E-Filing Tips – Start Early!
    
  • Premium Requirements for Plan Year 2007
    
  • Proposed Premium Rule
    
  • Premium Changes Coming for Plan Year 2008
    
  • Minimum Lump Sum Amounts under PPA
    
  • Visit PGBC's Web Site, http://www.pbgc.gov/
    
    
    
    
• New forms and publications that were revised, and not already discussed in the Winter Edition of Retirement News for Employers, include the following:
  
  • Form 5330 - Return of Excise Taxes Related to Employee Benefit Plans
    
    
  • Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
    
    
  • Publication 590 - Individual Retirement Arrangements (IRAs)
    
    
    
    
• The IRS reinstated the generation of the EP Taxpayer Delinquency Investigation (TDI) Notices for the plan year ending December 31, 2004. For more information, check out the above mentioned Retirement Plans FAQs regarding CP 403 and CP 406 Notices - Delinquency.
  
  
• The IRS is moving forward with the process of auditing potential abusive tax avoidance transactions involving defined benefit pension plans claiming to be 412(i) plans. The article discusses one potential solution – the option to treat the plan as if it had never claimed to be a 412(i) plan.
  
  
• It included an EP Benefits Conferences, including recent and upcoming events. Here are the upcoming conferences:
  
  • Great Lakes Benefits Conference
    
  • Mid-Atlantic Benefits Conference
    
  • Northeast Employee Benefits Conference
    
  • 20th Annual Cincinnati Employee Benefits Conference

March/April Deadlines
March 26, 2007

No matter what your role, you are most likely impacted by some of the qualified plan deadlines. Now is a good time to revisit the March and April deadlines discussed in two prior posts:

Winter Edition of Retirement News Winter Edition of Retirement News for Employers: Notice 2007-07/PPA Information Page/T.D. 9294 Use of Electronic Media/Automatic Rollover IRAs/Lost Participants/Terminating Plans/Payroll Deduction IRA/Self-Correction Program/401(k) Checklist/DOL News/IRS Form 5558/2007 IRS Tax Calendar/Upcoming Deadlines

• March 15: Deadline for –
  
  • Submitting waiver requests for the 2006 plan year for single employer plans.
    
  • Change in funding method requests for the 2006 plan year if a statement is attached detailing the reason for the delay.
    
• April 1: Last day to make required minimum distributions - Code section 401(a)(9) requires that distributions begin no later than April 1 of the calendar year following the later of:
  
  • The calendar year in which the employee attains age 70 ½ (required for 5% owners) or
    
  • The calendar year in which the employee retires.
    
• April 15: First quarterly installment due date for the 2007 plan year.
  
• April 15: Excess elective deferrals and any earnings thereon from the prior year must be distributed by this date.
  
• April 17: Deadline to establish an IRA for possible deductions in the 2006 calendar year.
  
  

ERISA Compliance Calendar/PPA/Notice 2007-07

0315

• ADP/ACP corrective distributions of excess contributions and earnings due to participants.
• Forms 1042S and 1042 due to IRS to report retirement plan distributions made to non-resident aliens and income tax withheld from distributions made to non-resident aliens.
• 2006 Employer Profit Sharing and Match Contributions due in order to take tax deduction (with no corporate tax extension) for 12/31 fiscal year-end plans.
• Application of Waiver for Minimum Funding Standard for defined benefit and money purchase pension plans (due no later than the 15th day of the 3rd month after the close of the plan year for which the waiver is requested).

0331

• Electronic filing of 1099Rs for 2006 distributions due to IRS. 0401
• Initial Age 70 1/2 Minimum Required Distributions due to participants (who are no longer actively participating and non-5% owners) who turned age 70 1/2 in 2006. Must be distributed by December 31 for each year thereafter.

0416

• Distributions of excess 402(g) deferral amounts due to participants. Note: Normally due by April 15, which is on Sunday in 2007.

For more information on RMDs, please check out the following posts:

Required Minimum Distributions (RMD) - April 1 Deadline

Required Minimum Distribution (RMD) Calculators

Another ESOP Blog
March 22, 2007

Steve Sheppard, the former CEO of Foldcraft Company and advocate of ESOPs, has been speaking to employee-owned companies and the business community across the country. He discusses ESOPs, some of his recent presentations, and other topics on his blog.

Hooker Furniture
March 22, 2007

A press release discusses the Hooker Furniture operating results from a two-month transition period. The results are noteworthy only because they include the reporting of the termination of the ESOP.

Required Minimum Distributions (RMD) – April 1 Deadline
March 19, 2007

Is your plan complying with the RMD rules (under IRC Section 401(a)(9))? You can find a general description of the RMD requirements in our ESOP planning section. In addition, here is a link to a blog post discussing RMD resources and calculators.

Generally, all participants must receive their first RMD by the April 1 of the year following the year they meet both of the following requirements: attain age 70½ and terminate employment. This date is referred to as the participant's required beginning date.

Here is an example of a participant that met both requirements in 2006:

• Required Beginning Date – Since the participant met both requirements in 2006, the required beginning date is April 1, 2007.
  
• RMD #1 - The participant must receive their first RMD by April 1, 2007. This RMD is the participant's 2006 RMD and is calculated using the 2005 balance.
  
• RMD #2 - The participant must receive their second RMD by December 31, 2007. This RMD is the participant's 2007 RMD and is calculated using the 2006 balance.
  
• Each subsequent RMD - Each subsequent RMD will be due on each subsequent December 31 (calculated using the prior year's balance).
  

Some plans provide eligible participants with the option to take their first RMD in the year they satisfy both requirements. Using the example, the participant would take their first RMD in 2006.

Another option is for the participant to take both their first and second RMDs before April 1 of the year the RMDs are due. Using the example, the first two RMDs would be taken in 2007 by April 1, 2007.

Where are you at in the ESOP Allocation Process?
March 15, 2007

If you have a calendar tax year, you are probably aware that you must file your return or file an extension by March 15, 2007, and you may or not be required to e-file your return. Now that you have satisfied these requirements, it is a good time to revisit where you are in the ESOP allocation process (assuming you have a calendar plan year end). Here are some questions to help you evaluate your status:

Where are you at in the ESOP allocation process?

• Allocation Timeline- Is the allocation timeline still on schedule? If not, have you addressed the reasons for falling off of the schedule and updated the schedule accordingly?
  
• Preliminary Allocation – Has a preliminary allocation been processed, reviewed, and approved? If not, what is preventing it from being completed? Has the trust accounting been completed and the eligibility processed?
  
• Stock Appraisal - Have you been communicating with the valuation firm on a regular basis? Are they going to meet their deliverable on time? Do they need anything else from you?
  
• Employee Communication – Have preliminary participant statements with actual numbers been reviewed and approved. How will the statements be delivered to the participants? Will there be participant meetings? Who will be conducting the meetings, where will they be held, and what will be discussed?
  
• Audit – Are you required to have an audit this year? If applicable, has the audit been scheduled? Is there anything the auditors will need to prepare for the audit?
  
• Diversification and Distribution Requirements – Have the appropriate diversification notices been distributed to the participants? Are you prepared to satisfy all of the distribution requirements?
  
• ESOP Planning – When is the last time you conducted an ESOP Planning meeting?
  

Now is a good time to revisit where you are at in the allocation process as well as plan for the future.

New – IRS Notice 2007-28 – Deduction Limits
March 13, 2007

The IRS released the following:

Notice-2007-28 provides guidance on certain of the changes made by the Pension Protection Act of 2006, Pub. L. 109-280 (PPA '06), to § 404 of the Internal Revenue Code (Code). Section 404 generally provides rules concerning the deduction for contributions to plans of deferred compensation. Some of the PPA '06 amendments to § 404 are effective for years beginning after December 31, 2005 (the 2006 changes) and others are effective for years beginning after December 31, 2007 (the 2008 changes). This notice provides guidance with respect to the 2006 changes and one related issue. Future guidance will be provided with respect to the 2008 changes. It will be in IRB 2007-14, dated April 2, 2007.

Please see the Rules and Regulations section of our website for more information on IRS Notice 2007-28 - Certain Deduction Limits under the Pension Protection Act of 2006.

CBO Update - Key Congressional Players
March 13, 2007

We previously discussed the Congressional Budget Office (CBO) proposed budget cut, Option 19 – End the Preferential Treatment of Dividends Paid on Stock Held in Employee Stock Ownership Plans, in the following posts:

The Congressional Budget Office Recommends Repealing 404(k)

Update on Proposal to Repeal 404(k) - Letter to the CBO

The Employee-Owned S Corporations of America (ESCA) website also addressed the subject in this update. The update discusses the fact that House Ways and Means Committee Chairman Charlie Rangel (D-NY) says that he supports employee ownership and is willing to communicate the benefits to House Education and Labor Chairman George Miller (D-CA), who has questioned S ESOPs in the past and has a great deal of influence with policy decisions.

New DOL Regulation/Tribune ESOP Update
March 12, 2007

The DOL published a new regulation last week: DOL Regulation - Time and Order of Issuance of Domestic Relations Orders (DROs) (Mar 7, 2007). It is an interim final rule that provides guidance to plan administrators, service providers, participants, and alternate payees on the qualified domestic relations order (QDRO) requirements under ERISA, and it is effective April 6, 2007. The regulation provides for the following:

1. Subsequent Domestic Relations Orders – A DRO that would otherwise be considered a QDRO will not fail to be considered a QDRO solely because the DRO is issued after, or revises, another DRO or QDRO.
   
2. Timing of Domestic Relations Order - A DRO that would otherwise be considered a QDRO will not fail to be considered a QDRO solely because of the time at which it is issued (after the death of the participant, after the parties divorce, after the participant's annuity starting date).
   
3. Requirements and Protections - A DRO described in the DOL regulation is subject to the same requirements and protections that apply to all QDROs.
   

................

We previously discussed the proposed Tribune transaction in the following posts:

Proposed Transaction to Structure a Buyout Around an ESOP

Tribune Company/ESOP Update

This post recapped what we have already discussed along with discussing some of the history behind ESOPs being used for leveraged buyouts. In addition, another blog says that, "Zell wants to take the company private for about $13 billion, and act as its chairman."

Relationship between Shareholders and the Board of Directors
March 8, 2007

This post discusses the role of the board of directors in an ESOP. Here is some more general information about the roles of the shareholders and the board of directors:

• The shareholders or stakeholders are the owners of the company. One of their primary responsibilities is to elect the members of the board of directors.
  
• The board of directors represents the highest level of management in the company and is responsible for governing the company. It consists of inside members (usually executive management) and/or outside members (not employed by the company, brought in for expertise and/or an impartial perspective). Some of their responsibilities include:
  
  • Preserving shareholder value
    
  • Selecting, reviewing the performance of, and approving the compensation of the chief executive.
    
  • Approving the financial statements of the company
    

If you were to create a traditional hierarchy chart, it would be in the following order:

1. Shareholders
   
2. Board of directors
   
3. CEO
   
   
4. Senior Management

Shared Capitalism
March 7, 2007

According to an ESOP Association press release, the Employee Ownership Foundation released data on shared capitalism programs in the US. The press release defined shared capitalism as "broad-based employee, current or deferred, stock compensation programs, such as ESOPs, stock purchases, stock options, gainsharing, profit sharing, and bonus programs." The data was collected from the General Social Survey (GSS), which is a survey that is conducted with a face-to-face interview by the National Opinion Research Center at the University of Chicago. The press release summarized the findings as follows:

"According to the results, out of 114 million people in the US who work in the private sector, 17.5% of employees own company stock, about 20 million employees, and 9.3% hold stock options, approximately 10 million employees. The number of employees who reported profit sharing, gainsharing, owning company stock or holding stock options was 46.7%, which is an increase over the 2002 GSS finding of 43.1%. While the data reflect a slight drop from the 2002 results which showed that 21.2% of employees owned company stock and 13.1% held stock options, the numbers are still impressive when one takes into consideration that almost 50% of the individuals working in the private sector are involved in some sort of shared capitalism program. "

The survey was also discussed in the following articles:

New Data on Breadth of Employee Ownership in U.S.

Data: 20M Employees Own Company Stock

Update on Proposal to Repeal 404(k) – Letter to the CBO
March 6, 2007

Last week we discussed the Congressional Budget Office 's (CBO) recommendation that Congress repeal Code Section 404(k). As a result, the ESOP Association sent a letter to Mr. G. Thomas Woodward, the Assistant Director for Tax Analysis for the CBO. The letter references a report by Steven F. Freeman of the University of Pennsylvania. The Employee Ownership Foundation commissioned the report to provide an independent look at the impact of the ESOPs. This report was also discussed in the latest Employee Ownership Update.

More ESOPs in the News – Marriott International ESOP
March 5, 2007

This article talks about another ESOP in the news:

"The Internal Revenue Service is auditing Marriott International's federal tax returns for fiscal 2000 through 2002 over $1 billion in deductions the hotel chain took related to its employee stock-ownership plan." Bethesda-based Marriott said it received "notices of proposed adjustment" from the IRS on Thursday that challenged most of the federal income tax deductions related to the plan, and the government agency proposed "substantial excise taxes and penalties."

The IRS is reviewing the ESOP feature of their qualified retirement plan implemented in 2000.

"Principal and interest on the debt related to the transaction was forgiven over a 26-month period as a mechanism for funding company contributions of elective deferrals and matching contributions to the plan," according to the filing. Marriott claimed $1 billion in federal income tax deductions for the forgiven principal and interest on the debt over that period.

"The benefit related to the tax deductions was reflected in equity and did not flow through the provision for income taxes," the filing said.

Tribune Company/ESOP Update
March 3, 2007

There has been more news coverage of the Tribune Company/ESOP story. This article provides an update on the status of the deal:

• Without providing details, Zell confirmed that his plan involves creating an employee stock ownership plan (ESOP) and that the ownership would be "a partnership between myself and the ESOP," Crain's reported.
  
• Zell acknowledged that his proposal to take over the Tribune may be a long shot, according to Crain's, which quoted him as saying, "There's a long way between the lip and cup here."
  

Meanwhile, this article provides more background, including the fact that the Tribune Company used to have an ESOP that was "ended" in 2003.

Tribune launched a small ESOP in 1988 and soon expanded it to successfully thwart a hostile takeover by the billionaire Bass brothers of Texas. When the ESOP was shut down three years ago, workers' stock was deposited in 401(k) retirement accounts, a spokesman confirmed yesterday. If that ESOP existed today, its holdings - 18.6 million shares of common stock, according to a securities filing - would make it Tribune's third-largest shareholder, behind the Chandler family of Los Angeles, which owns 20 percent, and the McCormick Tribune Foundation with 13 percent. The company owns Newsday and WPIX/11.

The article includes quotes from J. Michael Keeling, president of the ESOP Association, and Corey Rosen, director of the NCEO. It also mentions some of the other options available to the Tribune Company:

The directors also are weighing the Zell bid against an alternative from top management that would split Tribune's 23 television stations from its 11 newspapers and pay a hefty dividend to shareholders. Other proposals submitted last month by the Chandlers, billionaires Eli Broad and Ron Burkle of Los Angeles and the Carlyle Group private equity firm have been put to the side, for the moment.

This blog discusses some of the alternative options in more detail.

The article then discusses how ESOPs have been used to buy companies and block hostile takeovers. It used Avis Inc. (more background information here and here) as an illustration of a success story, and Charter Medical Corp., which we discussed in this post, as an example of an ESOP that did not work.

Perform Preliminary Allocation
March 2, 2007

Since January we have been discussing the ESOP allocation process. Today I am going to be discussing the preliminary allocation.

Although the final stock value will most likely not be available, there is value in preparing and reviewing a preliminary allocation and preliminary participant statements. While the majority of the compliance testing issues (e.g. Section 415 problems, discrimination or coverage issues, Section 409(p) issues) should already have been identified and resolved, performing a preliminary allocation will help ensure that any compliance testing issues have been resolved and no new compliance testing problems have developed. The preliminary allocation can be prepared at last year's value or an estimate of what you believe the value will be. The latter will provide you with a more accurate picture of the allocation and also give you a better look at what the statements will look like, providing you with plenty of time to make any changes to the statement format, if necessary. Finally, in most cases the preliminary allocation will be the same as the final allocation, and the only thing that will change is the value of the shares. This will help increase the turnaround time from receiving the final stock appraisal to finalizing participant statements and the rest of the allocation process.