Vesting Requirements
February 28, 2007

PRE-EGTRRA RULES

Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Internal Revenue Code Section 411 – Minimum Vesting Requirements, specifically IRC Sectoin 411(a)(2), provided for the following:

2)
Employer contributions Except as provided in paragraph (12), a plan satisfies the requirements of this paragraph if it satisfies the requirements of subparagraph (A) or (B).

(A) 5-year vesting

A plan satisfies the requirements of this subparagraph if an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

(B) 3 to 7 year vesting

A plan satisfies the requirements of this subparagraph if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

Years of service: The nonforfeitable percentage is:
3 20
4 40
5 60
6 80
7 or more 100

EGTRRA RULES

Effective for plan years beginning after December 31, 2001, EGTRRA shortened the allowable vesting schedules for match accounts to a maximum of 3-year ("cliff") vesting or 2 to 6 year ("graded") vesting.

PPA RULES

The Pension Protection Act of 2006 (PPA) expanded the EGTTRA match-vesting requirements to all defined contribution accounts effective for plan years beginning after December 31, 2006. However, it did provide an exception for ESOPs that had an ESOP loan outstanding on September 26, 2005: The new vesting requirements "shall not apply to any plan year beginning before the earlier of— (A) the date on which the loan is fully repaid, or (B) the date on which the loan was, as of September 26, 2005, scheduled to be fully repaid."

What if you have some leveraged shares (that meet the requirements of the exception) and some non-leveraged shares? I have heard some advisors take the position that the entire plan can maintain the old vesting schedule until the above-mentioned exception no longer applies. If you are in this situation you should discuss this with your ESOP consultant or counsel.

The new rules apply only to contributions made on or after the effective date of the new vesting schedule. However, if the vesting schedule was not changed retroactively for prior contributions, you would need to maintain separate accounts with separate vesting schedules. Many plans will apply the new schedule to all contributions to avoid the record keeping and communication complexities created by two separate vesting schedules.

The new rules only apply to employees who work an hour of service after the effective date of the new vesting schedule. Therefore you will not be required to increase the vesting for participants who terminated prior to the date of the change.

The ESOP Blog provides a summary of the vesting requirements, including the following vesting decisions that you will need to make if you are not currently satisfying the vesting requirements:

• Which vesting schedule will you use?
  
  
• If you are a leveraged ESOP, do you want to delay the change in vesting schedules as allowed under the exception outlined above?
  
• Do you want to apply the new vesting schedule to all balances or only to amounts accumulating in post – 2006 plan years?
  
• Do you want to limit the application of the new vesting schedule to participants who have an hour of service in the first plan year beginning after December 31, 2006?
  

Your plan document does not need to be amended to reflect these decisions until the end of the 2009 plan year. Nevertheless, you may choose to adopt an amendment now to record the decisions made and you may also want to communicate the new vesting provisions to your employees at this time.

A more detailed explanation of the new vesting rules can be found here.

Proposed Transaction to Structure a Buyout Around an ESOP
February 27, 2007

In a September 21, 2006 press release, the Tribune Company announced the following:

"That its board of directors has established an independent special committee to oversee management's exploration of alternatives for creating additional value for shareholders"

The special committee has been looking at ways to restructure or sell the company. A proposal to structure a buyout around an ESOP has been in the news. The proposed deal "trumps two other private bids -- a $7.6 billion ($31.70 per share) offer from the Chandler family, the company's biggest shareholder; and a $34.00 per share offer from billionaires Ronald Burkle and Eli Broad -- that the company had already indicated it considered insufficient."

Here are some highlights of the proposed transaction from this article:

• "It would create a privately held, highly leveraged company that would be able to take advantage of federal tax breaks associated with ESOPs to provide a "a bigger payoff" to existing shareholders than the other restructuring options being studied by the Tribune board, one of the sources said."
  
• "Details of Zell's proposal were sketchy Friday. But one source said the Chicago billionaire's private firm and an ESOP would team up to purchase Tribune's shares and keep the company largely intact for now, including keeping management in place."
  
• "Zell's deal would present a high risk but potentially high reward proposition for Tribune employees. Their retirement nest eggs would be concentrated in a new company with a large amount of debt. But if the newspaper and local TV industries turn around, employees would stand to reap big returns Tribune, which owns the Chicago Tribune, saw its revenues drop by 5 percent in January."

The Congressional Budget Office Recommends Repealing 404(k)
February 26, 2007

The ESOP Association sent out the following message last Friday afternoon:

CONGRESSIONAL BUDGET OFFICE ATTACKS ESOP DIVIDEND DEDUCTION PROVISION—IRC 404(k) The Congressional Budget Office (CBO) has issued its annual report containing 250 recommendations to Congress on how to reduce the Federal Budget Deficit. In language that says there is no proof that ESOPs are effective, the CBO recommends that Congress repeal Code Section 404(k), better known as the ESOP dividend deduction provision that permits C corporations to deduct dividends paid on ESOP stock if passed through to employees in cash, used to pay an ESOP loan, or reinvested by the employee back to the plan for more company stock. [S corporations may use dividends on its ESOP stock to pay ESOP debt, but obviously an S ESOP does not obtain a corporate tax deduction for doing so.] The ESOP dividend deduction provision has been law since 1984.

"Most disturbing is that this staff group of the CBO, which is not a part of the key tax committees of Congress, would go after an ESOP tax benefit as if it were easy road kill," President Michael Keeling said after reading the CBO recommendations. "But what concerns me even more is the declaration that there is no evidence that ESOPs increase productivity or profitability of companies with ESOPs. The recent University of Pennsylvania research paper by Dr. Stephen Freeman, which is available on our website, demonstrates how incorrect this statement is based on 30 years of research on ESOPs."

Here is a link to the original language from Budget Options (February 2007):

Option 19 – End the Preferential Treatment of Dividends Paid on Stock Held in Employee Stock Ownership Plans

The report states that "this option would eliminate the tax advantages that are now accorded to ESOPs, effectively rendering them indistinguishable from other qualified retirement plans. That change would increase revenues by $0.4 billion next year and by $3.9 billion over the next five years."

The report provides the following reasons for eliminating the preferential tax treatment to ESOPs:

1. The current treatment causes similar dividend payments to have different tax consequences for different companies.
   
2. It hinders the diversification of employees' retirement portfolios, because the assets of an ESOP, by design, consist primarily of shares of the employer's stock. If the price of that stock drops, employees may have much less wealth in retirement than they would have had if they had been allowed to diversify their investments, as participants in a typical 401(k) plan can.
   
3. ESOPs have occasionally been used for purposes for which they were not intended, such as to ward off hostile takeovers by placing large numbers of shares in friendly hands.
   

As for the reason for keeping the preferential tax treatment, the report states:

"The main rationale for retaining the tax advantages of ESOPs is that having employees own stock directly links their financial interests to their productivity. That is, greater productivity translates into higher profits for the company and thereby increases the value of the employees' stock. To the extent that the incentive of stock ownership works as intended, ESOPs help promote increased productivity among workers. However, the efficacy of that incentive has not been clearly established."

More EPCRS/DOL Settlement
February 23, 2007

Earlier this week I noted that we have had three EPCRS-related posts this week. Well, why stop at three. This article discusses resolving ESOP operational mistakes.

……

In a February 8, 2007 DOL press release, the DOL announced a settlement with an accounting firm over a deficient ESOP audit. The CPA firm must pay the ESOP $5,000 in restitution and ensure all audit personnel posses the appropriate knowledge and training. According to the press release:

"The order resolves a lawsuit alleging that the CPA firm knowingly participated in fiduciary breaches under the Employee Retirement Income Security Act (ERISA). The CPA firm was alleged to have knowingly participated in breaches by the plan committee members and others when the firm failed to disclose in its audit report that the plan was not receiving employer contributions needed to make loan payments on RCI stock purchased by the plan."

In addition, according to a March 14, 2006 DOL press release, the DOL also sued the fiduciaries:

"The U.S. Department of Labor has sued the fiduciaries of Rehab Consultants Inc. (RCI), Jefferson, Georgia, for making improper loan payments from the company's employee stock ownership plan (ESOP) to parent company Rehab Consultants of Florida (RCF) and then abandoning the plan…

According to the lawsuit, filed in federal district court in Atlanta, Georgia, plan committee members -- Joseph Gentzel, Mary Ann Gentzel, Grayson Gentzel, Jennifer Heidt Gentzel, and Graeme Gentzel -- violated the Employee Retirement Income Security Act (ERISA) by allowing the plan to engage in a prohibited transaction. Loan payments of more than $170,000 were paid from the plan to RCF. In June 2001, RCI was dissolved and the plan committee members resigned without providing for continued management of the plan

The value of the stock purchased by the ESOP, which the Labor Department alleges the defendants abandoned, declined from $19.74 per share in 1996 to $.79 per share in 1998 and is currently worthless….

The suit seeks a court order requiring the defendants to restore to the plan all losses with interest. The suit also asks the court to permanently bar the defendants from serving in a fiduciary capacity to any plan governed by ERISA and to appoint an independent fiduciary to manage, terminate and distribute plan assets to eligible participants."

Diversification Timing Requirements and EPCRS
February 21, 2007

Last week I talked about the diversification disclosure requirements. The latest ESOP Law Blog post expands on the problem that a privately held ESOP faces when trying to comply with the timing requirements: The annual stock appraisal may not be completed by the end of the 2-90 day periods after the end of the plan year. As discussed in my previously-mentioned post,

I am not aware of any plans that have experienced any problems when they have sent the final diversification disclosures as soon as administratively feasible after receiving the final amounts eligible to diversify. Nonetheless, the plan is still violating the diversification requirements of IRC Section 401(a)(28).

The ESOP Law Blog suggests using the Self-Correction Program (SCP) of the Employee Plans Compliance Resolution System (EPCRS) as a possible solution. We have recently discussed the SCP and EPCRS, including twice this week, in the following posts:

Rules and Regulations/EPCRS/IRS 2007 Dirty Dozen Tax Scams

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

Employee Plans Compliance Resolution System (EPCRS)

By using the SCP and making the payments as soon as administratively feasible, the participants will most likely be in the same position that they would have been in had the violation not taken place. The post also raises other concerns, including the lost earnings opportunity and whether the violation was really inadvertent. The post concludes with the following: "Perhaps, given the commonality of this problem, the IRS will one day provide additional guidance to ESOP companies."

Rules and Regulations/EPCRS/IRS 2007 Dirty Dozen Tax Scams
February 20, 2007

Last week we added the Rules and Regulations section to our website. The section contains links to recent rules and regulations in both .html and .pdf formats (when available) and a brief description of the rules. In addition, most rules and regulations have an information page that contains links to relevant The One-Stop ESOP Blog posts and other related links. Here is a list of the current information pages:

Treasury Regulations

T.D. 9302 - Prohibited Allocations of Securities in an S Corporation (IRC Section 409(p) Final Regulations)

T.D. 9294 - Use of Electronic Media for Providing Employee Benefit Notices and Making Employee Benefit Elections and Consents

DOL/EBSA Final Rules and Field Assistance Bulletins

Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries (Feb 15, 2007)

Statutory Exemption for Cross-Trading of Securities (Feb 12, 2007)

DOL FAB 2007-01 Statutory Exemption For Investment Advice (Feb 2, 2007)

DOL FAB 2006-03 Periodic Pension Benefit Statements - PPA (Dec 20, 2006)

Electronic Filing of Annual Reports (Jul 21, 2006)

IRS Notices

Notice 2007-8 - In-Service Benefits Permitted to be Provided at Age 62 by a Pension Plan

Notice 2007-7 - Miscellaneous Pension Protection Act Changes

Notice 2007-6 - Cash Balance and Other Hybrid Defined Benefit Pension Plans

Notice 2007-3 - 2006 Cumulative List of Changes in Plan Qualification Requirements

………...

We discussed the EPCRS program in yesterday's post. If you are looking for more information, the IRS has a Correcting Plan Errors information page that provides "tools, an overview of EPCRS and other useful information to assist plan sponsors."

………...

The IRS has published their annual 2007 "Dirty Dozen" Tax Scams. Item number one, the telephone excise tax refund, is something that most everyone and every company will have on their tax return. Here is the complete list of common tax avoidance schemes to avoid:

1. Telephone Excise Tax Refund Abuses
   
2. Abusive Roth IRAs
   
3. Phishing
   
4. Disguised Corporate Ownership
   
5. Zero Wages
   
6. Return Preparer Fraud
   
7. American Indian Employment Credit
   
8. Trust Misuse
   
9. Structured Entity Credits
   
10. Abuse of Charitable Organizations and Deductions
    
11. Form 843 Tax Abatement
    
12. Frivolous Arguments

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
February 19, 2007

The winter 2007 edition of Retirement News for Employers is now available. This newsletter is a great source of information for plan sponsors as well as qualified plan professionals. Here are some of the highlights:

• IRS Notice 2007-07 was released on January 10, 2007.
  
  
• As discussed in this post, the IRS has a PPA information page.
  
  
• Treasury Decision (T.D.) 9294 - Use of Electronic Media for Providing Employee Benefit Notices and Making Employee Benefit Elections and Consents was issued:
  
  Final regulations have been issued setting forth standards for electronic systems that make use of an electronic medium to provide notices to recipients, or make participant elections or consents, with respect to retirement plans, employee benefit arrangements, or individual retirement plans. Generally, these regulations apply to applicable notices provided, and participant elections made, on or after January 1, 2007.
  
  Note: These final regulations reflect the applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-SIGN), Public Law 106–229, as it relates to the electronic delivery of notices. E–SIGN generally provides that electronic records and signatures are given the same legal effect as their paper counterparts.
  
  
  
  The article includes an informative, easy-to-understand explanation of the rules.
  
  
• The following automatic rollover IRAs concerns were discussed:
  
  
  • Plan sponsors wonder how to set up IRAs for automatic rollovers of participants' accounts pursuant to § 657 of EGTRRA. Note: Section 657 of EGTRRA amended the Code to require that mandatory distributions of more than $1,000 from a qualified plan be paid in a direct rollover to an IRA.
    
    
  • Plan sponsors/administrators of terminated plans have been told that they cannot set up IRAs for the account balances of missing participants. (For more information on this item not discussed in the newsletter, check out When terminating a defined contribution plan, may the plan cash out a participant who has a vested balance of over $5,000 who can not be located?)
    
    
• The IRS has established two groups to assist in selecting the most appropriate returns to review or audit. The first group, the Data Analysis Unit (DAU), consists of outside experts with experience in various areas of data analysis. The second group, the Employee Plans Compliance Unit (EPCU), consists of employees hired from within the IRS, to focus on high profile projects. An example of the projects this group is working on is the "Identification of reported fraud from analysis of the Form 5500".
  
  
• Employers who want to help employees save for retirement without establishing an employee benefit plan should consider a Payroll Deduction IRA. Payroll Deduction IRAs for Small Businesses, a "plain-language" publication, was just released.
  
  
• We have previously discussed the Employee Plans Compliance Resolution System (EPCRS). The newsletter includes an excellent 2½ page article on the Self-Correction Program, including the following sections:
  
  
  • Self-Correction Program (SCP)
    
  • Eligibility Requirements for Using SCP
    
  • Determining if the Violation is Insignificant
    
  • Correction Must be Timely
    
  • Availability of Correction by Plan Amendment in SCP
    
  • Diligent Plan Administration and Prompt Correction is the Best Policy
    
    
• A 401(k) Checklist (Publication 4531) that highlights the top 10 compliance issues occurring in 401(k) plans available online. The purpose is to raise awareness of these issues to plan sponsors.
  
  
• The newsletter includes a DOL News section. Many of the items covered in this section can also be found in the Rules and Regulations section of our website:
  
  
  • Inherited IRA Regulation and Exemption
    
    
  • Cross-Trading Statutory Exemption
    
    
  • Investment Advice Statutory Exemption
    
    
  • Individual Benefit Statements and Diversification Notices
    
    
  • Proposed PPA Revisions to Form 5500 Annual Report for 2008
    
    
    
• Two forms were recently updated: IRS Form 5558, which was also discussed here, and Publication 575 – Pension and Annuity Income.
  
  
• The 2007 IRS Tax Calendar for Small Businesses and Self-Employed (Publication 1518) has been released.
  
  
• The newsletter includes a reminder of the following 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.

Diversification Forms
February 14, 2007

ESOPs are required to provide participants age 55 and older with 10 years of participation (as defined by the plan or other administrative document) the option to diversify a portion of their company stock. They are eligible to diversify 25% of their shares during the first five years of eligibility and 50% in the sixth and final year.

A notice informing the participants eligible for diversification of their rights must be provided to participants no later than 90 days after the end of the plan year:

• If the allocation is final, you can send a final diversification disclosure to the participant (that will include the final amounts eligible to be diversified), and you will have satisfied the requirements.
  
• If the allocation is not completed, then you must send a preliminary disclosure (which does not need to include the amount eligible to diversify) no later than 90 days after the end of the plan year and a final diversification disclosure no later than 180 days after the end of the plan year. In some cases, the final allocation balances are still not known 180 days after the end of the plan year. While there is no formal guidance, I am not aware of any plans that have experienced any problems when they have sent the final diversification disclosures as soon as administratively feasible after receiving the final amounts eligible to diversify.
  

Both disclosures should solicit an election on whether or not the participant is interested in taking a diversification distribution. You should collect a response from all participants to ensure that you have additional documentation to further demonstrate compliance. The preliminary election should be considered nonbinding, and the final election accompanied with a completed distribution form would instruct the plan to process a diversification payment.

For more information about diversification, please check out the distributions installment (page 4) of the ESOP Planning section.

Short Plan Years
February 13, 2007

This Compensation and Limitation Chart is a good resource for short plan years and for participants entering a plan after the first day of a full plan year. It addresses the following items:

• Compensation Limit §401(a)(17)
  
• HCEs
  
• Key Employee
  
• Elective Deferrals §402(g)
  
• Catch-up Limit
  
• Allocation of Employer Contributions §401(a)(4)
  
• Top-Heavy Minimum Contribution §416
  
• ADP/ACP and Nondiscrimination Testing §401(a)(4)
  
• Annual Additions Limit §415 (Based on gross §415 compensation)
  
• Deduction §404(a)
  
• Amendment Timing
  
• Eligibility
  
• Last day and/or 1,000 hours for an allocation/accrual of benefit
  
• Vesting

Rules and Regulations
February 12, 2007

We have added a Rules and Regulations section to our site, which can be found in the main menu. The intent of the section is to provide you with a single reference point for all retirement plan related rules and regulations.

Non-spouse Beneficiary Rollovers
February 9, 2007

I recently came across a couple of articles discussing some problems with the rules for non-spouse beneficiary rollovers provided in IRS Notice 2007-07:

What Is The IRS Thinking?

IRS Puts a Stingy Spin on Pension Protection Act

Here is a brief summary of the old rules, the rules according to the Pension Protection Act of 2006 (PPA), and the new rules per IRS Notice 2007-07:

Old Rules – A surviving spouse was the only type of beneficiary that could roll over an inherited 401(k) to an IRA and defer taxation. A new IRA would be created in the name of the spouse. All other beneficiaries (children, siblings, etc.) were NOT allowed to roll it over and were generally required to receive a distribution within 5 years of the death of the 401(k) owner.

PPA– The PPA provides that non-spouse beneficiaries would also be able to roll over an inherited 401(k) into an IRA for distributions taken after 12/31/06. A new IRA would be in the 401(k) owner's name for the benefit of (FBO) the beneficiary.

New Rules per IRS Notice 2007-07 – The rules per IRS Notice 2007-07 were generally the same as provided by the PPA. However, some of the details may not have been the same as intended. The articles discuss the frustrations that some have experienced because the non-spouse rollover provision is not required and the rules are not effective unless the plan document has been amended. Another problem discussed was the transition rules for accounts inherited prior to 2006. Legislation to correct PPA-related mistakes will likely address these issues.

The articles also provided the following suggestions:

• "And if you've got an old 401(k) sitting at an ex-employer, do your heirs a favor and roll it into an IRA before you die, to avoid any complications."
  
• "What should you do if your dad died last year and you were the beneficiary of his 403(B) account? If the plan requires you to close the account within 2 years, should you wait and withdraw the money at that time or roll it to an inherited IRA? Choate's recommendation is to "do the transfer to the IRA. We'll assume the IRS will fix this. If they don't you're no worse off."
  

In addition to the links provided in the following posts, here is another summary of Notice 2007-07 that includes more details on the nonspouse beneficiary rollover provisions:

Miscellaneous Pension Protection Act Changes

Update on 409(p) Final Regulations and Notice 2007-07

ERISA Compliance Calendar/PPA/Notice 2007-07

New Addition to Our Website: IRC Section 409(p)
February 7, 2007

We have added an IRC Section 409(p) section to our website that can be found in our main menu. It currently contains a timeline of the rules and regulations with links to the Internal Revenue Code and the Proposed, Temporary, and Final Regulations. It also contains links to 409(p)-related posts on the One-Stop ESOP Blog and other related links. We will be adding more information and links to the section in the near future.

Clarification of Save At Work Proposal/409(p) Final Regulations
February 6, 2007

The ESOP Association published the following news bulletin on their website:

President Bush's Proposed Budget For FY 2008 Clarifies The Presidential Panel On Federal Tax Reform "Save At Work" Proposal: Does Not Propose Elimination of ESOPs, But Leaves Questions About How ESOPs Are To Be Handled Under New "Employee Retirement Savings Accounts"

The bulletin discusses the release of the proposed 2008 budget, which also included some tax law recommendations. As the title indicates, the bulletin clarifies that while the proposal provided by the Presidential Panel on Federal Tax Reform does not propose eliminating ESOPs, many questions remain unanswered:

"The budget proposal for ERSA's (Employee Retirement Savings Account's) is clear that only so-called "contributory plans," which are 401(k)'s, SIMPLE 401(k)'s, 403(b), 457, SIMPLE IRA, and SARSEPs, are to be eliminated and all are now to be covered by yet to be written law and rules for ERSA's. [An ERSA will be very similar to a 401(k) plan with easier testing to satisfy nondiscrimination rules.]

Unless an ESOP is combined with a 401(k) plan, the ERSA proposal has no obvious impact on ESOPs."

……………

We have previously discussed the final 409(p) regulations in the following posts:

IRC Section 409(p) Final Regulations

Update on 409(p) Final Regulations and Notice 2007-07

Using Rebalancing to Comply with IRC Section 409(p)

The ESOP Law Blog has a post about the final 409(p) regulations. It includes discussions on the following:

• The consequences of failing 409(p), including the excise tax (to the plan sponsor), the taxable income (to the participant), the plan disqualification, and the loss of S status.
  
• The avoidance of failing 409(p) by the transfer of shares to a non-ESOP plan or portion of the plan (that would be subject to Unrelated Business Income Tax (UBIT)).
  
• How targeted reshuffling would most likely be discriminatory because it provides HCEs with an investment opportunity that NHCEs do not have.
  
• The avoidance of failing 409(p) by preventing disqualified persons from sharing in allocations or by providing larger contributions to NHCE disqualified persons.
  
• The problems with "mandating diversification" and forced elections.
  
• Family attribution and deferred compensation plans.
  
• The right of first refusal and synthetic equity.
  

Rebalancing, which we discussed in detail last week, was also discussed:

"So, while IRS is clearly opposed to targeted reshuffling, a reshuffling approach that treats all participants' accounts equally would be acceptable."

Finalize Trust Accounting
February 4, 2007

We previously discussed organizing the trust accounting information. The trust and contribution information is used to prepare the plan's income statement and balance sheet. The release of shares for the year is calculated, and the financial statements and supporting schedules are updated accordingly. Every number on the income statement and balance sheet should reconcile back to a bank statement and/or supporting schedule (e.g. the total distributions should be reconciled to the bank statements and a schedule of distributions by participant).

When the trust accounting is completed, it will be used to process the allocation, prepare the IRS Form 5500, and prepare the audited financial statements (if applicable).

100 Best Companies to Work for/Hooker Furniture ESOP
February 2, 2007

The latest NCEO Employee Ownership Update is online. It discusses how 56% of the companies (with stock) on the 100 Best Companies to Work for list have broad-based employee ownership programs. It also discusses the termination of the Hooker Furniture ESOP and how accounting rules (specifically how compensation expense must be reported at the current fair market value of the shares and not at the original cost) may make it less desirable for public companies to sponsor ESOPs.

Roth vs. Traditional Retirement Contributions
February 1, 2007

In a prior post we compared pre-tax and after-tax retirement contributions. Speaking of which, I just received a copy of the February 2007 edition of the Journal of Accountancy and read an article called To Roth or Not to Roth. The article goes through various scenarios and discusses the appropriate mix of pre-tax or after-tax contributions. It also discusses considering the type and holding period of the investments of the portfolio:

"....the wisdom of letting long-term capital gains rates work for them, especially with aggressive-growth assets, while keeping lower-yield securities in a traditional 401(k) or other pretax account."