An ESOP S Corporation approached SES ESOP Strategies concerning options for freezing or terminating their Plan. The company is an S Corporation that is substantially owned by its ESOP. Management was concerned that the company was building up excess cash on the companys balance sheet. The ESOP trustees were concerned with whether having the company hold substantial non-operating assets created potential fiduciary liability. Moreover, substantial ESOP account balances were having a detrimental effect on employee retention because some employees were leaving the company in order to access their ESOP benefits.
SES reviewed the company’s valuation report, evaluated the benefit levels in the ESOP and described several options for the company, including freezing the Plan, terminating the Plan, re-leveraging, and offering participants a special diversification opportunity. Management and the ESOP trustees preferred to leave the ESOP in place but wanted to move some of the excess non-operating assets off its balance sheet. SES modeled several potential scenarios and mechanisms for redeeming a portion of the ESOPs stock. SES devised a plan to offer a one-time diversification to all vested ESOP participants. The total offering amount was fixed by the company at about 25 percent of the company’s assets in excess of working capital needs. This approach allowed the company to accomplish its goals of moving a portion of its excess assets off the balance sheet and providing diversification and access to benefits to the ESOP participants, while minimizing transaction cost and complexity.
The structure of the plan amendment needed to execute this offering was complicated by two factors:
1. The offering needed to be structured in a way that didn’t favor highly compensated employees.
2. The redemption of a portion of the ESOPs stock could not result in the ESOP failing an important compliance test [IRC Section 409(p) Anti-Abuse Test].
SES ESOP Strategies consulting, finance and legal experts crafted a solution that met the company’s goals without creating compliance problems.
The special diversification offer was well received by ESOP participants. Eighty percent of the eligible participants elected to participate. The participants were able to diversify and/or access approximately 15 percent of their ESOP benefits.