ESOP Plan Administrators answer your questions: Why Is My Record Keeper Asking for That?

ESOP Plan Administrators answer your record keeping questions with this downloadable eBook (PDF). It is that time of year when you are responding to year-end data requests from your ESOP record keeper. You may be wondering why he/she truly needs all this information. In order to maintain compliance with extensive Internal Revenue Service and Department of Labor regulations, a lot of information has to be compiled and provided to your record keeper. This article will explain why some of the more difficult data items are being requested.

Synthetic Equity

If you are an S Corporation sponsoring an ESOP, your record keeper will ask you for copies of plans or agreements defining all forms of synthetic equity, and you may not think you have any. You may be surprised to learn just what the IRS has defined as synthetic equity. Obvious forms of synthetic equity include stock options, warrants, and certain buy-sell agreements that allow individuals to acquire stock directly, but the definition is much broader.

Phantom stock (often used to offset restrictions on plan participation by selling shareholders and their family members who elected Section 1042), stock appreciation rights, supplemental executive retirement plans, deferred compensation plans, and certain severance and employment agreements that provide for termination benefits to be paid more than two and half months after the end of the year in which the individuals employment terminated are all synthetic equity under the regulations.

Synthetic equity can even be a split dollar life insurance arrangement where premiums and benefits are split between the employer and the employee, or rights to acquire stock or similar interests in an entity related to the S Corporation. Because of the breadth and sensitivity of some of these benefits, the Human Resources department should have senior management verify that all forms of synthetic equity are indeed being reported to the record keeper.

Family Attribution Rules

Your record keeper will need to know who is related to whom in your employee database. Family attribution rules pursuant to IRC Section 318 will affect the determination of key and highly compensated employees who are included in most compliance tests. The IRC Section 318 definition of family includes the individual and any spouse, children, grandchildren and parents of the individual. If you have any stock with an IRC Section 1042 taint, you would be subject to the broader family definition of IRC Section 267, which requires that you also report any siblings (half or whole blood) and grandparents of the individual.

Additionally, if you are an S Corporation, you are subject to IRC Section 409(p) testing, which uses the broadest possible definition of family and requires the Human Resources department to track family relationships not normally monitored. The expanded IRS Section 409(p) definition of family includes all of the above relationships plus any ancestor or lineal descendant of the individuals spouse or siblings, spouses of the siblings of the individual, the lineal descendants of those siblings and the spouse of any person listed above.

Historical Data

There are many reasons why your record keeper may ask you to gather historical data about an employee. The most common reason is that you have rehired an employee. In order to calculate eligibility, vesting, date of entry into the ESOP, and possible prior forfeiture restoration, you will need to provide all the hire, term, rehire, re-term dates that apply to that employee, as well as hours worked for those periods.

Another reason could be that your record keeper is trying to determine forfeiture timing and may need hourly data from five years ago to determine if the participant has incurred a five-year break in service.

Employee Terminations

Record keepers are also very concerned with how an employee terminates employment during the plan year. In order to accurately calculate eligibility for allocations, vesting, and timing of distributions, your record keeper will need to know if the termination is due to death or disability, as defined in your plan document (the record keeper can typically determine retirement based on the census data provided).

In order to comply with USERRA regulations, he/she needs to know if a termination (or subsequent rehire) is due to military service. To determine if there has been a partial termination, he/she needs to know the difference between voluntary terminations and involuntary terminations.

Lastly, for certain kinds of leave you may even need to credit hours for periods of time not worked; therefore, you need to let your record keeper know if an employee was separated from service due to authorized leave of absence, paternity or maternity leave, family medical leave or other types of approved leave of absence.

Multiple Plan Compliance Testing

Finally, you may wonder why your ESOP record keeper is asking for so much information on your 401(k) plan. Combined compliance testing for multiple plans sponsored by a company can be a complicated task. Typically, ESOP record keepers perform this service because the ESOP valuation is done after the 401(k) allocations are completed.

In addition, most of the regulations complicating this testing process are ESOP related, so your ESOP record keeper may be better equipped to accurately complete the testing. At a minimum, you will need to provide your ESOP record keeper with 401(k) deferrals or other types of employee deferrals (e.g., catch up, ROTH), matching amounts, profit sharing and other types of employer contributions, amounts of reallocated forfeitures and ending account balances.

You may also need to provide prior distribution information, rollover information, or plan document information depending on what types of compliance testing your plans are subject to and the results of those tests.


Your record keepers data requests can seem daunting, but each request is necessary for accurate record keeping. If you do not understand why something is being requested, ASK! The record keeper will be happy to explain to you why he/she is asking for that particular information. Remember, it takes a team effort to keep your ESOP administration accurate, efficient and compliant.

Contact the Author
Mychelle Holloway, Principal and Senior ESOP Administrator