age 55 diversification 18 th annual ohio employee ownership conference presented by dorn swerdlin...

Age 55 Diversification

18th Annual Ohio EmployeeOwnership Conference

Presented by Dorn SwerdlinSwerdlin & CompanyFriday, April 16, 2004

18th Annual Ohio Employee Ownership ConferencePresented by Dorn Swerdlin, Swerdlin & Company

What We Will Discuss

Basic Rules Examples

• Timeline• Election Forms• Acting on Election

Diversification Calculations

Sticky Issues

Basic Rules


Age 55 Diversification

Code Section 401(a)(28)(B)

Allows participant to diversify out of company stock.


Eligibility

10 years ofparticipation

in planAge 55


Stock Eligibility

Shares of company stock acquired by trust after December 31, 1986

May be allowed with respect to all shares


Election Period

6 year period

Begins when participant meets eligibility requirements


Elections

Able to diversify 25% of qualifying shares

First 5Years

Final option to diversify up to50% of qualifying shares

6th Year


Computing Shares

Total of allocationshares that haveever been eligible

fordiversification

Any shares that have been previouslydiversified-minus


Exceptions

Not required if shares in participant’s company stock account have a market value of $500 or less

Market Value $500<


Timing of Elections

Must be granted to participant within 90 days of close of plan year during which he meets requirements


Implementation

Within 90 days after the last day of the 90-day election period


Alternatives

Company may implement diversification elections by:

Making a distribution of the diversified shares or

Providing at least 3 investment options within the ESOP (or another plan)

Corporation

Effective Date of ESOP: January 1, 1980

Diversification Occurs:Age 55 and 10 years of participation

KL Corporation also sponsors a 401(k) Plan

Leon Kelso

Date of Birth:January 1, 1935

Date of Participation: January 1, 1995

Diversification Procedures Timetable

Description Due

Begin discussions regarding alternatives to comply and requirements.

Two years before plan is subject to diversification.

Review plan document as it relates to diversification.

One year before plan is subject to diversification.

Send preliminary diversification election forms to participants eligible to diversify. If final allocation report and stock valuation are completed, send final forms instead.

Within 90 days after the end of the plan year.

Send final diversification election forms to participants eligible to diversify.

As soon as possible after allocation and stock appraisal are completed.

Complete diversification for those choosing to diversify.

Within 180 days after the plan year end (provided final allocation and stock appraisal are completed by that date).

Diversification TimelineLK

Att

ain

s A

ge 5

5

01/0

1/19

90

Join

s P

lan

01/0

1/19

95

Pre

lim

inary

Exp

lan

ati

on

01/0

1/20

04

10 y

ears

pla

n

part

icip

ati

on

(elig

ible

for

div

ers

ificati

on

)

12/3

1/20

04

Pre

lim

inary

Ele

cti

on

Form

01/0

1/20

05

Retu

rns P

relim

inary

Form

03/3

1/20

05

(9

0 da

ys)

Ap

pra

isal an

d A

llocati

on

C

om

ple

te

04/1

5/20

05

Fin

al Ele

cti

on

Form

04/3

0/20

05

Execu

te T

ran

sfe

r

06/3

0/20

05

(180

day

s)


Election Forms

Preliminary 2004

Diversification Election Notice


Election Forms

Final 2004 Diversification Election Notice


Election Forms

Final 2009 Diversification Election Notice


Acting On The Election

Transfer to KL Corporation 401(k)

Take Cash Taxed as ordinary income and subject

to any applicable penalties

Roll over to IRA Take Stock

Put Option is available (closely held)


Diversification Calculation

K L

Number Diversified

Cumulative Shares

Diversified

(567.500) (567.500)

(7.500) (575.000)

(6.250) (581.250)

(3.750) (585.000)

0.000 (585.000)

(595.000) (1,180.000)

L. KelsoPlan allows participants to "diversify" 25% of their shares after 5 years of plan participation.

A B C D E F G H I J

Diversification Year

# Post 1986 Shares as of Beginning of

Year

# Shares Allocated During the

Year

Post 1986 Shares

Previously Dist in 2000

Post 1986 Shares

Previously Diversified

Total Post 1986 Shares

% Available for Diversificaiton

Maximum # Available for

Diversification

Less # Shares Previously Diversified

Net Available for Diversification

1 2,000.000 20.000 250.000 0.000 2,270.000 25% 567.500 0.000 567.500

2 1,452.500 30.000 250.000 567.500 2,300.000 25% 575.000 (567.500) 7.500

3 1,475.000 25.000 250.000 575.000 2,325.000 25% 581.250 (575.000) 6.250

4 1,493.750 15.000 250.000 581.250 2,340.000 25% 585.000 (581.250) 3.750

5 1,505.000 0.000 250.000 585.000 2,340.000 25% 585.000 (585.000) 0.000

6 1,505.000 20.000 250.000 585.000 2,360.000 50% 1,180.000 (585.000) 595.000

If the plan allows the participant to diversify more than the number of shares required under the Code, there are no provisions under the Code or regulations allowing those shares to be deducted from the amount available for diversification during the qualified election period. However, they must be included in determining the total number of post 1986 shares allocated to the participant's account.

Sticky Issues


Determining Years of Participation

Vesting:1,000 hours of service in a plan year

Eligibility:1,000 hours during initial year of employment and anniversaries thereof – or – if fewer than 1,000 hours during initial year of employment, measurement period reverts to plan year

1,000 hours ofservice withina 12-month

period

General yearof servicedefinition

ActiveEmployees



Code is unclear Conservative approach:

As long as a terminated participant has a vested benefit remaining in the plan, he/she is considered to be a “Participant” under the Internal Revenue Code; therefore, for each plan year that they have a vested balance, they have a year of participation for diversification purposes

What About Terminated With a Vested Account Balance?



There is no clear guidance; however, the conservative approach is to count years of participation from entry in the older plan.

What Happens When Plans Merge?

Mergesexisting

401(k) intoESOP

Right Away:Participants may have 10 years of

participation if you include

their years in the 401(k) plan

Employer sets up

new ESOP



Recommendation In both instances, draft documents to

specifically define years of participation for diversification purposes.


What About Reshuffling?

Each participant has same proportion of shares and cash

How do you keep track of shares?

Administratively maintain separate “buckets” for post 1986 shares

For qualifying participants, diversify within the plan and transfer diversified shares to cash investment

Any other suggestions?


Deadline Dilemmas

How do you meet the 90 Day and 180 Day deadlines?

Offer a preliminary diversification election form based on prior year information

Upon completion of appraisal and allocation, provide a final election form based on final information


Deadline Dilemmas

What if you miss the deadline? Creates an operational error for the

plan.

Correct the problem so that the plan is in the same position it would have been had the error never occurred; offer the participant the diversification right at the price that would have been paid when the election should have been made

age 55 diversification 18 th annual ohio employee ownership conference presented by dorn swerdlin...

Documents

dorn swerdlin swerdlin

swerdlin company eligibility

swerdlin company age

swerdlin company exceptions

shares slide

th year slide

qualifying shares

diversified minus slide