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Employee Benefits Law Report Reporting on recent trends and developments affecting employee benefits

Category Archives: ESOPs

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ESOP boundaries: plan design versus fiduciary function

Posted in ESOPs

Greeting from Northeast Ohio. We have LeBron James coming home, the Republican National Convention, and something almost as exciting: thoughts about ESOPs!

As I mentioned in a prior blog, in Coulter v. Morgan Stanley & Co. the Second Circuit held that the decision to contribute employer stock rather than cash to a benefit plan was a settlor function, not a fiduciary function. This settlor/fiduciary distinction is critical to the foundation of ERISA and the future of employer-sponsored plans.

The United States Supreme Court’s Dudenhoeffer decision shortly after that surprised me because the Supreme Court has repeatedly made this …


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Dudenhoeffer update – The Supreme Court kills the Moench presumption but requires plausible pleadings

Posted in ESOPs

In a bit of a surprise, the United States Supreme Court declined today in Fifth Third Bancorp v. Dudenhoeffer to adopt the Moench presumption of prudence, which entitled fiduciaries of qualified defined contribution plans (including ESOPs) a presumption of prudence for continued investments in qualifying employer securities. In its holding, the Court did unanimously reverse the 6th Circuit’s ruling that a presumption of prudence exists only after the pleading stage. While the reversal itself may not come as a surprise, the Court’s rationale does, particularly given how the question accepted on certiorari was presented.

As noted in our prior blog


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The ESOP sponsor / fiduciary boundary dispute, employer contribution edition

Posted in ERISA Fiduciary Compliance, ESOPs

As a follow up to our blog on the ERISA sponsor / fiduciary boundary dispute, here is another case, Coulter v. Morgan Stanley & Co. Inc., from the Second Circuit. The employer decided to make contributions in the form of company stock, rather than cash. Then the employer’s stock price plunged in conjunction with the economic downturn. Plaintiffs alleged the employer breached its fiduciary duty by making the investment in stock. The district court dismissed the claims on the basis of the Moench presumption of prudence.

The Appellate Court affirmed the dismissal of the claims, but on a …


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The ESOP sponsor / fiduciary boundary dispute, accounting fraud edition

Posted in ESOPs

A common theme in many of our blogs is that of respecting boundaries. ERISA contains many examples of boundaries and compromises that are designed to balance on one hand the goal of encouraging employers to adopt employee benefit plans while on the other hand protecting the benefits of employees who participate in those plans. A common example of a boundary is the distinction between “settlor,” or general business decisions, and “fiduciary” decisions related to plan administration. Sometimes it is difficult to know which side of the boundary line a particular decision falls upon. When employers sponsor an ESOP, the boundary …


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ESOP Trustee Indemnification Stymied by Arbitrator’s Legally Unsupportable Analysis – Schafer v. Multiband Corp.

Posted in ERISA Fiduciary Compliance, ESOPs, Retirement Plans

I am not a fan of binding arbitration in the context of ERISA plans, and a new Sixth Circuit decision, Schafer v. Multiband Corp., demonstrates why.

Two individuals (Schafer and Block) founded a company. As part of a series of corporate transactions, two employee stock ownership plans (“ESOPs”) were formed. Schafer and Block were appointed as trustees of the ESOPs, and entered into indemnification agreements with mandatory arbitration clauses. While the DOL was investigating its suspicion that the ESOPs had purchased stock at inflated prices, and with knowledge of this, Multiband entered into a purchase agreement to buy the …


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Supreme Court Takes on Fifth Third Bancorp v. Dudenhoeffer ESOP Dispute

Posted in ERISA Litigation, ESOPs, Other Articles

As I mentioned in my Heimeshoff v. Hartford blog, the U.S. Supreme Court has agreed to review Dudenhoeffer v. Fifth Third Bancorp, now captioned Fifth Third Bancorp v. Dudenhoeffer. The Court granted certiorari on the question as originally framed:

Whether the Sixth Circuit erred by holding that Respondents were not required to plausibly allege in their complaint that the fiduciaries of an employee stock ownership plan (“ESOP”) abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by [ERISA], …


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Dudenhoeffer v. Fifth Third Bank at the U.S. Supreme Court: DOL Brief and the ESOP Sponsor / Fiduciary Boundary Dispute

Posted in ERISA Litigation, ESOPs

The DOL has filed a brief with the U.S. Supreme Court in the Dudenhoeffer v. Fifth Third Bank employee stock ownership plan (“ESOP”) dispute that made me think about Boundaries, a book about the importance of establishing boundaries, and compelling respect for those boundaries. In designing ERISA, Congress forged a delicate balance between protecting benefit plans and encouraging employers to provide those benefit plans. The U.S. Supreme Court reminded us in CIGNA v. Amara that this delicate balance includes carefully distinguishing the roles of plan sponsors and fiduciaries, even when one entity (e.g., the employer) wears both hats. The …


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Join Porter Wright and GBQ for a breakfast seminar on Friday, October 11 on ESOPs

Posted in ESOPs

Employee Stock Ownership Plans (ESOPs):
A Tax-Advantaged Strategy for Growth, Liquidity and Succession Planning

In an uncertain tax and financial environment, business owners are increasingly looking at ESOPs as a potential strategy for tax-preferred growth and business succession planning. Join Porter Wright and GBQ Consulting LLC as we present a morning seminar discussing the ins and outs of ESOPs.

Friday, October 11
8:00 – 8:30 a.m.

Registration and Breakfast

8:30 – 10:30 a.m.
Program

Topics to be discussed include:

  • What is an ESOP?
  • Why adopt an ESOP?
  • ESOP financing considerations
  • ESOP valuation considerations
  • Tax planning for selling shareholders
  • Is an

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Sutardja Decision Shows Employers How to Preserve Stock Option Flexibility In a 409A World

Posted in ESOPs

Many commentators were surprised by the recent federal court of claims decision to deny summary judgment in Sutardja v United States. Sutardja, which currently is headed for trial, involves the IRS assessing a public company executive with Code Section 409A penalties, including a 20% additional income tax plus interest, with respect to potentially discounted stock options. What’s surprising isn’t so much the court’s decision, but that the IRS chose this particular fact pattern to assess Code Section 409A penalties. The option grant procedures that the employer followed would not be confused with best practices, but they occurred before …


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ESOP Dividend Deduction Rule Targeted by Obama Budget Proposal

Posted in ESOPs

The just-released Obama budget proposal includes a proposal to eliminate the IRC Section 404(k) ESOP dividend deduction for large C corporations (or at least what the Obama administration describes as large for this purpose).  The Obama budget proposal would repeal the deduction for dividends paid with respect to stock held by an ESOP sponsored by a C corporation (excluding C corporations with annual receipts of $5 million or less).  The current provisions, as described below, allowing for immediate distribution or use of an applicable dividend would remain intact (although without the corresponding deduction).  These distribution and use rules would be …


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IRS Announces Cost of Living Adjustments for Retirement Plans

Posted in ESOPs, Retirement Plans

The Internal Revenue Service (“IRS”) recently announced cost of living adjustments affecting retirement plans. These new limitations are effective for tax year 2012. Many, but not all, applicable dollar limitations will increase. For this purpose, the IRS uses an adjustment process that is similar to the process used to adjust Social Security benefits (which also will increase effective in 2012).

Some of the more important increases relevant to retirement plans are as follows:

  • the elective deferral limit applicable to 401(k), 403(b) and certain 457 plans will be increased from $16,500 to $17,000;
  • the dollar limitation on the maximum annual benefit

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“Fiduciary” Regulation Change Put On Hold, Pending Revision and Economic Analysis

Posted in ERISA Fiduciary Compliance, ESOPs

The Department of Labor’s Employee Benefits Security Administration(EBSA) has put the brakes on its proposed rule on the definition of a fiduciary, which was slated to become final in the near future. EBSA’s goal for the regulatory change was to ensure that potential conflicts of interest among financial advisors would not compromise the quality of investment advice to individuals. Many employers were concerned that the regulation could increase the costs of investments in their 401(k) plans, and undermine efforts to educate employees about investments and retirement planning. The proposed regulation would also have turned employee stock ownership plan (ESOP) …


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Curtiss-Wright Corp. v. Schoonejongen Comes Back to Haunt Us — Follow Your Plan Amendment Procedures

Posted in ERISA Litigation, ESOPs, Health and Welfare Plans, Retirement Plans

We often are asked why plan amendment procedures vary from plan to plan, and why it is important to follow those procedures—however written. Sometimes there are unique reasons for the specified procedures, but very possibly the answer goes back to the 1990′s and a case called Curtiss-Wright Corp. v. Schoonejongen, which took us on an amendment procedure roller coaster ride. First, the district court in Curtiss-Wright invalidated a plan amendment to cease post retirement health care coverage on the basis that the plan failed to specify a valid “procedure for amending [the] plan, and for identifying the persons who …


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Update on What Fiduciaries Need to Know about Investments and Fees

Posted in ERISA Litigation, ESOPs

Plan fiduciaries generally understand that they have certain duties related to plan investments and service provider fees. Court decisions over the years have shed some light on these duties. Fiduciaries should already be doing the following to satisfy their fiduciary duties:

1. Obtain some measure of expertise in plan investments. Lacking expertise, a fiduciary should hire someone with the professional knowledge required to carry out the investment functions.

2. When selecting service providers, engage in a reasoned decision-making process and document the basis for decisions. The duty to act prudently focuses primarily on the decision-making process.

3. Pay only reasonable


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DOL Urges Sixth Circuit to Weaken Presumption of Prudence of Plan Fiduciaries in Stock Drop Cases

Posted in ERISA Litigation, ESOPs

The United States Department of Labor (“the DOL”) has challenged the dismissal of a 401(k) plan fiduciary breach claim on two grounds, in an amicus brief filed with the Sixth Circuit Court of Appeals, See Pfeil v. State Street Bank & Trust Co., E. D. Mich. No. 09CV12229; (Brief available here). One argument the DOL is rejecting is a position that affords fiduciaries of 401(k) plans and ESOPs a presumption of reasonableness in stock drop cases. The DOL’s second argument is that under the ERISA Section 404(c) safe harbor, fiduciaries may still be liable for the imprudent selection …


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