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In-Service Distribution Forms
Under Section
401(a)(28) of the Internal Revenue Code, every ESOP must
provide
participants with the option to "diversify" a portion
of their Company Stock account balance
once they have completed
10 years of participation in the Plan and have attained age
55.
Sample Forms Packages #28 through #36 provide sample forms
for use when the
"diversification" requirement is satisfied
by having the Plan make distributions of the
required amounts.
Some ESOPs contain provisions that permit participants to
obtain in-service distributions
in addition to diversification
distributions. Since the forms and procedures for in-service
distributions
are almost identical to the forms and procedures for diversification
distributions,
we have combined these
forms with the diversification forms set forth in Sample
Forms
Packages #28 through #36. In each case, however, we
have separately described the
procedures that apply to in-service
distributions, and we have provided separate sample forms
and
sample letters in those cases where the language for in-service
distributions is different than
the language for diversification
distributions.
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S Corp. Distribution Forms
Under Section 1361 of the
Internal Revenue Code, an Individual Retirement Account
(“IRA”) is
not an eligible shareholder of an S corporation. Accordingly,
S corporations must be careful that
shares of Company Stock
are not distributed or rolled over to an IRA, since this would
terminate
the S election and cause the employer to become a
C corporation.
In Rev. Proc. 2003-23, the Internal Revenue
Service provided some relief from this harsh
result. In
this revenue procedure the IRS announced that the S election
would not be terminated
if (i) the terms of the ESOP require
that the IRA immediately sell the shares back to the
company,
(ii) the employer purchases the shares from the IRA on
the same day, and (iii)
the IRA is not treated as having
received any share of the S corporation’s earnings.
In Rev. Proc. 2004-14, this relief was further
extended to situations where the shares of
Company Stock
are repurchased by the ESOP trust, provided that (i) the
trust purchase the
shares from the IRA on the same day,
and (ii) the IRA is not treated as having received any
share
of the S corporation’s earnings.
Because most IRAs are administered by large
banks and insurance companies that are not
accustomed to
receiving shares of Company Stock of privately-held companies,
and
because there is a substantial risk that the IRA trustee
may fail to execute the sale of Company
Stock on the same
day that the stock is received, we have drafted all of the
S Corp. Stock
Distribution Packages (Sample Forms Packages
#22 through #27, #35 through #36, and
#47 through #48) to
provide that shares of Company Stock may only be distributed
to the
participant, and may not be distributed as a direct
rollover. Under this procedure, there is
no withholding,
since the distribution is entirely in shares of Company Stock.
The shares are
then repurchased by the company or by the trust,
and the participant is then free to rollover the
proceeds
to his or her IRA. Under this approach, the IRA trustee
never receives any shares of
Company Stock, thus avoiding
the risk that the IRA trustee may fail to sell the shares
on the
same day. The only risk of this approach is
that the participant must complete the rollover
within 60
days of the date of distribution.
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Automatic
Rollovers
On September 28, 2004, the Department of Labor published
final regulations regarding automatic
rollovers. Under these
regulations, which take effect for all "mandatory distributions"
on or after
March 28, 2005, if a plan contains a provision
which allows the plan administrator to distribute all
amounts
of $5,000 or less without participant consent, and a participant
does not elect to have
such distribution paid directly to
an eligible retirement plan or to receive the distribution
directly,
the plan administrator must transfer such distribution
to an individual retirement account (see
Department of Labor
Regulation §2550.404a-2, as set forth in 29 CFR Part 2550,
published
September 28, 2004).
Accordingly, for all distributions on or after March 28,
2005, the user will need to make the
following changes to
the forms contained in this manual:
| 1. |
For all Sample Forms Packages relating
to cash distributions, the second sentence of the
last paragraph
of Exhibit
B of such packages and the "Failure to Elect" section
of Exhibit
C of such packages will need to be revised
to read as follows:
“ If your distribution is $5,000 or
less and you do not return the enclosed Withholding/Rollover
Election
Form within 30 days or receipt, the Plan Committee
will roll over your distribution, in
cash, to a rollover
IRA established in your name at a bank or other financial
institution.”
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| 2. |
For all C-Corp Sample Forms Packages relating
to stock distributions, the second sentence
of the
last
paragraph
of Exhibit B of such packages and the “Failure to
Elect” section
of
Exhibit C of such packages will need to be revised
to read as follows:
“If your distribution is $5,000 or less and you do
not return the enclosed Withholding/Rollover
Election
Form within 30 days of receipt, the Plan Committee will
roll over your distribution, in
stock, to a rollover
IRA established in your name at a bank or other financial
institution.”
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