The Language of ESOPs
June 27, 2016
By Tina Fisher (215.508.7717, firstname.lastname@example.org)
Does it ever seem like the world of retirement plans (especially ESOPs) speaks a different language? Words are constantly being used that you do not hear in normal conversation, and to add to the confusion depending on who is using the words they may have different meanings. For those of us who speak the language on a daily basis, it’s just another day at the office. But it is important to understand the terminology, so that you can successfully fulfill roles and responsibilities as they relate to the ESOP. Our goal over the next series of emails is to address several topics that come up frequently in discussions with our clients.
You may ask why if you are outsourcing the administration of the ESOP to SES Advisors, why is it important for you to be fluent in “ESOP” as well. While it is true that SES is assigned the task of all the record keeping and compliance testing that is required during each annual administration cycle, by doing so we are filling the role of a third party administrator (TPA) while you are still required to fill the role of plan administrator. So a good place to begin this series is to discuss the role of a plan administrator and how SES as your TPA can team up with you to help you meet your responsibilities.
The plan document generally designates who is responsible for the administration and operation of the plan. This person(s) may be defined in the document by name, group, or the procedure under which the administrator is designated (e.g., by the board of directors). If there is no specific plan administrator designated, the employer who sponsors the plan is considered the plan administrator. The following responsibilities must be fulfilled by a person or persons at the employer:
- Determine which employees are eligible to enter the plan.
- Direct the payment of allowable plan expenses from the trust.
- Furnish all required notices to participants including the summary plan description, summary annual report and participant statements.
- Determine who is eligible for a distribution and provide the necessary forms and tax notices in the time period required.
- Final authority for interpreting the plan.
- Keep all records necessary for maintenance of the plan.
- Complete all required filings with government agencies.
- Establish procedures for determining if a Domestic Relations Order is qualified.
In case any responsibilities have not been included in the list above, in summary a plan administrator has the exclusive responsibility and authority for the operation and administration of the plan with some exceptions (such as those duties allocated to the trustee under the trust agreement or allocated to others by law).
If these responsibilities seem daunting, the below best practice suggestions can help:
- Know your plan. Carefully read and understand the plan document, Summary Plan Description, any written policies and all forms being used in the administration of the plan.
- Know the rules. Retirement plans are governed by IRS and DOL regulations and while many of the same rules of your other retirement plans apply to ESOPs, ESOPs have their own unique set of rules as well. There are many options for learning about ESOPs including national and local chapter ESOP conferences, as well as ESOP publications and webinars. In addition, SES Advisors consulting group is available to help not only educate your participants, but educate plan administrators, committees and internal trustees.
- Know your SES Administrator. In hiring SES Advisors as your TPA, all of the eligibility determinations, allocations, distribution calculations, government filings and disclosures to participants have been outsourced to us. While you are still responsible for the final review of these items and making any discretionary decisions with respect to the operation of the plan, our role is to take as much off your plate as possible. In addition, with an average of twenty years experience per administrator, and administration of 450 plans firm wide, we have seen just about every ESOP plan issue out there. Please contact your SES Administrator with any questions you have or services you might need.