Capitol Region Breakfast Meeting, July 12, 2007

A group of over 20 attendees was informed and entertained by the dynamic duo of
Gary Tell, partner, O’Melveny & Myers, LLP, and former DOL attorney, and Paul Horn, WorkPlace Consultants, LLP, and former IRS attorney. Gary and Paul revealed that they first met 15 years ago when they both worked at the same law firm and, while they had spoken over the years, had not seen each other in close to ten years.

The discussion began with “ounces of prevention” you can compile with a good recordkeeper, thorough plan auditor (if your ESOP has 100 or more participants), and a good dialogue with your ESOP attorney, including his attendance at your ESOP trustee or plan committee meetings. ESOPs with under 100 participants should perform a self-audit as a preventive measure. If you discover a problem, you should consult with your attorney on submitting for correction under the IRS EPCRS and/or DOL VFCPprograms.

The first thing the IRS and DOL request upon audit is documentation of plan actions and decisions. It is critical that your ESOP plan governance house be in order with rooms full of meeting minutes, resolutions, accompanying plan amendments, and of course your alphabet soup of SPD, SMM, and SAR. Other documentation you can be expected to produce are your employee census, Forms 1099-R for distributions, cancelled checks representing your ESOP loan repayments or contributions, and your valuation report.  Remember to redact SSNs and use attorney client privilege if it applies to a specific request.

You also should have a distribution policy, a QDRO policy, and an investment policy if the ESOP holds cash. You should document ESOP voting by the trustee or by pass through to participants. If you are an S Corp., you also should have handy your anti-abuse test under section 409(p).
             
When it’s your lucky day and the auditors appear at your door be organized and hospitable.  Set aside a quiet room, provide one contact for all inquiries, and don’t volunteer information or get too chatty. Certainly be organized and labeled binders with the requested documents always make a good impression.

The IRS audit is concerned with tax qualification issues involving the operation of your ESOP. Some favorite issues are allocations (e.g., eligibility, share release method, section 415, section 1042 restrictions if applicable), vesting, and distributions (e.g., timing, forms).

The DOL audit is primarily concerned with fiduciary compliance and will focus on areas such as (1) distribution of required ERISA documents and providing participants with specific benefits required under the ESOP, such as voting, diversification, and right to sell stock, (2) the valuation used when purchasing, selling, or distributing stock, and (3) ESOP loan refinancing.

Before the dust settles and your audit is just a faint memory, make sure you receive a closing letter from the government that you can put in your files. A good time was had by all. Thanks to Ernest & Young for hosting this outstanding event.