In this podcast we’re going to talk about the advantages and considerations to ESOP releveraging, one solution for getting stock to new employees.
Transcript
Speaking of benefits, this is Sheryl Bayani Alzona.
For ESOPs that find themselves in what is known as a “have and have-nots” situation, releveraging is one solution. In this podcast we’re going to talk about the advantages and considerations to that solution.
Let’s start with how releveraging works.
At the most basic level, it starts with the ESOP trust re-purchasing shares that were previously distributed. The purchase is financed with a loan from the company to the ESOP. The shares are then placed in a loan suspense account and released over time as contributions are used to pay down the loan.
There are significant advantages and important considerations to a releveraging, and the advantages can be significant:
- It
creates allocations for future shares to new participants. But it is also best
known as a way to help manage the repurchase obligation.
- Beyond
that, it can be a redemption strategy that can reduce 409(p) concerns.
- The
contributions used to pay the internal loan are tax deductible.
- And,
it offers a way to buy out terminated participants.
But of course with any ESOP transaction there are going to be financial and legal/fiduciary considerations involved.
- There will be transaction fees for the valuation and third party administrator.
- The Trustee will likely require a fairness opinion
- Corresponding to the transaction, there will an immediate cash flow dilution.
- And, there’s always a level of fiduciary risk when the ESOP purchases shares from a party in interest.
The important thing to remember is that the transaction requires careful planning and expert guidance to understand and deal with the complexities involved.
Thank you for listening. If you need specific guidance on this topic, let’s start a conversation.
This podcast is for general informational purposes only. It does not create an attorney-client relationship between Employee Benefits Law Group and the listener or reader and does not constitute legal advice for a specific situation.
