ESOP reshuffling is a tool you can use to manage your ESOP repurchase obligation and get stock to the so-called ESOP “Have Nots.”
Transcript
Speaking of benefits, this is Kevin Long. In this episode, we’re going to talk about tools you can use to manage your ESOP repurchase obligation and get stock to the so-called ESOP “Have Nots.”
There are five principal tools that ESOP companies can use to achieve these objectives. They’re collectively known in the ESOP industry as the five R’s – recycle, redeem, rebalance, releverage, and reshuffle. Today we’re going to talk about the reshuffle option. This how it works.
At the end of each plan year, the Trustee exchanges stock in terminated participants’ accounts with cash drawn from active participants’ accounts. This all happens within the ESOP.
The value of their benefits doesn’t change, just how much they’re invested in cash.
This is done regardless of when the inactive participant is eligible to begin distributions from the ESOP.
The reshuffle maximizes the amount of stock in the active participants’ accounts, while they continue to affect the value of the stock by working to continue the company’s success.
At the same time, it protects inactive participants from stock value fluctuation by diversifying them as soon as possible.
Reshuffling is also a classic strategy for managing the repurchase obligation, because shares can be liquidated at the current known stock value. That eliminates projected uncertainty.
Now, this option may not be preferred for the ESOP that wants to accumulate cash to purchase additional stock in the future.
But if the company can afford to contribute enough cash to the ESOP to both cash out terminated participant accounts and accumulate cash for future stock purchases, then this may not be a concern.
The IRS has published requirements that must be met, and variations on the theme to customize the approach based on needs are available.
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.
ESOP Reshuffling – Learn More
Read more about this topic in ESOP Reshuffling – Good For Everyone On Deck … And Off.
