ESOP Best Practices
As employee benefit plan (EBP) audit season is upon us, it is important to note what “good” governance, oversight, and management should look like. For employee stock ownership plans (ESOP) specifically, it is imperative to have the right people familiarized with the process to meet compliance and reporting standards while also achieving the company’s stated goals and objectives. Below are a few recommended steps to make sure you are on the right path.
- The first key to success is to be certain that you have the right service providers. ESOPs generally need a trustee, attorney, valuation company, third-party administrator/record-keeper, advisor, and plan auditor (if required). Regarding the trustee, the first decision is whether to use an internal trustee, e.g., employee(s), board member(s), or an external institutional trustee. A best practice is to engage an external institutional trustee who has the necessary experience and knowledge to serve as trustee and make decisions free of potential conflicts of interest or independence issues. For all service providers, do your research and make sure they have the credentials, experience, and knowledge to help you make decisions that comply with laws and regulations, help ensure the ESOP meets your business objectives, and help you understand how decisions that are made today could impact the ESOP and your company in the future. Ask the tough questions:
- “What is your experience/qualifications?”
- “How many and what types of ESOPs, e.g., size or industry, do you serve?”
- “Do you have references?”
- “Have you ever been involved in an ESOP complaint or litigation?”
- “How can you add value to our company and ESOP?”
- “What differentiates you as an ESOP advisor?”
- Second, management oversight is equally important. This includes carefully documenting decisions made throughout the year as well as consulting with your advisors frequently. When in doubt, it is much better to discuss potential decisions or issues with your advisors early in the process, rather than having to incur the cost and expense of correcting an issue after the fact.
- Third, there are many compliance matters to keep track of. Your Form 5500 filing is due seven months after your year-end with a two-and-a-half-month extension. In general, if you have more than 100 eligible participants as of the beginning of the plan year, you will need a plan audit to be filed with your Form 5500. If your company is growing, be sure to review and monitor this potential requirement, as audits take time. The takeaway here is to work with your advisors to develop a compliance schedule to keep your plan compliant with the applicable laws and regulations. Be sure you are tracking the proper eligibility requirements to allow employees into your plan as well as allocating shares to those in the plan. Your plan document should always be your guide. Remember the mission for your ESOP and make sure that it aligns with your plan document.
With the proper advisors, a plan document, and strong reviewing and monitoring processes in place, you can be well on your way to having a successful plan year. Reach out to an ESOP professional at FORVIS or submit the Contact Us form below if you have questions.