A new year brings a set of new rules and regulations ESOP plan sponsors should know. This is true for 2024, although, fortunately, it is not as burdensome as in previous years. The following are several changes that may pertain to your ESOP or your company.
Cash-Out Limits
When ESOP participants terminate with a vested account balance between $1,000 and $5,000, the plan sponsor can cash out participants without their consent as long as the distribution is rolled over to an IRA on behalf of the participants. With the SECURE 2.0 Act of 2022, this cash-out limit increases from $5,000 to $7,000 for distributions processed after December 31, 2023. This new threshold applies to the ESOP distributions which will be processed in 2024 and based on the 2023 year-end balance. Plans with former employees with small, vested balances could benefit from this change.
The plan document’s distribution section will need to be amended in 2024 to take advantage of the change.
Required Minimum Distributions (RMD)
The two SECURE Acts (SECURE Act of 2019 and SECURE 2.0 Act of 2022) have confused ESOP plan sponsors on the required age for an RMD. Here is an attempt to simplify the requirements:
- If an employee is deemed to be a 5% (or more) shareholder of a company (factoring in any warrants or options), an RMD is required once the employee attains the RMD age regardless of employment status.
- All other employees can delay RMDs until they attain the RMD age AND terminate employment.
What is the RMD age? It depends on the employee’s age when they are deemed a 5% or more shareholder or terminate employment. A helpful cheat sheet to determine the appropriate RMD age is:
| Birth Date or Year | RMD Age |
|---|---|
| 6/30/1949 or earlier | 70½ |
| 7/1/1949 – 12/31/1950 | 72 |
| 1/1/1951 – 12/31/1959 | 73 |
| 1/1/1960 or later | 75 |
Remember, an RMD is required from each employer-sponsored plan, i.e., 401(k) plan and ESOP. Unlike the rules for IRAs, you cannot aggregate the account balances of multiple retirement plans and elect a distribution from just one plan.
Changes to the 2023 Form 5500
In February 2023, the Federal Register Notice announced a change in the method of determining which employee benefit plans will require an audit for 2023. This change reduces time and fees incurred by the plan sponsor if the ESOP moves from a large plan (requires an audit) to a small plan (does not require an audit). Historically, independent plan audits have been required for benefit plans with 100 or more eligible participants on the first day of the plan year. For the 2023 Form 5500, the requirement for an independent audit will be based on the number of account balances and not the number of eligible employees. (The 80-120 exception rule still applies even with the new definition.) This change will be a relief for companies that sponsor an ESOP plan where employees meet the eligibility requirements to enter the plan, but fewer employees meet the allocation provisions to receive shares in the plan.
If you have questions or need assistance, please reach out to a professional at FORVIS.