Organizing the Trust Accounting Information

Organizing the Trust Accounting Information
January 15, 2007

One of the keys to completing the annual ESOP allocation in a timely manner is organizing the trust accounting information as soon as possible. Here are things to consider when organizing and preparing the trust information to be sent to the internal or external recordkeeper.

ACCOUNT STATEMENTS

Account statements with ESOP activity should be organized and forwarded to the recordkeeper in a timely manner. In most cases trust statements are available within 15 days after the end of the plan year.

SUPPORTING INFORMATION

Supporting schedules should be provided, preferably in electronic format, for any other account activity not reported in the account statements as well as for information in the account statements that requires more detail. Here are some examples:

Schedule of Contributions – This schedule should contain the contributions, split by date, and include the amount and value of the contribution, breakdown between cash and shares, and what the proceeds were used for. See the discussion below for more details.
Schedule of Dividends (or S Distributions of Earnings) – This schedule should contain the dividends, split by date, and include the amount and what the proceeds were used for.
Schedule of Loan Payments – This schedule should contain the loan payments, split by date, and include the amount and the source of the funds (e.g. current cash contribution, current dividend, and existing cash balance).
Schedule of Distributions Paid –This schedule should contain the distributions, split by participant, and include the participant’s name, social security or other identification number, gross distribution amount, and breakdown between cash distributed and shares distributed. The distribution totals should equal the total distributions according to the account statements and any difference should be reconciled. In order to simplify the preparation of the benefit payment government filings, you may wish to include more information in this schedule.
Share Transactions – This schedule should reconcile the shares in the trust (allocated and unallocated) from the beginning of the year to the end of the year. It will most likely contain shares purchased, sold, and distributed. It should contain the participant’s name, social security or other identification number, and the amount and value of the shares transacted. If the purchase involved an ESOP loan, the support documents should be provided (e.g. Loan and Pledge Agreement, Amortization Schedule, and Promissory Note, Section 1042 documentation (if applicable))

CONTRIBUTIONS

Although the Schedule of Contributions is listed above, it is also worthy of mentioning separately. The determination of the final contribution is an important piece of the trust accounting puzzle. Since many contributions are accrued, the account statements may not reflect the final contribution amount. Therefore it is crucial to finalize that number as soon as possible so the recordkeeper can proceed with the trust accounting. Here are a couple of scenarios that may simplify the determination:

If all you are contributing to the plan is your scheduled loan payments and/or contributing cash necessary to fund the distributions that took place during the year, determining the final contribution should be easy. Make sure you communication your intentions to your recordkeeper so they can provide you with the amount.
If you would like to maximize your contribution, you will need to again need to notify your recordkeeper so they can provide you with the maximum contribution amount.

Even if you know that you will not make the contribution until later in the year (you have until the extended tax deadline), you will most likely need to know what the amount will be to proceed with your tax and financial accounting as well as the appraisal process. It is important to share this information with your recordkeeper as well to keep the allocation process moving.

If your accountants are not already assisting you with the contribution determination, you should also make sure that they are aware of the final contribution, as the valuation firm may be waiting for them to finish their work in order to complete the appraisal process.

If you are not sure about what your contribution will be or how the contribution determination process works, you should discuss it with your ESOP recordkeeper or consultant, as they will be able to answer your questions and guide you through the process so you can make the final determination.

STOCK APPRAISAL

The last thing that is needed to finalize the trust accounting is the stock appraisal. In order to keep the process moving, the trust accounting and the allocations are generally processed on a preliminary basis until the stock appraisal has been finalized. In most cases (but not all cases) the final value will only impact the ending value and not the cash and share allocations.