How to Determine the Release of Shares

  • Tuesday, August 1, 2017

Print This Page Share

When an ESOP borrows money from the company sponsoring the plan or from a selling shareholder, the ESOP will provide the shares of company stock purchased with the borrowed funds (aka promissory note) as security or collateral for the repayment of the borrowed funds. The shares of company stock provided as collateral for the repayment of the ESOP’s promissory note will be characterized as “unallocated” or “suspense” shares because they are maintained by the ESOP in a “suspense account” while they remain pledged as collateral to the noteholder. The IRC requires that the suspense shares must be released and allocated to ESOP participant accounts as the ESOP’s promissory note is repaid. See ESOP Stock Purchase Transaction Structures for more information. 
 
The release of the suspense shares from the suspense account must be effectuated by one of two formulas established by the IRC. 

  1. Suspense shares are released based on both principal and interest payments made under the loan (Principal Plus Interest Method); or

  2. Suspense shares are released based on only principal payments made under the loan (Principal Only Method).

The Principal Only Method can be utilized ONLY when the ESOP’s promissory note is repayable based on its terms in 10 years or less. If you have an ESOP loan that has an original term greater than 10 years or that extends beyond 10 years as a result of a refinancing or modification of the term of the ESOP promissory note, you should consult with legal counsel to determine the appropriate correction.
 
The formula for the release of shares from the suspense account resulting from the annual repayment of the ESOP’s promissory note using the Principal Plus Interest Method is as follows:

 

 

The number of suspense account shares immediately before
release for the current plan year

Number of Shares Released =

X

 

Amount of principal and interest paid for the current plan year

 

Sum of the numerator plus the principal and interest to be paid
for all future years

For example, if there are 1,000 suspense shares, total principal plus interest outstanding of $4M, and the current payment of principal plus interest is $400,000; then the suspense shares to be released and allocated to the participant accounts in the current plan year is equal to 100 shares (1,000 shares X ($400,000 / $4M) = 100 shares). The formula does not take into consideration at all the value of the suspense shares that are released from the suspense account annually.

Steve Cohen

Shareholder

603-695-8504
Send an Email

Tabitha Croscut

Shareholder

603-695-8542
Send an Email

Rebecca S. Kane

Associate

603-695-8635
Send an Email

Harper R. Marshall

Shareholder

603-695-8645
Send an Email

Patricia M. McGrath

Shareholder

603-695-8537
Send an Email

Joseph P. Rheaume

Associate

603-695-8733
Send an Email

Jon B. Sparkman

President & Shareholder

603-695-8507
Send an Email

Tabitha Croscut

Shareholder

603-695-8542
Send an Email