ESOP Lawyer | ESOP Transaction Attorneys | ESOP Advisors

What is an ESOP?

An ESOP can be a highly effective liquidity and diversification strategy for business owners, while also providing additional employee incentives and sustaining local operations. The ESOP lawyers at Devine Millimet are uniquely qualified to assist owners of companies in assessing the feasibility of ESOPs in light of their personal objectives and the financial capability of their company. We counsel businesses in all industries to understand the benefits, the pros, and the cons of establishing an ESOP. Additional benefits of entering into an ESOP can be significant federal tax advantages to the owners and to the underlying company. 

ESOP transactions require extensive understanding of the tax and business considerations, rules, and regulations.  Our experienced Team has guided many companies and their owners throughout New England and across the US with their personalized ESOP investigation, feasibility, and transaction process. 

The Devine Millimet Team also has extensive experience representing both individual and institutional ESOP trustees in connection with their fiduciary role in an ESOP’s sale or purchase of company stock and with ongoing decisions. In a time when there is more focused attention by the regulatory agencies that oversee ESOPs, it’s important for ESOP trustees to have access to experienced ESOP legal counsel.

Beyond the flexible nature of the ESOP as an ownership transition strategy, the ESOP serves as an additional retirement benefit plan for employees participating in the ESOP. Our Team can assist companies ensure the ongoing compliance of the ESOP to ensure it remains a qualified retirement plan eligible for tax deferral.

Please call a member of the Devine Millimet ESOP Team today to explore whether an ESOP might be the right ownership transition solution for you!

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Contact us today to learn more about how the attorneys at Devine Millimet can help you with your legal needs.

            Common Questions About ESOPs

            Q:  One of our employees is seeking a divorce and they have asked for a distribution to their ex-spouse of 50% of their vested ESOP account value.  Can we transfer 50% of the ESOP account value to the ex-spouse?
            A:  Generally a participant’s ESOP account is not assignable, meaning it cannot be transferred; however, a qualified domestic relations order (QDRO) is an exception to the antiassignment rule which permits the ESOP to pay benefits to someone other than a participant pursuant to the terms of the QDRO.  In the absence of a QDRO or if the domestic relations order is not qualified, any payment of benefits to someone other than the participant results in disqualification of the ESOP and possible fiduciary liability.  A DRO must meet a list of requirements to be considered qualified and every ESOP should have QDRO procedures.

            Q:  An employee is filing bankruptcy and is concerned about access to his/her vested ESOP account balance.  Is a participant’s ESOP account excludable from his/her bankruptcy estate under Bankruptcy Code section 541?
            A:  Yes, the Supreme Court has held that the antiassignment provision in ERISA Section 206(d) is enforceable, which results in the exclusion of the ESOP benefit from the bankruptcy estate of the plan participant.


            Q: Can an ESOP participant’s account be assigned or levied against?
            A:  An ESOP participant’s account as a qualified plan accrued benefit is protected from assignment or alienation under IRC Section 401(a)(13)/ERISA Section 206(d).  The two exceptions to this are a Qualified Domestic Relations Order and a federal tax levy.  The IRS may enforce a tax levy against a participant’s ESOP account; however, the IRS generally can’t demand payment from the ESOP until the time the participant is entitled to a distribution from their ESOP account.  This exception does not extend to state tax levies.
            The ESOP account is also protected from the company’s creditors because the ESOP assets are held for the exclusive benefit of the participants and their beneficiaries and are not part of the company’s general assets.


            Q: Why does the independent trustee in an ESOP transaction need separate legal counsel?

            A: The ESOP Trustee’s attorney is serving the role as Buyer’s counsel in a typical M&A transaction – the ESOP is the Buyer (or seller in some cases).  The Trustee’s attorney will review and negotiate the transaction documents on behalf of the Trustee and should be engaged in a review of the legal due diligence information.  When we serve as Trustee’s legal counsel we prepare a lengthy diligence memo for the Trustee and also ensure that all formal meetings of the Trustee are documented in minutes.  Trustee’s counsel should have sufficient experience and knowledge to be awareness of the requirements and expectations that the Department of Labor and Internal Revenue Service have regarding the Trustee’s process and assist the Trustee in procedurally complying with those requirements and expectations, which will enable the Trustee and the Company to provide acceptable responses in any audit post-closing.
            Depending on the attorney’s billing rate, it would be very difficult to adequately complete a transaction as Trustee’s counsel for $25,000, and there are very few ESOP lawyers that will fix the fee due to the number of unknowns that are out of their control, such as what information will be uncovered during the due diligence review process.


            Q: As an ESOP plan sponsor, can I change the allocation eligibility requirements of my ESOP to add or remove requirements after the ESOP is adopted?

            A: Yes.  An ESOP can require an employee to be employed on the last day of the plan year and/or to complete at least 1,000 hours of service to receive an annual allocation of employer contributions or company stock for the plan year, provided the legal coverage requirements are satisfied.  These are referred to as the allocation eligibility requirements and are separate and distinct from the participation eligibility requirements. Generally, new ESOPs will define the plan’s allocation eligibility requirements when the ESOP is first implemented, and those requirements are not changed for the life of the ESOP; however, the allocation eligibility requirements can be modified prospectively.  For example, if the ESOP’s current allocation eligibility requirement is only completion of 1,000 hours of service during the applicable plan year, the plan sponsor could later decide to add the requirement of employment on the last day of the plan year  to future plan year allocations. 

            Adding an allocation eligibility requirement in a current plan year could result in a reduction of participants’ accrued benefits (i.e., a participant has worked 1,000 hours by August 1st and the sponsor adds a last day of plan year employment requirement to the plan on August 30th; if the participant terminates prior to year end, the participant loses the allocation for that plan year), which would be a violation of the anti-cutback rule.  Thus, it is much harder to change the eligibility requirements for a current plan year.

            Another feature of the allocation eligibility requirements that ESOP sponsors consider at the outset is how to treat death, disability and normal retirement age terminations during a plan year.  Should those categories of terminations be excluded from the 1,000 hours of service requirement?  Should they be excluded from the last day of plan year employment requirement? Or should they be excluded from all allocation eligibility requirements and automatically receive an allocation no matter what?  Additionally, some ESOP sponsors decide to treat the three categories differently.  For example, the normal retirement age terminations may not be required to meet the last day of plan year employment requirement, but they must still have 1,000 hours of service during the plan year; whereas, the death and disability terminations might be excluded from both requirements.  Again, these are features of the allocation eligibility requirement that can be modified prospectively.

            A couple common questions asked about these requirements deal with certain categories of employees.  First, what happens when you have seasonal layoffs.  If the ESOP has a last day of plan year requirement, will those employees never receive an allocation in the ESOP?  The answer depends on the treatment of seasonal layoffs.  Most companies do not remove those employees from payroll and consider them terminated, but rather they are temporarily laid off and remain on payroll to return to active employment in the next plan year.  If that’s the treatment of such seasonal employees, then they will meet a last day of plan year requirement by remaining on payroll as an employee of the company.  Second, what if you have employees that move from union to non-union, how does that impact the participant where there is a last day of employment requirement and they might be a union employee on the last day of the plan year?  Whether the participant is categorized as union or non-union, the employee would be considered to meet the last day of plan year employment requirement so long as he or she is an employee on the last day of the plan year.


            Q: Is my ESOP plan required to regularly be submitted to the Internal Revenue Service (IRS) for confirmation that it remains qualified as an employee stock ownership plan?

            A: Effective January 1, 2017, the IRS changed the submission requirements and eliminated the five-year remedial amendment cycle system for all individually designed plans, including ESOPs.  Prior to January 1, 2017, ESOPs were required to submit determination letter applications every five years within their “cycle” based on the plan sponsor’s EIN.   The IRS now accepts determination letter program submissions for individually designed plans for ONLY initial plan qualification (e.g., newly adopted ESOPs) and qualification upon plan termination.  There is no longer a requirement for ongoing ESOPs to regularly submit to the IRS for a determination letter.  However, each year the IRS issues a Required Amendment List, which establishes required changes and the applicable period of time within which those changes must be made to plans, referred to as the remedial amendment period.  There were no items included on the 2018 Required Amendment List.  It is important for qualified plans to stay in compliance with the required changes established by the annual Required Amendment List to ensure in the event of an audit that the plan sponsor will not be assessed a penalty fee for noncompliance. 

            Additionally, the IRS has indicated in guidance that determination letters issued to sponsors of an individually designed plan (e.g., an ESOP) on or after January 4, 2016, will not include an expiration date.  Such guidance also confirmed that expiration dates included in determination letters issued prior to January 4, 2016 are not operative.