ESOP with a failing company
Hey monkeys,
Who the hell knows how ESOPs work? If a company is failing and intends to file for bankruptcy, are the employee's individual ESOP plans protected? My mothers company is failing terribly and the CEO is currently working on his 10-year transformation plan, but I believe that too will be a failure. She will be eligible to retire next year(age 61), so I'm telling her to run for the hills, but I want to understand how her distributions will be affected if the company does file for bankruptcy in say 7 years? If I understand correctly, she will receive payments in lump-sum distributions occurring every three years, is this right? Also, say she receives 2 of the distributions 6 years after retiring, and then the company files for bankruptcy in the 7th, will her 3rd distribution be protected?
I've already told her to roll over each distribution into an IRA to avoid taxation that ESOPs carry with them, but I want to find a way for her to secure her income. She's been with the place for 45 years, so I don't want her to lose everything she has worked for.
With all due respect - you don't want an answer to this question here. You want a documented response from a CPA who specializes in company benefits/plan structure on file. This is a big deal and you'll want your mother to take advantage of every protection she's entitled to. If you get a bad response here and act on it (or miss a key point because of bad info), she's stuck, just pay a professional.
I'd also be looking at any other vehicles the company has. Profit sharing, pension, 401(k). Even with a 401(k) it's possible that they only have a handful elections and that company stock is one of them - make sure none of your mother's other assets are invested in company stock wherever possible. If a psp/pension is invested in company stock you'll want to understand from a CPA/attorney what actions may be available.
You're probably right that she should be running for the hills if the situation is dire. But long term employees can have emotional attachment to their company and it might take some work to get through to her, especially if the company is putting out a corporate line that resonates with her. Also, if there's a 30% chance the company might go under, this is a case where you don't want to let the tax tail wag the dog. Get her out of everything you can as quickly as possible, but hire a CPA first to ensure the transactions are efficient.
Thanks for your response. We have informed our family CPA about the situation, but I figured I would ask here during the meantime.
pray they get acquired and someone is willing to take on that esop and perhaps make lump sum payments out to the employees.
See, this was my exact response when I initially spoke with my mother. In fact, Amazon execs have actually met with the company. Nothing has been determined, but the rumor is that eventually Amazon will acquire the company(2-3 yrs). But I just don't understand why a company that acquires another company would be willing to pay the current employees for their worthless(failing) shares? Maybe it's just me, but man ESOPs are confusing as shit.
Really depends on the FMV adjustment what the ESOP shares are worth. Know you are speaking to a professional- which is great. Hope things work out OK for your mom.
ESOPs have a lot of latitude on how they are structured. Not an expert by any means but I would highly recommend to see if your mother is eligible for diversification. Near retirement age- ESOP participants need to be allowed to withdraw up to 25% one time and then up to an additional 25% over 5 years for a total of up to 50% withdrawal from their ESOP plan to roll over into another qualified (IRA-type) fund. I believe the minimum age is somewhere around 60- similar to IRA rules. Have your mom see if she's ellible for a diversification withdrawal- and if so do it ASAP.
Another reminder for seeking professional advice. Most ESOPs are tied to the company's stock price. if the stock is worth $0.00 and that's the case, then the value of the ESOP is probably worth zero as well. This is a BIG deal. Don't cheap out and try to get an internet message board to answer your question, plan specifics matter a LOT here. Pay for a professional to look over the specifics.
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