Owners of closely held businesses, particularly first-generation owners, often have a difficult time finding a suitable succession plan. These owners are faced not only with phasing out of their labor of love, but choosing a new direction for the thing they created. That new direction often starts by looking at third party investors and buyers, which may consist of competitors or private equity. If the owners find the third-party market undesirable, they may seek out alternatives. Our blog post today looks at three “internal” succession alternatives that owners may want to consider, particularly those that are driven by a desire to preserve legacy and/or protect the workforce, including existing management.
Equity Incentive or Phantom Equity – Equity and phantom equity incentive arrangements tend to be small cogs in the business succession strategy since traditional equity incentive plans typically grant only between 5% and 15% of outstanding ownership. These arrangements generally transition ownership in exchange for services (and sometimes cash payments or notes) from employees, often in the form of stock options, restricted stock, or phantom equity. Phantom equity allows owners to replicate the economics of ownership without transferring actual ownership. For succession planning purposes, these plans are typically the incentive/retention tool used to increase business value for a later exit event.
ESOPs – Employee Stock Ownership Plans (ESOPs) are a vehicle in which ownership is sold to a qualified retirement (employee benefit) plan. ESOPs are not new, but they are riding the apparent swell of support for employee ownership in the U.S. (e.g., see the law change in 2022 under SECURE 2.0 requiring the Department of Labor to promote worker-owned businesses). Some states have adopted tax credits and other incentives to assist with forming and maintaining employee-owned businesses. For example, Colorado-headquartered businesses can currently qualify for a tax credit of up to $150,000 to offset the cost of forming an ESOP. ESOP strategies are pursued primarily for their significant tax advantages and owners seeking preservation of legacy. Potential tax advantages include deferral of gain/tax, increased cash flow due to reduced tax at the business level, and significant estate planning opportunities. Sales to ESOPs can be partial or full sales of ownership and are often leveraged transactions, allowing owners to receive payment for their shares immediately.
EOTs – Employee Ownership Trusts (EOTs) are a developing model in which ownership is sold to a perpetual trust that often has a social purpose (including employee-centric purposes). Unlike ESOPs, EOTs are in their infancy in the U.S. Ownership can be transferred to EOTs in a gift or, as with ESOPs, in a sale transaction. EOTs do not provide the tax advantages that ESOPs provide under current law, but they can be structured to provide greater legacy protection and may be a better fit for certain workforces due to the flexibility in how and when the ownership income is distributed to employees.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00Kevin Selzerhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngKevin Selzer2024-05-13 12:00:352024-05-13 12:00:35Sweet Child O’Mine – Business Transition with Benefits
“Missing participants” have long been a thorn in the side of plan sponsors and administrators, as they are owed a retirement benefit, but are unable to be found or unresponsive to plan communications. As a partial solution, Congress directed the DOL in the SECURE 2.0 Act of 2022 to create a “Retirement Savings Lost and Found”—an online searchable database that would connect missing participants with their retirement benefits—by December 29, 2024. The DOL had contemplated populating the database with information from Form 8955-SSA, which plans already submit to the IRS. However, the IRS has refused to provide the information to the DOL, citing privacy concerns regarding confidential tax information. This has caused the DOL to look to sponsors of ERISA plans to voluntarily provide participant information to populate the database. While this may be a good idea in principle, it creates many obstacles. Read more
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00Brenda Berghttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngBrenda Berg2024-04-26 14:23:452024-04-29 10:58:35Just Because I’m Missing, Doesn’t Mean I’m Lost: Should Plan Sponsors Provide Data for the DOL’s Missing Participant Database?
“Georgia” on your mind? As we look towards the upcoming Masters golf tournament weekend, our minds turn to the condition of the greens (exquisite), the players tee off order (does afternoon help or hinder Tiger on an expected rainy day?), and who will make that amazing chip shot out of the bunker to save par. It may not get quite the level of TV viewership of other sporting events, but benefit plan administration is a lot like golf: a series of pars, birdies and bogies, and—oh my, not a double bogie!
If you’re hitting par with your benefit plans, they’re operating smoothly, participants are happy with the offerings, and you’re in compliance with the most obvious regulations. All is good, but you probably won’t earn a green jacket. Read more
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00Becky Achtenhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngBecky Achten2024-04-10 16:02:102024-04-10 16:02:10ERISA, ERISA…Just an Old Sweet Song Keeps ERISA on my Mind
There has been a shift taking place in ERISA litigation and compliance that could significantly impact group health plan fiduciary requirements. We anticipate group health plan fiduciary standards will evolve along the same lines as what occurred in the 401(k) industry after the ERISA 408(b)(2) rules became effective in 2012.
401(k) plans for years have been subject to fee disclosure and relatively well-defined fiduciary standards of conduct. Much of the improvement in 401(k) fiduciary practices over the past decade can be attributed to the ERISA 401(k) fee disclosure requirements that went into effect in 2012 under ERISA 408(b)(2) and the resulting fee litigation fueled by the ERISA 408(b)(2) fee disclosure rules. As a result of the ERISA 408(b)(2) and the related litigation, employers and plan fiduciaries, often with the aid of counsel, have become significantly more proficient in monitoring fees and negotiating agreements with 401(k) plan TPAs and investment service providers.
The Consolidated Appropriations Act (CAA) in 2021 extended the ERISA 408(b)(2) fee disclosure requirements to group health plans. Based on what took place in the 401(k) industry after 2012 when the ERISA 408(b)(2) disclosure went into effect, we anticipate the ERISA 408(b)(2) fee disclosure requirement, now also applicable to group health plans, will make it easier for plan participants to bring breach of fiduciary duty claims against employer and plan fiduciaries. There are already several such cases currently making their way through the courts.
In addition to the ERISA 408(b)(2) fee disclosure requirement, group health plan fiduciaries now have a better line of sight into the structure and economics of their group health plans than ever before. This insight comes in the form of a series of new disclosure requirements that require plans to obtain and publish network and out of network payment rates, and to report plan drug and service cost information to HHS. Further, the CAA now requires employers to prepare periodic reports demonstrating compliance with the Mental Health Parity rules. These new rules give employers and plan fiduciaries unprecedented leverage with their service providers through increased transparency and improved awareness of the structure and economics of their group health plans.
With this greater knowledge and understanding comes more risk of criticism that an employer or plan fiduciary could have looked closer—and should have looked closer—at fees and plan design in carrying out their fiduciary responsibilities. We think these new group health plan transparency and disclosure rules will drive new litigation against group health plan fiduciaries similar to what occurred in the retirement plan industry after ERISA 408(b)(2) became effective for 401(k) plans.
Employers and plan fiduciaries should be considering now how to formalize appropriate compliance structures to ensure that reasonable fiduciary standards are being applied to group health plan administration. Our general recommendation is to adopt similar group health plan governance structures and practices that are now common in 401(k) plan administration. These governance structures may take on different forms than what we see in the 401(k) industry, but employers should be thinking now how best to match step with the shifting fiduciary standards applicable to group health plans.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00Bret Busackerhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngBret Busacker2024-04-01 11:05:062024-04-01 12:22:17Go Your Own Way (Or Maybe Not): New Heightened Fiduciary Standards are Coming to Group Health Plans
A recent decision by a federal district court in Ohio in a health plan benefits dispute highlights the importance for health plan fiduciaries to properly review benefit claim denials to ensure that the claims administrator’s basis for denial is appropriate and that the claims administrator has properly considered information provided by the participant.
In this case, the participant sued after he was denied coverage for more than $100,000 of medical bills related to a broken ankle suffered when he was kicked by his bull calf. Even though the participant worked as an HVAC division manager, the health plan’s third-party administrator denied the claims based on the plan’s exclusion for on-the-job injuries because the participant owned a cattle farm from which he sold beef. The court ruled that the participant was entitled to coverage for his medical expenses because the health plan fiduciaries had the burden of demonstrating the plan exclusion applied. Read more
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00Alex Smithhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngAlex Smith2024-03-06 13:13:582024-03-06 13:16:37Should’ve Been a Cowboy, Court Inflicts Pain on Health Plan Sponsor After Participant Kicked by Bull
The Employee Plans Compliance Resolution System (“EPCRS”), as set forth in Revenue Procedure 2021-30, allows plan sponsors to correct “Qualification Failures,” which are defined as any plan document, operational, demographic or employer eligibility failures. Failure to follow the terms of a plan constitutes an operational failure.
Operational Failures can be corrected without IRS supervision under the Self-Correction Program (“SCP”) of EPCRS without paying a fee or sanction in two circumstances: (1) insignificant operational defects can be corrected at any time, even if the plan is under an IRS audit; and (2) significant operational defects can be corrected by the end of the third plan year following the plan year in which the defect arose. EPCRS summarizes the factors a plan sponsor may use to determine if a failure is insignificant or not. Moreover, SCP is only available if the plan sponsor has established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Internal Revenue Code requirements, and the failure occurred through an oversight or mistake in applying the procedures or because the procedures were not sufficient to prevent the occurrence of the failure. Read more
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00Leslie Thomsonhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngLeslie Thomson2024-02-21 16:40:122024-02-21 16:40:12You Live, You Learn… Correcting “Qualification Failures” under the Self-Correction Program
Join us in-person to hear updates on retirement plan audits, Mental Health Parity requirements and risks, ERISA fiduciary developments, SECURE 2.0 eligibility rules, benefits in mergers and acquisitions, service provider contracts, and more.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2024-02-13 10:47:222024-02-13 10:47:22Join Us for the Employee Benefits Symposium 2024
Sweet Child O’Mine – Business Transition with Benefits
/in ESOPs, Executive CompensationBy Kevin Selzer
Owners of closely held businesses, particularly first-generation owners, often have a difficult time finding a suitable succession plan. These owners are faced not only with phasing out of their labor of love, but choosing a new direction for the thing they created. That new direction often starts by looking at third party investors and buyers, which may consist of competitors or private equity. If the owners find the third-party market undesirable, they may seek out alternatives. Our blog post today looks at three “internal” succession alternatives that owners may want to consider, particularly those that are driven by a desire to preserve legacy and/or protect the workforce, including existing management.
Just Because I’m Missing, Doesn’t Mean I’m Lost: Should Plan Sponsors Provide Data for the DOL’s Missing Participant Database?
/in 401(k) Plans, 403(b) plans, 457(b) plans, 457(f) plans, Defined Benefit Plans, DOL, Employee Stock Purchase Plans (ESPPs), ERISA, ESOPs, Fiduciary Duties, Legislation, Retirement Plansby Brenda Berg
“Missing participants” have long been a thorn in the side of plan sponsors and administrators, as they are owed a retirement benefit, but are unable to be found or unresponsive to plan communications. As a partial solution, Congress directed the DOL in the SECURE 2.0 Act of 2022 to create a “Retirement Savings Lost and Found”—an online searchable database that would connect missing participants with their retirement benefits—by December 29, 2024. The DOL had contemplated populating the database with information from Form 8955-SSA, which plans already submit to the IRS. However, the IRS has refused to provide the information to the DOL, citing privacy concerns regarding confidential tax information. This has caused the DOL to look to sponsors of ERISA plans to voluntarily provide participant information to populate the database. While this may be a good idea in principle, it creates many obstacles. Read more
ERISA, ERISA…Just an Old Sweet Song Keeps ERISA on my Mind
/in 401(k) Plans, Cafeteria Plans, Defined Benefit Plans, DOL, ERISA, Fiduciary Duties, Health & Welfare Plans, IRS, Retirement Plansby Becky Achten
“Georgia” on your mind? As we look towards the upcoming Masters golf tournament weekend, our minds turn to the condition of the greens (exquisite), the players tee off order (does afternoon help or hinder Tiger on an expected rainy day?), and who will make that amazing chip shot out of the bunker to save par. It may not get quite the level of TV viewership of other sporting events, but benefit plan administration is a lot like golf: a series of pars, birdies and bogies, and—oh my, not a double bogie!
If you’re hitting par with your benefit plans, they’re operating smoothly, participants are happy with the offerings, and you’re in compliance with the most obvious regulations. All is good, but you probably won’t earn a green jacket. Read more
Go Your Own Way (Or Maybe Not): New Heightened Fiduciary Standards are Coming to Group Health Plans
/in 401(k) Plans, Cafeteria Plans, Corporate Governance in Benefits, DOL, ERISA, Fees, Fiduciary Duties, Fringe Benefits, Health & Welfare Plans, Investments, IRS, Legislation, Litigation, Retirement Plans, Severance Plansby Bret Busacker
There has been a shift taking place in ERISA litigation and compliance that could significantly impact group health plan fiduciary requirements. We anticipate group health plan fiduciary standards will evolve along the same lines as what occurred in the 401(k) industry after the ERISA 408(b)(2) rules became effective in 2012.
401(k) plans for years have been subject to fee disclosure and relatively well-defined fiduciary standards of conduct. Much of the improvement in 401(k) fiduciary practices over the past decade can be attributed to the ERISA 401(k) fee disclosure requirements that went into effect in 2012 under ERISA 408(b)(2) and the resulting fee litigation fueled by the ERISA 408(b)(2) fee disclosure rules. As a result of the ERISA 408(b)(2) and the related litigation, employers and plan fiduciaries, often with the aid of counsel, have become significantly more proficient in monitoring fees and negotiating agreements with 401(k) plan TPAs and investment service providers.
The Consolidated Appropriations Act (CAA) in 2021 extended the ERISA 408(b)(2) fee disclosure requirements to group health plans. Based on what took place in the 401(k) industry after 2012 when the ERISA 408(b)(2) disclosure went into effect, we anticipate the ERISA 408(b)(2) fee disclosure requirement, now also applicable to group health plans, will make it easier for plan participants to bring breach of fiduciary duty claims against employer and plan fiduciaries. There are already several such cases currently making their way through the courts.
In addition to the ERISA 408(b)(2) fee disclosure requirement, group health plan fiduciaries now have a better line of sight into the structure and economics of their group health plans than ever before. This insight comes in the form of a series of new disclosure requirements that require plans to obtain and publish network and out of network payment rates, and to report plan drug and service cost information to HHS. Further, the CAA now requires employers to prepare periodic reports demonstrating compliance with the Mental Health Parity rules. These new rules give employers and plan fiduciaries unprecedented leverage with their service providers through increased transparency and improved awareness of the structure and economics of their group health plans.
With this greater knowledge and understanding comes more risk of criticism that an employer or plan fiduciary could have looked closer—and should have looked closer—at fees and plan design in carrying out their fiduciary responsibilities. We think these new group health plan transparency and disclosure rules will drive new litigation against group health plan fiduciaries similar to what occurred in the retirement plan industry after ERISA 408(b)(2) became effective for 401(k) plans.
Employers and plan fiduciaries should be considering now how to formalize appropriate compliance structures to ensure that reasonable fiduciary standards are being applied to group health plan administration. Our general recommendation is to adopt similar group health plan governance structures and practices that are now common in 401(k) plan administration. These governance structures may take on different forms than what we see in the 401(k) industry, but employers should be thinking now how best to match step with the shifting fiduciary standards applicable to group health plans.
Should’ve Been a Cowboy, Court Inflicts Pain on Health Plan Sponsor After Participant Kicked by Bull
/in Corporate Governance in Benefits, DOL, ERISA, Fiduciary Duties, Health & Welfare Plans, Litigationby Alex Smith
A recent decision by a federal district court in Ohio in a health plan benefits dispute highlights the importance for health plan fiduciaries to properly review benefit claim denials to ensure that the claims administrator’s basis for denial is appropriate and that the claims administrator has properly considered information provided by the participant.
In this case, the participant sued after he was denied coverage for more than $100,000 of medical bills related to a broken ankle suffered when he was kicked by his bull calf. Even though the participant worked as an HVAC division manager, the health plan’s third-party administrator denied the claims based on the plan’s exclusion for on-the-job injuries because the participant owned a cattle farm from which he sold beef. The court ruled that the participant was entitled to coverage for his medical expenses because the health plan fiduciaries had the burden of demonstrating the plan exclusion applied. Read more
You Live, You Learn… Correcting “Qualification Failures” under the Self-Correction Program
/in 401(k) Plans, IRS, Retirement Plansby Leslie Thomson
The Employee Plans Compliance Resolution System (“EPCRS”), as set forth in Revenue Procedure 2021-30, allows plan sponsors to correct “Qualification Failures,” which are defined as any plan document, operational, demographic or employer eligibility failures. Failure to follow the terms of a plan constitutes an operational failure.
Operational Failures can be corrected without IRS supervision under the Self-Correction Program (“SCP”) of EPCRS without paying a fee or sanction in two circumstances: (1) insignificant operational defects can be corrected at any time, even if the plan is under an IRS audit; and (2) significant operational defects can be corrected by the end of the third plan year following the plan year in which the defect arose. EPCRS summarizes the factors a plan sponsor may use to determine if a failure is insignificant or not. Moreover, SCP is only available if the plan sponsor has established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Internal Revenue Code requirements, and the failure occurred through an oversight or mistake in applying the procedures or because the procedures were not sufficient to prevent the occurrence of the failure. Read more
Join Us for the Employee Benefits Symposium 2024
/in UncategorizedJoin us in-person to hear updates on retirement plan audits, Mental Health Parity requirements and risks, ERISA fiduciary developments, SECURE 2.0 eligibility rules, benefits in mergers and acquisitions, service provider contracts, and more.
Reserve your seat by registering (click here to register). This event is in-person only, so please attend the symposium at one of our Holland & Hart offices: Billings, MT | Boise, ID | Denver, CO | Salt Lake City, UT.
For more information, please view our full agenda here.
Tuesday, February 27, 2024
8:30 AM – 12:00 PM MST
CLE/CPE Credits: 3.0 CLE and CPE credits pending for Colorado, Idaho, Montana, and Utah.
PREREQUISITES: None
COST: None
Questions: Please contact Lisa Adelberg.